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Chapter 8
Employee Earnings
and Deductions
Updated
5/2011
Employment Statistics in the U.S.
• The Bureau of Labor
Statistics reported the
California unemployment
rate at 12.3 percent in
March 2011.
• In November 2008,
the rate was reported to be
6.5 percent in the U.S.
•
http://www.bls.gov/web/laus/laumstrk.htm
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Performance Objectives
1. Understand the role of laws that affect payroll
deductions and contributions.
2. Calculate total earnings based on an hourly,
piece-rate, or commission basis.
3. Determine deductions using tables of employees’
income tax withholding.
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Performance Objectives (cont’d)
4. Complete a payroll register.
5. Journalize the payroll entry from a payroll
register.
6. Maintain employees’ individual earnings records.
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Performance Objective 1
Understand the role of laws that affect payroll
deductions and contributions.
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Employee Earnings
• Gross pay
Total amount of an
employee’s pay before
deductions
• Net pay
Amount an employee
takes home after
deductions
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Why Are Accurate
Payroll Records Necessary?
1. Collection of data for computation of compensation
2. Provide required information for federal and state
governments
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Employer Requirements
• To withhold federal and state taxes from
employees’ paychecks
• To pay the withholdings (as well as other
payments) to government agencies before
specific deadlines
• To submit federal and state reports on official
forms
Payroll accounting is important.
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Required Payroll Records
1. Employee personal information
–
–
–
–
Name
Address
Social Security number
Date of birth
2. Data on wage payments
– Dates and amounts of payments
– Payroll periods
3. Amount of taxable wages paid
– Dates and amount earned year to date for the calendar
year involved
4. Amount of taxes withheld for each employee’s
earnings by pay period
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Calendar Year
A twelve-month period beginning on January 1
and ending on December 31 of the same year
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Employees and
Independent Contractors
• Employee
– Under “direction and control” of employer
• Independent contractor
– Someone who is engaged for a definite job or service
– Not under “direction and control” of employer
– Decides how to do his or her own work
• Payments to independent contractors not subject to
withholding or payroll taxes
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Laws Affecting
Employees’ Pay Deductions
• Fair Labor Standards
Act
– The act of 1938 that
provides for minimum
standards for wages and
overtime, including
provisions related to
child labor and equal
pay for equal work
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• Current Tax Payment
Act
– An act to require
employers to withhold
and pay to the Internal
Revenue Service
employee funds
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Laws Affecting
Employees’ Pay Deductions (cont’d)
• 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 income.
– In 2006, employees contributed 6.2 percent on the
first $94,200 earned in a calendar year for Social
Security. (In 2007, that figure jumped to $97,500. In
2008, that figure jumped to $102,000. In 2009 and
2010, the figure was $106,800.) We will use $94,200
to match the solutions given in the textbook.
– Employees contribute 1.45 percent on all earnings in
a calendar year for Medicare.
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Laws Affecting Employer’s
Payroll Tax Contributions
• Federal Insurance Contribution Act (FICA)
• State Unemployment Tax Act (SUTA)
• Federal Unemployment Tax Act (FUTA)
• Workers’ compensation laws
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FICA Taxes
• FICA taxes are:
– Social Security taxes
– plus Medicare taxes
– paid by both employee and employer under the
provisions of the Federal Insurance Contributions Act.
• The employer matches the employee’s
contribution.
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State Unemployment Tax Act (SUTA)
• SUTA is a tax levied only on the employer in
most states.
• Rates 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 year.
• Proceeds are used to pay subsistence benefits
to unemployed workers. (Typically 60% of your
regular salary, usually only granted to former
full-time employees.)
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Federal Unemployment Tax Act (FUTA)
• FUTA is 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 year.
• This tax is used to support government-run
employment offices throughout the country.
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Workers’ Compensation Laws
• Laws that protect employees and dependents
against losses due to death or injury incurred
on the job
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How Employees Get Paid
Salary
Wages
Usually paid to
managers or
administrative
service workers
Usually paid to
skilled or unskilled
laborers
Time period:
Month or year
Time period:
Weekly, biweekly,
semimonthly
Supplemental income: commissions,
bonuses, cost-of-living adjustments,
profit-sharing
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Performance Objective 2
Calculate total earnings
based on an hourly,
piece-rate, or
commission basis.
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Wages
• In order to compute
wages, the following
information is needed:
1. Rate of pay
2. Hours worked
3. Overtime rate of pay
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Time Card
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Calculate Hourly Wages and Overtime
Assumptions
Hourly Rate
Overtime Multiple
Regular Hour Worked
40
Overtime Hours Worked
Monday - Wednesday
Thursday
Friday
Saturday
Total Gross Earnings
0
2
1
3
Regular Pay
Overtime Premium
Total Gross Earnings
46
6
$22.95
150%
Pages 270
and 271
Overtime by Day Method
40 x $22.95 per hour
$918.00
0
$ 68.86*
34.43
103.29
$1,124.58
2 x $34.43 per hour*
1 x $34.43 per hour
3 x $34.43 per hour
Overtime Premium Method
46 Total Hours x $22.95 Hourly Rate
6 Overtime Hours x $11.48 per hour premium**
$1,055.70
68.88
$1,124.58
*($22.95 x 1.5 = $34.425; round up to $34.43 and then multiply by overtime hours)
**$22.95 hourly rate x 50% per hour premium = $11.48 per hour premium
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Calculate Hourly Overtime for Salary
Assumptions
Monthly Salary
Overtime Multiple
Hours Worked in One Week
Overtime Hours
(1) Calculate Hourly Rate First
Calculate Yearly Pay
Monthly Salary x 12
Calculate Weekly Pay
Yearly Salary / 52
Calculate Hourly Pay
Weekly Salary / 40
$2,350.00
1.5
40
4
$28,200.00
$542.31
$13.56
(2) Then Calculate Overtime
Regular Pay
Hours x Hourly Rate
$
Overtime Pay
Hours x Hourly Rate x Multiple
Total Gross earnings
$
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p. 271
542.31
81.36
623.67
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Piece Rate
p. 271
Payment at the rate of # of units of production
Piece rate per bin of pears
Number of bins per day
Total gross pay for a day
(Piece rate x number of bins)
$8.00
6
$48.00
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8 | 25
Commissions
Annual
Sales
Lori
Borsca
Commission on Sales
(Excess Annual Sales x
Commission Rate)
$245,000
Commission
Rate
$7,250 *
p. 272
Base Salary
Gross Pay
(from Contract) (Comm. + Base)
$22,000
$29,250
* 245,000
- 100,000
145,000
x 0.05
$7,250
5%
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Deductions from Total Earnings
p. 272
1. Federal income tax withholding
2. State income tax withholding
3. FICA tax (Social Security and Medicare), employee’s
share
4. Union dues
5. Medical and life insurance premiums
6. Charitable contributions
7. Repayment of personal loans
8. Savings through credit union or retirement savings
9. Purchase of U.S. savings bonds
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Employees’ Federal
Income Tax Withholding
8 | 27
p. 272
Employers are required to:
• Withhold federal income taxes from employees’
paychecks
• Pay the withheld federal income taxes to the IRS
• Keep required records
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Basis of Federal
Income Tax Withholding
• Taxable earnings
• Withholding allowance
– Amount of earnings that
– The amount of an
are exempt from federal
employee’s earnings
income tax
subject to a tax
– How many?
• Marital status
• Number of withholding
allowances claimed
– One for personal
– One for spouse
– One for each
dependent
• Exemption
– Amount of yearly
earnings that are not
taxed
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Employee’s Withholding
Allowance Certificate (Form W-4)
• A form that specifies the number of allowances
claimed by each employee
• Gives the employer the authority to withhold
money for an employee’s federal income taxes
and FICA taxes
• Must be filled out by every employee
• Illustration on text p. 273 and on next slide
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Employee’s Withholding
Allowance Certificate (Form W-4) (cont’d)
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Publication 15 (Circular E),
Employer’s Tax Guide
http://www.irs.gov/publications/p15/index.html
• Actual book or downloadable files to use in
spreadsheet or accounting program provided
free of charge by IRS to employers
• Contains withholding tables
– Federal income tax
– FICA
• Social Security
• Medicare
• Lists rules for employer’s deposits
• Lists requirements for submitting reports
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Wage-Bracket Tax Tables
http://www.irs.gov/pub/irs-pdf/p15.pdf
• Tables providing the amounts to be deducted for
income taxes based on earnings, marital status,
and number of allowances claimed
• Payment periods covered
–
–
–
–
–
Monthly
Semimonthly
Biweekly
Weekly
Daily
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Using the Tables
to Determine Deductions
•
•
•
•
•
Step 1: Select correct table for payment period and marital status.
Step 2: Locate gross pay in first two columns.
Step 3: Find column for number of withholding allowances.
Intersection shows amount of federal income tax to withhold from
paycheck.
Be careful of:
– “At least”
– “But less than”
– Married Persons Weekly table, text p. 274 shows 2006
deductions
– http://www.irs.gov/pub/irs-pdf/p15.pdf (p. 43 for Married/Weekly
rates for 2010)
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State Income Tax Withholding
• Use state tables to determine withholding.
Or
• Use percentage of federal income tax deduction.
– Textbook assumes that employee’s state income tax
deduction is
20% of the federal income tax deduction.
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FICA Taxes
Social Security Taxes
• Federal taxes levied
on employees and
employers
• Proceeds used for:
Medicare Taxes
• Federal taxes levied
on employees and
employers
• Proceeds used for
medical insurance for
– Pension payments after
a worker has reached
eligible people age 65
62 years
or over
– Disability benefits for
disabled worker and
dependents
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FICA Taxes (cont’d)
• Text assumes a 2006 Social Security rate of
6.2% (number equivalent = .062).
– Only the first $94,200 of earnings are taxed.
• Medicare rate is 1.45%
(number equivalent = .0145).
– All earnings are taxed.
• Applied to gross earnings during a calendar year
• Calculated separately because of the different
upper limits for two types of taxes
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Calculating FICA Taxes
Mark Amano
Week’s Earnings =
Cumulative Earnings to Date =
FICA
Social Security Maximum
Social Security Rate
Medicare Rate
$1,124.58
$44,960.00
$94,200.00
6.20%
1.45%
FICA Social Security Deduction
FICA Medicare Deduction
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Calculating FICA Taxes (cont’d)
Mark Amano
Week’s Earnings =
Cumulative Earnings to Date =
FICA
Social Security Maximum
Social Security Rate
Medicare Rate
FICA Social Security Deduction
($1,124.58 x 0.062)
FICA Medicare Deduction
($1,124.58 x 0.0145)
$1,124.58
$44,960.00
$94,200.00
6.20%
1.45%
$69.72
$16.31
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Unemployment Taxes
• Unemployment insurance is paid through taxes levied on
employers.
• Not paid by employee in most states, but is paid by
employer on the employee’s behalf. In this text, we will
use a 5.4% rate to the state and 0.8% rate to the federal
government on the first $7,000 each employee earns in
a calendar year.
• We will learn in Chapter 9 how to compute and submit
the employer’s payments of FUTA (Federal
Unemployment) and SUTA (State Unemployment) taxes.
• (We will also learn in Chapter 9 about Workers’
Compensation premiums that are paid by the employer
to buy insurance based on how dangerous the job
category is. These also are not paid by the employee.)
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Performance Objective 4
Complete a payroll register.
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Payroll Register
A multicolumn form
prepared for each payroll
period listing the earnings,
deductions, and net pay
for each employee
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Payroll Register for Week Ended:
October 7, 20-- (page 276)
Let’s look at the different sections of the payroll register.
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Payroll Register for Week Ended:
October 7, 20-- (cont’d)
Let’s look at the different sections of the payroll register.
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Compare Beginning Cumulative Earnings with
Maximums for Social Security and Unemployment
$94,200
$7,000
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8 | 45
Calculate Regular
and Overtime Earnings
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Calculate Ending Cumulative Earnings
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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.
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Calculate Deductions
From
Tables
20% of
Fed. Tax
Calculate,
6.2%
$94,200
Calculate,
1.45%
Given
UW = United Way
AR = A/R
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8 | 49
Total Earnings – Total Deductions = Net Pay
and Two Different Wages Expenses
…
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Performance Objective 5
Journalize the payroll entry from a payroll register.
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Payroll Journal Entry:
Expenses and Payables
1,158.73
+ 272.60
$1,431.33
Although Social Security and Medicare taxes are
calculated separately, they are treated as a single
payable because they will be paid at the same time.
General Journal
Date
20-Oct.
Description
7 Sales Wages Expense
Office Wages Expense
Employees’ Federal Income Tax Payable
FICA Tax Payable
Employees' State Income Tax Payable
Employees' Medical Insurance Payable
Employees' United Way Payable
Accounts Receivable
Wages Payable
page 5
Post.
Ref.
Debit
14,332.15
4,467.28
Credit
2,838.00
1,431.33
567.60
320.70
185.00
30.00
13,426.80
Payroll Register, page 56, for week ended Oct. 7.
Equivalent to sum of take-home pay for all employees
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Paying Employees from
Regular Checking Account
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Paycheck
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Payroll Bank Account
• A special checking account used to pay a
company’s employees
• Money transferred from the regular checking
account to the payroll account
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Journal Entry for Paying
Employees from Payroll Bank Account
General Journal
Date
20-Oct.
Description
8 Wages Payable
Cash—Payroll Bank Account
Paid wages for week ended October 7.
Clear payable
with a debit
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Page 11
Post.
Ref.
Debit
Credit
13,426.80
13,426.80
Credit Cash—
Payroll Bank
Account
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Performance Objective 6
Maintain employees’
individual earnings records.
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Employee’s Individual Earnings Record
• A supplementary record for each employee
showing personal payroll data and yearly
cumulative earnings, deductions, and net pay
• Contains source data for the required payroll
tax reports
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Ethics Discussion
You work for a small business called Burger Barn.
Your boss prefers to pay you in cash instead of
giving you a check each week. He tells you that he
won’t withhold taxes from your pay, which will give
you a higher take-home amount. Is the boss of
Burger Barn acting unethically? Why or why not?
The boss of Burger Boss is acting unethically and illegally.
As an employer, he is required to withhold income, Social
Security, and Medicare taxes from you and pay the
employer’s share of Social Security and Medicare taxes.
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8 | 59
Employee’s Individual Earnings Record
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Review Question
Q. How are earnings calculated using an hourly
basis?
A. Hourly rate multiplied by the number of hours
worked
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8 | 61
Review Question
Q. How much of a worker’s annual earnings are
subject to Social Security taxes?
A. The first $94,200 (in 2006 per text)
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Review Question
Q. Name four deductions that might be taken from
an employee’s gross pay.
A. Federal income tax, state income tax, social
security tax, Medicare tax, medical or life
insurance premiums, union dues, savings
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8 | 63
Review Question
Q. Which account(s) are used to record the total
cost to the company for services of its
employees?
A. Wages Expense accounts
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Review Question
Q. What is a Form W-4?
A. Form that specifies the number of
allowances claimed by each employee and
gives employer the authority to withhold
money for an employee’s federal income
taxes and FICA taxes
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8 | 65
Demonstration Problem
Payroll Problem
Payroll Register for Week Ended October 14, 20-Names
Barker, T. C.
Ellis, M. R.
Fisk, C. P.
Janus, V. O.
Pham, H. L.
Rell, M. A.
Beg. Cum. Earn. Week's Earnings
6,820.00
480.00
6,840.00
470.00
36,320.00
740.00
69,043.00
540.00
84,857.00
1,389.00
85,430.00
1,690.00
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Unemployment
UE Max
$7,000.00
Fed Rate
0.008
State Rate
0.054
FICA
FICA
SS Max
Medicare Max
$94,200.00
SS Rate
M Rate
6.20%
1.45%
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Look to Beginning Earnings to
Determine If There Are Taxable Earnings
Name
Barker, T. C.
Ellis, M. R.
Fisk, C. P.
Janus, V. O.
Pham, H. L.
Rell, M. A.
Totals
Payroll Register for Week Ended October 14, 200X
Beginning
Ending
Taxable Earnings
Cumulative
Cumulative
Social
Earnings
Total
Earnings
Unemployment
Security
6,820.00
480.00
6,840.00
470.00
36,320.00
740.00
69,043.00
540.00
84,857.00
1,389.00
85,430.00
1,690.00
289,310.00
5,309.00
0.00
0.00
0.00
Medicare
0.00
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8 | 67
Calculate Ending Cumulative Earnings
Name
Barker, T. C.
Ellis, M. R.
Fisk, C. P.
Janus, V. O.
Pham, H. L.
Rell, M. A.
Totals
Payroll Register for Week Ended October 14, 200X
Beginning
Ending
Taxable Earnings
Cumulative
Cumulative
Social
Earnings
Total
Earnings
Unemployment
Security
6,820.00
480.00
7,300.00
6,840.00
470.00
7,310.00
36,320.00
740.00
37,060.00
69,043.00
540.00
69,583.00
84,857.00
1,389.00
86,246.00
85,430.00
1,690.00
87,120.00
289,310.00
5,309.00
294,619.00
0.00
0.00
Copyright © Houghton Mifflin Company. All rights reserved.
Medicare
0.00
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Calculate Taxable Earnings
Name
Barker, T. C.
Ellis, M. R.
Fisk, C. P.
Janus, V. O.
Pham, H. .
Rell, M. A.
Totals
Payroll Register for Week Ended October 14, 200X
Beginning
Ending
Taxable Earnings
Cumulative
Cumulative
Social
Earnings
Total
Earnings
Unemployment
Security
6,820.00
480.00
7,300.00
180.00
480.00
6,840.00
470.00
7,310.00
160.00
470.00
36,320.00
740.00
37,060.00
0.00
740.00
69,043.00
540.00
69,583.00
0.00
540.00
84,857.00
1,389.00
86,246.00
0.00
1,389.00
85,430.00
1,690.00
87,120.00
0.00
1,690.00
289,310.00
5,309.00
294,619.00
340.00
5,309.00
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Medicare
480.00
470.00
740.00
540.00
1,389.00
1,690.00
5,309.00
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Calculate Deductions
Name
Barker, T. C.
Ellis, M. R.
Fisk, C. P.
Janus, V. O.
Pham, H. .
Rell, M. A.
Totals
Federal
Income Tax
46.00
45.00
85.00
55.00
238.00
287.30
756.30
Payroll Register for Week Ended October 14, 200X
Beginning
Ending
Taxable Earnings
Cumulative
Cumulative
Social
Earnings
Total
Earnings
Unemployment
Security
6,820.00
480.00
7,300.00
180.00
480.00
6,840.00
470.00
7,310.00
160.00
470.00
36,320.00
740.00
37,060.00
0.00
740.00
69,043.00
540.00
69,583.00
0.00
540.00
84,857.00
1,389.00
86,246.00
0.00
1,389.00
85,430.00
1,690.00
87,120.00
0.00
1,690.00
289,310.00
5,309.00
294,619.00
340.00
5,309.00
State
Income Tax
5.52
5.40
10.20
6.60
28.56
34.48
90.76
Deductions
Social
Security Tax
29.76
29.14
45.88
33.48
86.12
104.78
329.16
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Medicare Tax
6.96
6.82
10.73
7.83
20.14
24.51
76.99
Total
Deductions
88.24
86.36
151.81
102.91
372.82
451.07
1,253.21
Payments
Net
Amount
0.00
Ck.
No.
Medicare
480.00
470.00
740.00
540.00
1,389.00
1,690.00
5,309.00
Wages Expense
Wages Expense
0.00
8 | 70
35
4/30/2011
Calculate Net Pay
Name
Barker, T. C.
Ellis, M. R.
Fisk, C. P.
Janus, V. O.
Pham, H. .
Rell, M. A.
Totals
Federal
Income Tax
46.00
45.00
85.00
55.00
238.00
287.30
756.30
Payroll Register for Week Ended October 14, 200X
Beginning
Ending
Taxable Earnings
Cumulative
Cumulative
Social
Earnings
Total
Earnings
Unemployment
Security
6,820.00
480.00
7,300.00
180.00
480.00
6,840.00
470.00
7,310.00
160.00
470.00
36,320.00
740.00
37,060.00
0.00
740.00
69,043.00
540.00
69,583.00
0.00
540.00
84,857.00
1,389.00
86,246.00
0.00
1,389.00
85,430.00
1,690.00
87,120.00
0.00
1,690.00
289,310.00
5,309.00
294,619.00
340.00
5,309.00
State
Income Tax
5.52
5.40
10.20
6.60
28.56
34.48
90.76
Deductions
Social
Security Tax
29.76
29.14
45.88
33.48
86.12
104.78
329.16
Medicare Tax
6.96
6.82
10.73
7.83
20.14
24.51
76.99
Total
Deductions
88.24
86.36
151.81
102.91
372.82
451.07
1,253.21
Payments
Net
Ck.
Amount
No.
391.76
714
715
383.64
588.19
716
437.09
717
1,016.18
718
719
1,238.93
4,055.79
Payables
Medicare
480.00
470.00
740.00
540.00
1,389.00
1,690.00
5,309.00
Wages Expense
Wages Expense
480.00
470.00
740.00
540.00
1,389.00
1,690.00
5,309.00
Expense
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8 | 71
Record Expenses and Payables
Record Payment to Employees
General Journal
Date Description
20-Oct. 14 Wages Expense
Employees’ Federal Income Tax Payable
Employees’ State Income Tax Payable
FICA Tax Payable
Wages Payable
Payroll Register for Week Ended October 14, 20--.
Wages Payable
Cash—Payroll Bank Account
Paid wages for week ended Oct. 14, 20--.
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Page 17
Post.
Ref. Debit
Credit
5,309.00
756.30
90.76
406.15
4,055.79
4,055.79
4,055.79
8 | 72
36
4/30/2011
Chapter Review
1. Understand the role of laws that affect payroll
deductions and contributions.
2. Calculate total earnings based on an hourly,
piece-rate, or commission basis.
3. Determine deductions using tables of
employees’ income tax withholding.
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8 | 73
Chapter Review (cont’d)
4. Complete a payroll register.
5. Journalize the payroll entry from a payroll
register.
6. Maintain employees’ individual earnings
records.
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8 | 74
37