1. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. College Accounting 11 th Edition Employee Earnings and Deductions Teacher Version chapter 7 7–1

2. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The employer is required to keep records of the following information: Personal data on employee Data on wage payments Amount of taxable wages paid Amount of tax withheld from each employee’s earnings by pay period Objectives of Payroll Records and Accounting 7–2 Gross pay is the total amount of an employee’s pay before deductions. Net pay is the take-home pay. An employee is one who is under the direction and control of the employer. An independent contractor is engaged for a definite job or service and may choose his or her own means of doing the work. Key Terms

3. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Laws Affecting Payroll Fair Labor Standards Act of 1938, referred to as “the Act” or “FLSA” provides minimum standards for both wages and overtime. Also includes child labor and equal pay for equal work provisions Also exempts specified employees or groups from some provisions. Current Tax Payment Act (1943) requires employers to keep records (names, addresses, earnings, withholdings, and payment dates) 7–3

4. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. FICA Taxes: Employees’ Share The Social Security Act of 1935 (FICA) began as an attempt to provide retired workers with benefits based upon their work history. Currently, FICA consists of Social Security and Medicare. For Social Security, employees contribute 4.2% on the first $106,800 earned in a calendar year. Employees contribute 1.45% on all earnings in a calendar year with no limit for Medicare. 7–4

5. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The employer has to match the amount of FICA taxes withheld from the employee’s wages, and this amount is recorded by debiting Payroll Tax Expense. Each state is responsible for paying its own state unemployment tax, at a of 5.4% on the first $7,000 earned by each employee. The Federal Unemployment Tax Act is to provide financial support for the maintenance of government-run employment offices, paid at a rate of 0.8% of the first $7,000 of earnings. Workers’ compensation laws protect employees and their dependents against losses due to death or injury incurred on the job. FICA Taxes: Employers’ Share These two taxes (SUTA and FUTA) are paid by employer’s only 7–5

6. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Laws Affecting Employer’s Payroll Tax Contributions 7–6

7. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Money paid to a person for managerial or administrative services is usually called a salary, and the time period covered is generally a month or a year. Money paid for either skilled or unskilled labor is usually called wages, and the time period covered is hours or weeks. A company may also supplement an employee’s salary or wage by other benefits such as commissions, bonuses, cost-of-living adjustments, and profit-sharing plans. How Employees Get Paid 7–7

8. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Practice Exercise 1 7–8

9. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Mark Anderson’s pay information: regular rate of pay is $22.95 per hour Time and a half for hours in excess of 40 hours Double-time for work on Sundays and holidays Mark has ½-hour lunch during an 8 ½ hour work day. He is not paid for lunch. He is not paid for minutes before 8:00 am or after 4:30 unless the overtime hours have been authorized in advance. 7–9 Mark Anderson, who works for Green Sales Company, is paid $22.95 per hour. The company pays time-and-a-half for hours worked in excess of 40 per week. The company pays him double time for any work he does on Sundays and holidays. His time card for the week ending on October 7 follows.

10. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Calculating Wages: 40 hours regular time 40 x $ 22.95 per hour = $ 918.00 2 hours overtime (Thursday) 2 x 34.43 per hour = 68.86 Mark Anderson’s pay information: regular rate of pay is $22.95 per hour Time and a half for hours in excess of 40 hours ($22.95 x 1.5 = $34.43) 1 hour overtime (Friday) 1 x 34.43 per hour = 34.43 3 hours overtime (Saturday) 3 x 34.43 per hour = 103.29 $1,124.58 46 First Method 7–10

11. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Calculating Wages: 46 x $ 22.95 per hour = $1,055.70 Mark Anderson’s pay information: regular rate of pay is $22.95 per hour Time and a half for hours in excess of 40 hours ($22.95 / 2 = $11.48) 6 x 11.48 per hour = 68.88 $1,124.58 46 Second Method 46 hours regular time 6 hours overtime 7–11

12. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Some salaried employees may also be entitled to extra pay for overtime. Madeline Huan receives a salary of $4,350 per month. She is entitled to overtime pay for all hours worked in excess of 40 during a week at time-and-a-half her regular rate. This past week she worked 44 hours. Salaries 7–12

13. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Workers under the piece- rate system are paid at the rate of so much per unit of production. If John Joseph, a strawberry picker, is paid $3 for each box of strawberries picked, how much would he earn if he picked 24 boxes? Piece-Rate 7–13

14. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Some salespersons are paid on a purely commissions basis. A more common arrangement is a salary plus a commission or bonus. Lora Brown receives an annual salary of $44,000. Her employer agrees to pay her a 5 percent commission on all sales during the year in excess of $200,000. Her sales for the year totaled $445,000. Commissions 7–14

15. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Commissions Some salespeople are paid on a purely commission basis. More commonly is a salary plus commission or bonus arrangement. Consider Lora Brown who receives an annual salary of $44,000. Her employer agrees to pay her a 5% commission on all her sales during the year in excess of $200,000. Her sales for the year total $445,000. 7–15

16. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Practice Exercise 2 7–16

17. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Federal income tax withholding State income tax withholding FICA taxes (Social Security and Medicare), employee’s share Union dues Medical insurance premiums and medical expenses under a flexible spending plan Contributions to charitable organizations Repayment of personal loans from the company. Savings through the company 401(k) plan Dependent care expenses under a flexible spending plan (subject to a $5,000 limit) Common Deductions from Total Earnings 7–17

18. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Employees’ Federal Income Tax Withholding Employers are required to withhold employees’ taxes and then pay them to the U.S. Treasury. Employers have to keep records of the names and addresses of persons employed. A withholding allowance is an amount of an individual’s earnings that is exempt from income taxes. Each employee has to fill out an Employee’s Withholding Allowance Certificate (Form W-4). 7–18

19. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7–19

20. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Publication 15 (Circular E) contains the rules for depositing federal income, Social Security, and Medicare taxes. Publication 15-T contains the wage-bracket tax tables. Both publications are provided free of charge by the Internal Revenue Service. Publication 15 (Circular E), Employer’s Tax Guide and Publication 15-T 7–20

21. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Mark Anderson, claiming one allowance as of the October 7 payroll, has gross wages of $1,124.58. 7–21

22. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Practice Exercise 3 7–22

23. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. (1)(2)(3)(4) (5)(6) 7–23 The payroll register is a manual or computerized schedule prepared for each payroll period listing the earnings, deductions, and net pay for each employee.

24. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. (7A) (7A) – payroll earnings for the period, not to exceed $7,000, are listed in the Unemployment column. (7B) (7B) – payroll earnings for the period, not to exceed $106,800, are listed in the Social Security column. (7C) (7C) – all earnings for the period are listed in the Medicare column. 7–24

25. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. (8A) (8B) (8C) (8D) (8F) 7–25 (8E)

26. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. (9A) (9B)(10A) (10B) 7–26

27. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Practice Exercise 4 7–27

28. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

29. 7–29

30. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Because the payroll register summarizes the payroll data for the period, it is used as the basis for recording the payroll in the ledger accounts. The accountant records the total cost to the company for services of employees as debits to the Wages Expense accounts. Total Social Security tax deductions and total Medicare tax deductions are combined to become FICA Taxes Payable. The Payroll Entry 7–30

31. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Note: total Social Security and total Medicare are combined to become FICA Taxes Payable 7–31

32. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. A firm with a large number of employees would probably open a special payroll bank account. One check drawn on the regular bank account is made payable to the special payroll bank account for the amount of the total net pay for a payroll period. All payroll checks are then written on the special payroll bank account. Special Payroll Bank Account—An Alternative 7–32

33. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7–33

34. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Practice Exercise 5 7–34

35. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7–35

36. © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.