1. Payroll Computations, Records, and Payment
Chapter 10
Payroll Computations, Records, and Payment

2. Payroll Laws & Taxes Employee vs. independent contractor
Federal Employee Earnings & Withholding Laws
Fair Labor Standards Act of 1938
Social Security Tax
Medicare Tax
Federal Income Tax
Employee – hired by and works under the control and direction of the employer. Employer normally provides tools and equipment used by the employees, sets the working hours, and determines how the employee completes the job.
Independent Contractor – paid by the company to carry out a specific task or job but is not under the direct supervision or control of the company – will not deal with independent contractors in this chapter.
Fair Labor Standards Act – also referred to as the Wage and Hour Law, applied only to firms engaged directly or indirectly in interstate commerce. This law sets a minimum hourly rate of pay and maximum hours of work per week to be performed at the regular rate of pay. Minimum hourly rate = $5.15 at book printing and maximum number of hours was 40 hours. Still correct ($2.13 for tipped employees as long as the employee’s cash wages = $5.15 and if not employer must make up the difference.

3. State & Local Taxes Employer’s Payroll Taxes & Insurance Costs
Social Security Tax (FICA)
Medicare Tax
Federal Unemployment Tax (FUTA)
State Unemployment Tax (SUTA)
Workers’ Compensation Insurance
SS tax – taxes on the first $76,200 of earnings base. Will use 6.2% - employer generally remits to the federal government the social security tax withheld plus the employer’s share of the social security tax
Medicare Tax = 1.45% of earnings. Periodically the employer pays to the Federal Government the Medicare tax withheld plus the employer’s share of the Medicare tax. Remitted to the federal government
FUTA – employers pay the entire amount of these taxes and we assume that the earnings base is $7,000. However that base is determined based on the employer’s turnover rate, etc.
SUTA – employers pay all of the SUT taxes and the usualy earnings base for federal and state unemployment taxes are the same on the first $7,000 of each employee’s earnings for the year. In many states the SUTA tax rate is 5.4%. The federal tax rate (6.2%) can be reduced by the rate charged by the state and the SUTA can be as low as 0.8% (6.2% - 5.4% = 0.8%)
Workers’ Comp – protects employees against losses from job-related injuries or illnesses, or compensates their families if death occurs in the course of the employment. Requirements defined by each state.

4. Calculating Earnings & Taxes
Computing Employee Total Earnings
Hourly rate basis
Salary basis
Commission basis
Piece-rate basis

5. Hourly Employees
Need two pieces of data from weekly time sheets, time cards, etc.
Number of hours worked
Rate of Pay
Gross Pay
Regular rate
Overtime rate – 1½ times regular rate

6. Withholdings for Hourly Employees Required by Law
FICA (Social Security)
6.2% on the first $76,200
Medicare
1.45%
Federal income tax
Use wage-bracket table method
# of withholding allowances (W-4)
Total earnings during pay period

7. Withholdings Not Required by Law
Group life insurance
Group medical insurance
Company retirement plans
Bank or credit union savings plans
Loan repayments
Savings bonds, stocks, investment plans
Union dues

8. Determining Pay for Salaried Employees
Hours Worked
Salaried workers who do not hold supervisory jobs - covered by the Wage & Hour Law
Salaried workers who hold supervisory or managerial positions – are exempt from the Wage & Hour Law
Withholdings required by law
Same procedures for salaried or hourly employees.

9. Recording Payroll for Employees
Payroll Register
Allowances
Marital Status
Cumulative Earnings
No. of hours worked
Rate or Salary

10. Recording Payroll for Employees
Payroll Register Continued
Earnings
Regular – Overtime – Gross - Cumulative
Taxable Wages
Social Security - Medicare – FUTA
Deductions
SS – Medicare – Income Tax - Other
Distribution
Net Amount – Check # - Type

11. Recording Payroll Information
Two separate journal entries:
Record the payroll expense for the employer
Payment to the employees
Can be written on the regular bank account
Individual payroll checks issued from a payroll bank account

12. Individual Earnings Record
Individual Earnings record is created for each employee
Also called a compensation record
Shows all the payroll information for one person through his employment history

13. Payroll Entry #1 Salaries Expense 1,960.00
Gross wages
Salaries Expense 1,960.00
Social Security Tax Payable
Medicare Tax Payable
Employee Income Tax Payable
Health Insurance Premiums Payable
Salaries Payable 1,597.06
Payroll for week ending 3/3/05
Net wages

14. Payroll Entry #2 Salaries Payable 1,597.06 Cash 1,597.06
Net wages
Salaries Payable 1,597.06
Cash 1,597.06
Payment of salary for week ending 3/3/05.

15. Completing the Payroll
The two payroll journal entries below must be posted to the ledger accounts.
To record the employer’s share of the payroll, and
To record the payment of payroll to the employees

16. Learning Objectives
Explain the major federal laws relating to employee earnings and withholding
Compute gross earnings of employees
Determine employee deductions for social security tax
Determine employee deductions for Medicare tax
Determine employee deductions for income tax
Enter gross earnings, deductions, and net pay in the payroll register
Journalize payroll transactions in the general journal
Maintain an earnings record for each employee
Define the accounting terms new to this chapter