1. College Accounting, by Heintz and Parry Chapter 10: Payroll Accounting: Employer Taxes and Reports

2. Whenever a company pays a payroll, they also owe taxes on behalf of their employees (taxes that don’t come out of the employee’s paychecks). There are four such taxes: 1) Social Security Tax 2) Medicare Tax 3) Federal Unemployment Tax (or FUTA tax) 4) State Unemployment Tax (or SUTA tax) Question: Which of these taxes are also paid by the employees?

3. Answer: Social Security Tax and Medicare Tax are also paid by the employees. In fact, for these two taxes, the amount of the employer’s tax is the exact same amount that was withheld from the employees’ paychecks. For the two unemployment taxes, FUTA and SUTA, the payroll register column called “Taxable Earnings: Unemployment Compensation” is multiplied by a flat percentage (usually 0.8% for FUTA and 5.4% for SUTA). The tax is levied on the first $7,000 of each employee’s earnings in the calendar year. To see how employer taxes would be calculated and journalized, let’s assume once again that Rob Dillon is the only employee at The CD Side of Town. nDetails about this topicnSupporting information and examplesnHow it relates to your audiencenDetails about this topicnSupporting information and examplesnHow it relates to your audience

4. The payroll register looks like this: earnings taxable earnings name allow. m. stat. regular overtime total cum. tot. un. comp. soc. sec. R. Dillon 1 s 280.00 42.00 322.00 322.00 322.00 322.00 Earnings deductions name Total FIT SS tax MEDI tax STATE tax Health Ins. Total Net Pay R. Dillon 322.00 33.00 19.96 4.67 6.44 14.17 78.24 243.76 The employer taxes for Social Security and Medicare are $19.96 and $4.67, the exact amounts of the deductions. For the FUTA and SUTA taxes, multiply the $322.00 taxable earnings for unemployment compensation times the relevant rate: FUTASUTA 322.00322.00 X 0.8%X 5.4% 2.58 17.39

5. The journal entry credits liability accounts for the four employer payroll taxes and debits Payroll Tax Expense for the total of the four credits. A way to remember the accounts being debited and credited in this entry is to memorize the request of all employees, “Pay My Full Social Security!” Date Description P. R. Debit Credit 2000 Mar. 17 Payroll Tax Expense 44.60 Medicare Tax Payable 4.67 FUTA Tax Payable 2.58 SUTA Tax Payable 17.39 Social Security Tax Payable 19.96 nDetails about this topicnSupporting information and examplesnHow it relates to your audiencenDetails about this topicnSupporting information and examplesnHow it relates to your audience

6. The entries to pay payroll taxes, whether they are employee taxes, employer taxes, or both, are exactly as you’d expect: debit the liabilities and credit cash. It is important to note that federal income tax withholding, Social Security taxes, and Medicare taxes are all paid at one time (don’t forget that the last two taxes include the contributions from the employer and the employee). How frequently these taxes are paid depends upon how much tax is owed. The CD Side of Town is small enough that they will pay 15 days after the end of the month. The sample entry below is based on the numbers for Robert Dillon’s first payroll. Date Description P. R. Debit Credit 2000 Apr. 15 Employees Income Tax Payable 33.00 Social Security Tax Payable 39.92 Medicare Tax Payable 9.34 Cash 82.26 nDetails about this topicnSupporting information and examplesnHow it relates to your audiencenDetails about this topicnSupporting information and examplesnHow it relates to your audience

7. The other employer tax paid by employers in most states is workers’ compensation insurance. This insurance is paid to employees who suffer a job-related illness or injury. In most states, the amount of tax is paid at the beginning of the year based on payroll dollars, number of employees, job riskiness, and/or safety history at the company. Eddie made the entry when The CD Side of Town made their deposit in their opening week. The amount was based on estimated payroll of $74,000 X 0.3% premium rate = $222. Date Description P. R. Debit Credit 2000 Mar. 15 Workers’ Comp. Insurance Exp. 222.00 Cash 222.00 nDetails about this topicnSupporting information and examplesnHow it relates to your audiencenDetails about this topicnSupporting information and examplesnHow it relates to your audience

8. When the year ends, the company calculates the actual insurance premium based on the true payroll, and one of two situations results: (Situation A) The company has underpaid and will need to include the difference with next year’s estimated payment. Example: Actual Payroll of $76,000 X 0.3% = $228 premium $228 - $222 amount paid = $6 underpayment (Situation B) The company overpaid and is entitled to a refund. Example: Actual Payroll of $71,000 X 0.3% = $213 premium $222 amount paid - $213 = $9 overpayment Question: What would be appropriate account titles to debit and credit in each situation when the actual premium is calculated? n Stat e the mai n idea s you’ ll be talki ng abo ut

9. Answers: In Situation A, the workers’ compensation insurance expense needs to be increased with a debit, with a liability account credited for the underpayment due to the state. In Situation B, the expense account should be reduced with a credit. The debit is to an asset account representing the Insurance Refund Receivable from the state. Date Description P. R. Debit Credit Situation A 2000 Dec. 31 Workers’ Comp. Insurance Exp. 6.00 Workers’ Comp. Ins. Payable 6.00 Situation B 2000 Dec. 31 Insurance Refund Receivable 9.00 Workers’ Comp. Insurance Exp. 9.00 nDetails about this topicnSupporting information and examplesnHow it relates to your audiencenDetails about this topicnSupporting information and examplesnHow it relates to your audience