Presentation on theme: "Employee Earnings and Deductions"— Presentation transcript:
1 Employee Earnings and Deductions Chapter EightEmployee Earnings and Deductions
2 Performance Objectives Understand the role of laws that affect payroll deductions and contributionsCalculate total earnings based on an hourly, piece-rate, or commission basisDetermine deductions using tables of employees’ income tax withholdingAccounting Is Fun!
3 Performance Objectives Complete a payroll registerJournalize the payroll entry from a payroll registerMaintain employees’ individual earnings recordsAccounting Is Fun!
4 Employer Requirements To withhold federal and state taxes from employees’ paychecksTo pay the withholdings (as well as other payments) to government agencies before specific deadlinesTo submit federal and state reports on official formsThis makes payroll accounting very important!Accounting Is Fun!
5 Required Payroll Records Employee personal informationNameAddressSocial Security numberDate of birthData on wage paymentsDates and amounts of paymentsPayroll periodsAmount of taxable wages paidDates and amounts earned year to date for the calendar year involvedAmount of taxes withheld for each employee by pay periodAccounting Is Fun!
6 Calendar YearA twelve-month period beginning on January 1 and ending on December 31 of the same yearAccounting Is Fun!
7 Employees and Independent Contractors Under “direction and control” of employerIndependent contractorSomeone who is engaged for a definite job or serviceNot under “direction and control” of employerDecides how to do his or her own workPayments to independent contractors not subject to withholding or payroll taxesAccounting Is Fun!
8 Objective 1Understand the role of laws that affect payroll deductions and contributionsAccounting Is Fun!
9 Laws Affecting Employees’ Pay Deductions Fair Labor Standards ActThe act of 1938 that provides for minimum standards for wages and overtime, including provisions related to child labor and equal pay for equal workCurrent Tax Payment ActAn act to require employers to withhold and pay to the Internal Revenue Service employee fundsAccounting Is Fun!
10 Laws Affecting Employees’ Pay Deductions FICA Tax (employees’ share)Social Security Act of 1935 and its amendments provide benefits for retired workers, their spouses and minor children, disability insurance, Medicare, and supplemental security incomeEmployees contribute 6.2 percent on first $84,900 earned in a calendar year for Social SecurityEmployees contribute 1.45 percent on all earnings in calendar year for MedicareAccounting Is Fun!
12 FICA TaxesSocial Security taxes plus Medicare taxes, paid by both employee and employer under the provisions of the Federal Insurance Contributions ActEmployer matches employee contributionAccounting Is Fun!
13 State Unemployment Tax Act (SUTA) A tax levied only on the employer in most statesRates differ among the various states; however, they are generally 5.4 percent or higher on the first $7,000 of total earnings paid to each employee during the calendar yearProceeds used to pay subsistence benefits to unemployed workersAccounting Is Fun!
14 Federal Unemployment Tax Act (FUTA) A tax levied only on the employer, equal to 0.8 percent of the first $7,000 of total earnings paid to each employee during the calendar yearThis tax is used to support government-run employment offices throughout the countryAccounting Is Fun!
15 Workers’ Compensation Laws Laws that protect employees and dependents against losses due to death or injury incurred on the jobAccounting Is Fun!
16 Payment Periods Weekly Bi-weekly Semimonthly Monthly 26 times a year Accounting Is Fun!
17 EarningsWagesContract states hourly, weekly, or piecework rate of paySalaryContract states monthly or yearly earningsOvertime—generally 1 ½ pay, minimums per FLSASupplemental payCommissionsBonusesCost-of-living adjustmentsProfit sharingPaid byCheck or cashOther assets (recorded at market value, or fair value)Accounting Is Fun!
18 Performance Objective 2 Calculate total earnings based on an hourly, piece-rate, or commission basisAccounting Is Fun!
19 Payroll In earlier chapters we have seen: The $1, is really gross pay before deductionsGross pay (or earnings)Total amount before deductionsDeductionsAmounts taken out of an employee’s paycheck each pay period“Take home pay” or net payGross pay minus deductionsAccounting Is Fun!
21 Calculate Hourly Wages and Overtime Overtime by Day MethodRegular Hour Worked40Hours x Hourly Rate$913.60Overtime Hours WorkedMonday - WednesdayHours x Hourly Rate x Multiple =Thursday2Hours x Hourly Rate x Multiple =$Friday1Hours x Hourly Rate x Multiple =34.26Saturday3Hours x Hourly Rate x Multiple =102.78Total Gross Earnings$1,119.16Overtime Premium MethodRegular Pay46Total Hours x Hourly Rate$1,050.64Overtime Premium6Overtime Hours x (Multiple - 100%) x Hourly Rate68.52Total Gross Earnings$1,119.16Accounting Is Fun!
22 Calculate Hourly Overtime for Salary AssumptionsMonthly Salary$2,250.00Overtime Multiple1.5Hours Worked in One Week40Overtime Hours4(1) Calculate Hourly Rate FirstCalculate Yearly PayMonthly Salary x 12$27,000.00Calculate Weekly PayYearly Salary / 52$519.23Calculate Hourly PayWeekly Salary / 40$12.98(2) Then Calculate OvertimeRegular PayHours x Hourly Rate$519.20Overtime PayHours x Hourly Rate x Multiple$77.88Total Gross earnings$597.08Accounting Is Fun!
25 Deductions from Total Earnings Federal income tax withholdingState income tax withholdingFICA tax (Social Security and Medicare), employee’s sharePurchase of U.S. savings bondsUnion duesInsurance deductions (medical or life)Charitable contributionsPension contributionsCredit unionAutomatic savingsAutomatic loan repaymentOther deductions possibleAccounting Is Fun!
26 Employees’ Federal Income Tax Withholding: Employer Requirements Withhold federal income taxes from employees’ paychecksPay the withheld federal income taxes to the IRSKeep required recordsAccounting Is Fun!
27 Basis of Federal Income Tax Withholding Taxable earningsThe amount of an employee’s earnings subject to a taxMarital statusNumber of withholding allowances claimedWithholding allowanceAmount of earnings that are exempt from federal income taxHow many?One for personalOne for spouseOne for each dependentExemptionAmount of yearly earnings that are not taxedAccounting Is Fun!
28 Employee’s Withholding Allowance Certificate (Form W-4) A form that specifies the number of allowances claimed by each employeeGives the employer the authority to withhold money for an employee’s federal income taxes and FICA taxesMust be filled out by every employeeAccounting Is Fun!
30 Circular EActual book or downloadable files to use in spreadsheet or accounting program provided free of charge by IRS to employersContains withholding tablesFederal income taxFICASocial SecurityMedicareLists rules for employer’s depositsLists requirements for submitting reportsAccounting Is Fun!
31 Wage-Bracket Tax Tables Tables providing the amounts to be deducted for income taxes based on earnings, marital status, and number of allowances claimedPayment periods coveredMonthlySemimonthlyBiweeklyWeeklyDailyAccounting Is Fun!
32 Using the Tables to Determine Deductions Step 1: Select correct table for payment period and marital statusStep 2: Locate gross pay in first two columnsStep 3: Find column for number of withholding allowancesIntersection shows amount of federal income tax to withhold from paycheckBe careful of:“At least”“But less than”Accounting Is Fun!
33 State Income Tax Withholding State tables orPercentage of federal income tax deductionTextbook assumes that employee’s state income tax deduction is 20% of the federal income tax deductionAccounting Is Fun!
34 FICA Taxes Social Security Taxes Federal taxes levied on employees and employersProceeds used forPension payments after a worker has reached 62 yearsDisability benefits for disabled worker and dependentsMedicare TaxesFederal taxes levied on employees and employersProceeds used for medical insurance for eligible people age 65 or overAccounting Is Fun!
35 FICA Taxes Social Security rate = 6.2% (number equivalent = .062) Only the first $84,900 of earnings are taxedMedicare rate = 1.45% (number equivalent = .0145)All earnings are taxedApplied to gross earnings during a calendar yearCalculated separately because of the different upper limits for two types of taxesAccounting Is Fun!
42 Unemployment TaxesUnemployment taxable earnings represent remaining untaxed earnings up to state and federal maximumNot paid by employee in most statesPaid by employer on the employee’s behalfAccounting Is Fun!
43 Performance Objective 4 Complete a payroll registerAccounting Is Fun!
44 Payroll RegisterA multicolumn form prepared for each payroll period listing the earnings, deductions, and net pay for each employeeAccounting Is Fun!
45 Payroll Register for Week Ended: October 7, 2005 Let’s look at the different sections of the payroll registerAccounting Is Fun!
46 Compare Beginning Cumulative Earnings with Maximums for Social Security and Unemployment Accounting Is Fun!
47 Calculate Regular and Overtime Earnings Accounting Is Fun!
48 Calculate Ending Cumulative Earnings Accounting Is Fun!
49 Calculate Taxable Earnings We calculate the amount of earnings that are taxable for the unemployment taxes. We will use this amount in Chapter 9 to calculate the tax.Accounting Is Fun!
50 Calculate Deductions From Tables 20% of Fed. Tax 6.2% 84,900 1.45% GivenGivenUW = United WayAR = A/RAccounting Is Fun!
51 Total Earnings – Total Deductions = Net Pay & Two Different Wages Expenses AmountCk.No.SalesWages ExpenseOffice276.81842.35931.001,119.16175.28560.02932.00735.30227.18688.47933.00915.65245.80827.45934.001,073.25645.631,243.26935.001,888.89657.091,234.58936.001,891.67532.701,066.26937.001,598.96367.97903.78938.001,271.75478.101,022.33939.001,500.43662.341,151.17940.001,813.51328.75840.08941.001,168.83929.891,956.35942.002,886.245,527.5412,336.1013,626.974,236.67Expense Account DebitedPayments…Accounting Is Fun!
52 Performance Objective 5 Journalize the payroll entry from a payroll registerAccounting Is Fun!
53 Journalize the Payroll Entry from a Payroll Register ExpenseExpenseAccounting Is Fun!
54 Payroll Journal Entry: Expenses Accounting Is Fun!
55 Journalize the Payroll Entry from a Payroll Register ExpensePayablesAccounting Is Fun!
56 Payroll Journal Entry: Expenses and Payables DescriptionPost.Ref.DebitCredit2005October7Sales Wages Expense13,626.97Office Wages Expense4,236.67Employees’ Federal Income Tax Payable3,239.00FICA Tax Payable1,206.24Employees' State Income Tax Payable647.80Employees' Medical Insurance Payable260.50Employees' United Way Payable124.00Accounts Receivable50.00Wages Payable12,336.10Payroll Register, for week ended Oct. 7General Journalpage 5DateAccounting Is Fun!
57 Equivalent to sum of take home pay for all employees Payroll Journal EntryAlthough Social Security & Medicare taxes are calculated separately, they are treated as a single payable because they will be paid at the same timeDescriptionPost.Ref.DebitCredit2005October7Sales Wages Expense13,626.97Office Wages Expense4,236.67Employees Federal Income Tax Payable3,239.00FICA Tax Payable1,206.24Employees' State Income Tax Payable647.80Employees' Medical Insurance Payable260.50Employees' United Way Payable124.00Accounts Receivable50.00Wages Payable12,336.10Payroll Register, for week ended Oct. 7General Journalpage 5DateEquivalent to sum of take home pay for all employeesAccounting Is Fun!
58 Paying Employees from Regular Checking Account Accounting Is Fun!
63 Employee’s Individual Earnings Record A supplementary record for each employee showing personal payroll data and yearly cumulative earnings, deductions, and net payContains source data for the required payroll tax reportsAccounting Is Fun!
64 Employee’s Individual Earnings Record Accounting Is Fun!
73 Record Payables to Make DR = CR DescriptionPost.Ref.DebitCredit2005Oct.14Salary Expense5,309.00Employees’ Federal Income Tax Payable533.00Employees’ State Income Tax Payable63.96FICA Tax Payable217.92Salaries Payable4,494.12Payroll Register for Week Ended October 14, 2005—page 72General JournalPage 17DateAccounting Is Fun!
74 Journalize Cash Payments to Employees DescriptionPost.Ref.DebitCredit2005Oct.14Salary Expense5,309.00Employees’ Federal Income Tax Payable533.00Employees' State Income Tax Payable63.96FICA Tax Payable217.92Salaries Payable4,494.12Payroll Register for Week Ended October 14, 2005—page 72Cash—Payroll Bank AccountPaid wages for week ended Oct. 14, 2005General JournalPage 17DateAccounting Is Fun!