S U P P L E M E N TA L T O P I C
I
ACCOUNTING FOR
PAYROLL
Learning Objectives
After studying this
supplemental topic, you should
be able to:
1. Describe the basic
separation of duties in a
payroll system, and explain
how this contributes to
strong internal control.
2. Account for a payroll,
including computation of
amounts withheld and payroll
taxes on the employer.
I–1
I–2
TOPIC I Accounting for Payroll
Accounting for Payrolls
In most business organizations, the largest expense accruing on a daily basis is payroll.
In the airline industry, for example, labour costs usually represent about 28 percent of
total operating expenses.
The task of accounting for payroll costs would be an important one simply because
of the large amounts involved; however, it is further complicated by the many federal
and provincial laws that require employers to maintain certain specific information in
their payroll records not only for the business as a whole but also for each individual
employee. Frequent reports of wages paid and amounts withheld must be filed with government authorities. These reports are prepared by every employer and must be accompanied by payment to the government of the amounts withheld from employees and of
the payroll taxes levied on the employer.
A basic rule in most business organizations is that every employee must be paid on
time, and the payment must be accompanied by a detailed explanation of the computations used in determining the net amount received by the employee. The payroll system
must therefore be capable of processing the input data (such as employee names, social
insurance numbers, hours worked, pay rates, overtime, and taxes) and producing a prompt
and accurate output of paycheques, payroll records, withholding statements, and reports
to governmental authorities. In addition, the payroll system must have built-in safeguards
against overpayments to employees, the issuance of duplicate paycheques, payments to
fictitious employees, and the continuance on the payroll of persons who have been terminated as employees.
LO 1
Describe the basic separation
of duties in a payroll system,
and explain how this
contributes to strong internal
control.
Internal Control over Payrolls
Every business needs to establish adequate internal control over payrolls. With such controls, a business has assurance that employees will be paid the correct amounts and that
payroll-related taxes will be computed correctly and paid on time. Failure to pay
employees promptly and in the proper amounts is certain to damage employee morale.
Failures to remit payroll taxes to tax authorities on schedule may result in fines and
penalties. Finally, payroll historically has been an area in which poor internal control
has sometimes led to employee fraud.
Payroll fraud can take many forms. Small-scale payroll fraud may consist of employees overstating the number of hours (or days) that they have actually worked.
“Padding” the payroll—adding fictitious employees to the payroll in order to generate
extra paycheques—is a larger-scale payroll fraud.
A basic means of achieving adequate internal control over payrolls is an appropriate
separation of duties. In most organizations, payroll activities include (1) employing workers, (2) timekeeping, (3) payroll preparation and record keeping, and (4) the distribution
of pay to employees. Internal control is strengthened if each of these functions is handled by a separate department.
Human Resources Department The work of the human resources department begins with interviewing and hiring job applicants. When a new employee is hired, the department prepares records showing the date of employment, the authorized rate of pay,
and payroll deductions. It then sends a written notice to the payroll department to place
the new employee on the payroll. The human resources department also is responsible
for notifying the payroll department of changes in employees’ rates of pay and of persons whose employment has been terminated.
For employees paid by the hour, the time of arrival and departure
should be punched on time cards. A new time card should be placed in the rack by the
time clock at the beginning of each week or other pay period. Control procedures should
exist to ensure that each employee punches his or her own time card and no other. The
Timekeeping
I–3
The Computation of Payroll Amounts
timekeeping function should be lodged in a separate department that will control the
time cards and transmit these source documents to the payroll department.
In a computer-based payroll system, record keeping is simplified if the time clocks
are on-line devices—that is, if they are connected directly with the computer system. In
this way, the hours worked by each employee are entered automatically into the payroll
accounting system.
OPERATION OF A PAYROLL SYSTEM
Human Resources
Department
Hire, set
pay rates,
terminate
Timekeeping
Department
Paymaster (Finance
Department)
Payroll
Department
Maintain
record of
hours
worked
Name
pay rate,
exemptions, etc.
Paycheques
(unsigned)
Name
pay rate,
exemptions, etc.
Time cards
Time cards
{
{
Authorizes
placement
of
employee
on payroll
Sign and
distribute
paycheques
Authorizes
payment
for hours
worked
Paycheques
(signed)
Distributed
to
employees
{
Prepare
payroll
Assures
existence
of
employee
Payroll
records
and
reports
Paycheques
(unsigned)
The Payroll Department The input of information to the payroll department consists of hours reported by the timekeeping department and authorized names, pay rates,
and payroll deductions received from the human resources department. The output of
the payroll department includes (1) payroll cheques, (2) individual employee records of
earnings and deductions, and (3) regular reports to the government showing employee
earnings and taxes withheld.
THE COMPUTATION OF PAYROLL AMOUNTS
The actual preparation of a payroll including the computation of dollar amounts, maintenance of payroll records, and printing of paycheques is the responsibility of the payroll department. The dollar amounts associated with payrolls fall into three categories:
(1) employees’ gross pay, (2) amounts withheld from employees’ gross pay, and (3) payroll taxes levied on the employer.
LO 2
Account for a payroll, including
computation of amounts
withheld and payroll taxes on
the employer.
I–4
TOPIC I Accounting for Payroll
Gross Pay
Gross pay (earnings) is the amount earned by the employees during the pay period. Except to the extent that employers withhold amounts for taxes or other purposes, all gross
pay is payable directly to the employees.
Gross pay also includes compensation during sick days, holidays, and vacations. However, it does not include fringe benefits, such as group life insurance paid by the employer or the use of a “company car.” The distinction is that fringe benefits are not payable
directly to the employees.
Gross pay must be computed separately for each employee. For employees paid an
hourly wage, the payroll system must keep track of the number of hours that each employee works each day. In many cases, current laws require that employees be paid at
an overtime rate for hours worked in excess of 44 hours per week. For employees who
receive sales commissions, the system must record separately the sales revenue attributable to each salesperson. The amount of an employee’s gross pay affects the amounts of
taxes that must be withheld and also the payroll taxes levied upon the employer.
Amounts Withheld from Employees’ Pay
The net pay (or “take-home pay”) of most employees is substantially less than their gross
pay. This is because government authorities require employers to withhold specified
amounts of income taxes, employment insurance premiums, and Canada Pension Plan
contributions from each employee’s gross pay. (Employees often refer to amounts withheld as deductions.)
Taxes withheld from employees’ pay are taxes levied on the employees, not taxes on
the employer. The employer’s role in withholding taxes is that of a tax collector. The
amounts withheld must be forwarded to governmental tax authorities weekly, twicemonthly, monthly, or quarterly, depending on the size of the amount involved. Therefore, the employer records the amounts withheld as current liabilities.
The amount of income taxes withheld depends upon the amount of the earnings and upon the “claim amount” (income tax exemptions) to which the employee is entitled. To ensure that the proper amount of income
tax is withheld, each employee is required to file with the employer a Personal Tax
Credit Return, TD1 form, showing the total claim amount, the Claim Code, and the
supporting details. However, this return may not need to be filed by employees claiming the “basic personal amount” only—that is, claiming the minimum amount for tax
credit.
Based on the earnings and the amount claimed, the employer can determine the income tax to be withheld from the employee by referring to the income tax deduction tables provided by Canada Customs and Revenue Agency. The amount withheld from employees is remitted to Canada Customs and Revenue Agency. This amount includes both
the federal and provincial income taxes for all provinces except the province of Quebec,
which collects its own income tax. Employers in Quebec must withhold separate deductions for federal and Quebec income taxes.
Up to December 31, 2000, provincial tax in all provinces except Quebec was calculated as a percentage of the Federal Income Tax. As of January 2001, for all provinces
except for Quebec, Yukon, NorthWest Territories, or Nunavut, TONI (tax on net income)
is used to calculate provincial income tax. This new provincial tax system requires two
separate calculations based on the taxable income, one for federal tax withholdings and
the other for the provincial tax withholdings. This new calculation allows the Provinces
to set their own tax brackets and rates differently from that of the Federal government.
(For more information on TONI, go to the Canada Customs and Revenue Agency website at www.ccra-adrc.gc.ca.)
Federal and Provincial Income Taxes
The Computation of Payroll Amounts
Since its inception in 1940, federal Unemployment Insurance legislation has undergone significant changes. The current law requires with a few
exceptions both employers and employees to contribute to employment insurance on remuneration from insurable employment. Insurable employment includes most employment in Canada under a contract of service, that is, employee-employer relationship.
Also, there is no age limit for contribution to employment insurance. The purpose of the
legislation is to provide relief from financial hardships for those who are unemployed
even though they are willing and able to work. The eligibility for, and the amount of unemployment benefits depends on a number of factors, including past insurable earnings,
length of insurable employment, and regional unemployment rate.
The employers are responsible for withholding an appropriate amount of employment
insurance premium from their employees. The employee and employer amount of
premiums is remitted to Canada Customs and Revenue Agency. For the year 2001 the
employees’ premium has been set at 2.25 percent of their insurable earnings. The employers’ premium is 1.4 times that of the employee’s premium. For example, if an employee’s monthly insurable-earnings are $1,000, the premiums for the employee and the
employer are $22.50 ($1,000 2.25%) and $31.50 ($22.50 1.4) respectively. For the
year 2001, the rate of premium of 2.25 percent is applicable to annual insurable earnings to a maximum of $39,000. In other words, employees with annual earnings of
$39,000 or more are required to pay premiums on the annual maximum amount of
$39,000. Therefore, the maximum annual premium for an employee with maximum insurable earnings is $877.50 ($39,000 2.25%). Thus, the maximum payment by the
employer for an employee earning $39,000 or more per year is $1,228.50. Since contributions are made periodically, employees with annual insurable earnings exceeding the
maximum may pay the entire $877.50 maximum annual premium in the early part of
the year. The premium rate as well as the maximum amounts subject to the employment
insurance premium may change from year to year.
For an individual earning $60,000 annually, the maximum total deduction of $877.50
for Employment Insurance is made up of $112.50 for 7 months and $90.00 for the 8th
month.
On occasion, employees may have contributed more than the maximum amount of
premium. In such cases, the employees should claim a refund by reporting the overpayment in their income tax return.
While the individual contribution is small, the total contribution for employment insurance is huge. For example, the total contribution of employment insurance in a recent year was more than $18.6 billion.
Employment Insurance
Canada Pension Plan The Canada Pension Plan Act requires, with a few exceptions,
both employers and employees (between the ages of 18 and 70), including those who
are self-employed, to make contributions to the Canada Pension Plan. Its purpose is to
provide retirement, disability, and similar benefits. The eligibility for, and the amount
of, benefits depends on a number of factors, including the amount of pensionable earnings, the length of the contribution period, and the age of the individual.
The employers are responsible for withholding an appropriate amount of Canada
Pension Plan contribution from the pensionable earnings of each of their employees
and are required to contribute an amount equal to that of the employees’ contribution.
The amount withheld together with the amount contributed by the employer is
remitted to Canada Customs and Revenue Agency. For the year 2001, the employees’
contribution is 4.3 percent of the maximum annual pensionable earnings of $38,300,
with the first $3,500 exempted. For this deduction, the employer’s contribution is the
same as that of the employee. For example, if an employee’s annual pensionable earnings are $18,500, both the employee and the employer are required to contribute $645
each [($18,500 less $3,500 basic annual exemption) 4.3%)]. Therefore, in 2001, the
4.3 percent rate of contribution is applicable to annual pensionable earnings of over
$3,500 up to a maximum of $34,800, that is, earnings of $38,300 less the $3,500 basic
I–5
I–6
TOPIC I Accounting for Payroll
annual exemption. In other words, employees with annual pensionable earnings of $3,500
or less are not required to contribute, and employees with pensionable earnings of $38,300
or more are required to contribute on the maximum amount of $34,800. Accordingly,
the maximum annual contribution for an employee for the year 2001 is $1,496.40
($34,800 4.3%).
Since contributions are made periodically, employees with annual earnings
exceeding the maximum pensionable earnings will pay the maximum contribution
of $1,496.40. For the above employee who earned $60,000 annually, the Canada
Pension Plan maximum total deduction of $1,496.40 will be made up of $202.46
[($5,000 less the monthly exemption of $291.67) 4.3%] for seven months and $79.18
in the eighth month. In the first seven months the employee will have contributed
$1,417.22 and thus will only be required to contribute the balance of $79.18 in the eighth
month.1
The rate, and the maximum earnings subject to the Canada Pension Plan, may change
from year to year.
On occasion, an employee may have contributed more than the maximum amount.
In such cases, the employee is eligible to claim a refund by reporting the overpayment
in his or her income tax return.
The Canada Pension Plan applies to all provinces except the province of Quebec,
which has its own similar pension plan. The two plans are closely coordinated so that
contributing employees are protected wherever they may work in Canada.
The total contribution to Canada Pension Plan is very large; a recent year’s contribution amounted to more than $16.2 billion.
In addition to the compulsory deductions for employment insurance, Canada (or Quebec) Pension Plan, and income taxes,
many other deductions are voluntarily authorized by employees. Insurance premiums,
savings bond purchases, charitable contributions, retirement programs, and pension plans
are examples of voluntary payroll deductions.
Other Deductions from Employees’ Earnings
In withholding amounts from
an employee’s earnings for either voluntary or involuntary deductions, the employer acts
merely as a collection agent. The amounts withheld are paid to the designated organization, such as governmental authorities or a labour union. The employer is also responsible for maintaining accounting records that will enable it to file required reports
and make timely payments of the amounts withheld. From the employer’s viewpoint, the
amounts withheld from employee’s earnings represent current liabilities.
Employer’s Responsibility for Amounts Withheld
Basic Payroll Records
The formats of payroll records vary greatly among different businesses, depending upon
the number of employees and the extent of automation. However, there are two basic
records common to the payroll system of every organization: the payroll register and
the employees’ individual earnings records.
The payroll register is a special journal used for developing all of
the information needed for processing and recording the payroll of a specific pay period. This journal includes a separate line of data about each employee. On this line, the
employee’s gross pay, various amounts withheld, and net pay are entered in separate
Payroll Register
1
The monthly exemption is arrived at by dividing the annual exemption of $3,500 by 12. The proper amounts
of contributions can be obtained from the deduction tables provided by Canada Customs and Revenue Agency.
Since the exemption has already been taken into account in these tables, there is no need to deduct the monthly
or weekly exemption from the earnings. For example, if the monthly earnings plus taxable benefits, if any, are
$5,000, look up the earnings’ bracket between $4,991.78 and $5,001.77 to obtain the proper amount of contribution, which is $202.32.
I–7
The Computation of Payroll Amounts
columns. Thus, each line of the payroll register provides the data necessary for preparing one employee’s paycheque, and for updating the employee’s individual earnings
record. Totalling each column, on the other hand, provides information about the entire
payroll, which is posted to the general ledger accounts.
To illustrate, assume that Exhibits International Limited has 35 salaried employees
who are paid semi-monthly (on the fifteenth and the end of each month). A payroll register containing data relating to the March 31st payroll is illustrated below.
The illustrated payroll register includes separate columns for gross pay, four different types of withholding and net pay.2 The totals of these columns represent the expenses
and liabilities associated with the issuance of pay cheques to employees. (These totals
do not reflect the payroll deductions required by the employer for March 31st.)
BI-MONTHLY PAYROLL REGISTER
Payroll period ended March 31, 2000
Amounts Withheld
Employee
Gross Pay
Income Tax
Abrams,B.
Bolce, C.
Galo, Y.
$
$
$
$
$
$
Zucco, Y.
Totals
$ 2,400.00
$ 135,000.00
1,600.00
2,000.00
3,000.00
Employment
Insurance
416.00
560.00
780.00
$
$
$
$
696.00
$ 26,210.00
Canada
Pension Plan
Group
Insurance
Net Pay
Cheque No.
36.00
45.00
67.50
$
63.00
$
86.00
$ 129.00
$
$
$
35.00
42.00
66.00
$ 1,050.00
$ 1,267.00
$ 1,957.50
641
642
643
$
54.00
$ 4,351.00
$ 103.00
$ 8,030.00
$
81.00
$ 1,890.00
$ 1,466.00
$94,519.00
675
One common practice is to summarize the column totals of the monthly payroll register in the form of a general journal entry, as follows:3
Salaries Expense . . . . . . . . . . . . . . . . . . . . . .
Liability for income tax withheld . . . . . . . .
Liability for Employment Insurance withheld
Liability for Canada Pension Plan withheld .
Liability for group insurance withheld . . . . .
Accrued payroll . . . . . . . . . . . . . . . . . . . .
To record the monthly payroll for March
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
270,000
52,420
8,702
16,060
3,780
189,038
All of the accounts credited in this entry are current liabilities of the employer. Accrued payroll represents the net pay owed to employees; this liability will be discharged
almost immediately through the issuance of paycheques. The liabilities for amounts withheld will be discharged within a short period of time by remitting these amounts to the
appropriate recipients.
2
The illustrated payroll register is highly simplified. An actual payroll register includes many more columns
for such items as employees’ social insurance numbers and several other types of withholding. For employees
paid an hourly wage, additional columns would indicate pay rates and regular hours and overtime hours worked
during the pay period. Actual payroll registers generally are a computer printout with perhaps 156 or more data
columns.
3
A general journal entry is not actually necessary; the column totals could be posted directly from the payroll
register to the general ledger accounts.
Journal entry summarizing the
March payroll—except for
taxes on the employer
I–8
TOPIC I Accounting for Payroll
Employees’ Individual Earnings Records An employer also must maintain an individual earnings record for each employee. These records contain basically the same
information as does the payroll register—each employee’s gross pay amounts withheld
and net pay. The difference between a payroll register and the employees’ individual
earnings records is primarily the manner in which the data are organized.
A payroll register shows in one place all of the payroll data for one payroll period,
including data for all employees. An earnings record shows in one place all of the payroll data for one employee, including data for every payroll period. The individual earnings record for one of Exhibits International’s salaried employees is illustrated on page
I–9.
An employee’s earnings record always includes a column showing the employee’s cumulative gross pay earned thus far during the year. This year-to-date earnings figure determines when (and if) the employee’s earnings exceed the bases subject to employment
insurance and Canada Pension Plan contributions. In addition, employers must report
each employee’s gross earnings for the year to the employee and to Canada Customs
and Revenue Agency.
By the end of February each year, employers must furnish each employee and Canada
Customs and Revenue Agency with a copy of the Statement of Remuneration Paid (T4)
showing the employee’s gross earnings for the preceding calendar year and the amounts
of all taxes withheld. When the employee files an income tax return, he or she must attach a copy of this statement.
Payroll services and large companies now send more T4s by electronic tape with the
paper T4 copies only as backup. This has allowed the government to process refunds
more quickly.
Payroll Taxes Levied upon the Employer
As discussed earlier in this chapter, employers are required to contribute to employment
insurance and Canada Pension Plan. These contributions are expenses to the business
and are commonly called “payroll tax expenses.”4
Entry Recording an Employer’s Payroll Taxes
The entry to record the employer’s payroll taxes is usually made at the end of the month
along with the entry recording the payroll. To illustrate, let us consider the entry for the
payroll for the month of March for Exhibits International Limited. The entry to record
this payroll, including the taxes withheld from employees, appeared on page I–7. Now,
however, we are addressing the payroll taxes levied directly upon the employer.
The employer’s liability for employment insurance premium is 1.4 times the amounts
withheld from the employees—$12,183 (1.4 $8,702). The employer’s liability for
Canada Pension Plan is equal to the amount withheld from the employees—$16,060.
A general journal entry recording the payroll taxes levied upon Exhibits International
Limited for the month of March appears below:
Journal entry to record payroll
taxes levied on the employer
Payroll taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employment Insurance taxes payable . . . . . . . . . . . . . . . . . . . . . . . . .
Canada Pension Plan taxes payable . . . . . . . . . . . . . . . . . . . . . . . . .
To record employer’s payroll taxes relating to the March payroll
28,243
12,183
16,060
All of the accounts credited represent current liabilities that must be paid within a
short period of time.
4
There are also payroll taxes at the provincial level. For example, employers in Ontario must pay employer
health tax and insurance premium under the Workplace Safety and Insurance Act.
I–9
The Computation of Payroll Amounts
EMPLOYEE EARNINGS RECORD
Name
Address:
Carole Bolce
900 Lake View Lane, Apt. F
Windsor, ON N9B 8P9
Soc. Ins. #
Date of Birth
Date of Emp.
483-734-690
4-Jul-75
24-Jul-97
Position:
Commercial Artist - Grade 1
Date of Termination
Marital Status: M
Reason Termination
Claim Code
Monthly Sal: $4,000.00
A
Amounts Withheld
Pay
Period
Gross
Pay
Year-to
Date
Income
Tax
15-Jan.
31-Jan.
15-Feb.
28-Feb.
15-Mar.
31-Mar.
$
$
$
$
$
$
2,000.00
2,000.00
2,000.00
2,000.00
2,000.00
2,000.00
$ 2,000.00
$ 4,000.00
$ 6,000.00
$ 8,000.00
$10,000.00
$12,000.00
$
$
$
$
$
$
560.00
560.00
560.00
560.00
560.00
560.00
Total for
Quarter
$ 12,000.00
$12,000.00
$ 3,360.00
Employment
Insurance
$
$
$
$
$
$
45.00
45.00
45.00
45.00
45.00
45.00
$ 270.00
Canada
Pension Plan
$
$
$
$
$
$
86.00
86.00
86.00
86.00
86.00
86.00
$ 516.00
Group
Insurance
Net
Pay
Cheque
No.
42.00
42.00
42.00
42.00
42.00
42.00
$ 1,267.00
$ 1,267.00
$ 1,267.00
$ 1,267.00
$ 1,267.00
$ 1,267.00
207
329
456
501
560
642
$ 252.00
$ 7,602.00
$
$
$
$
$
$
Payroll by Computer
Because of the repetitious nature of payroll computations, payrolls are ideally suited to
computer processing. In fact, accounting for payrolls was among the first applications
of the computer in the business world. As an alternative to accounting for payrolls “inhouse,” small businesses often delegate this function to an outside agency.
Given the complexities of payroll accounting, computer-based payroll systems are
amazingly efficient. Often, the only input required for processing the entire payroll is
the number of hours worked by each employee receiving an hourly wage. If time clocks
are on-line devices, payrolls sometimes can be prepared without any manual input of
data or manual computations. (Of course, the computer-based files must be updated for
changes in pay rates, tax rates, and the personnel comprising the work force.)
In conclusion, it simply is not cost-efficient to account for payrolls manually in a business that has more than just a few employees.
Fringe Benefits
Many companies provide employees with various fringe benefits, such as dental and extended health care insurance, group life insurance, and a pension plan. The cost of fringe
benefits usually is determined for the work force as a whole, rather than computed separately for each employee. Separate expense accounts and liability accounts are used in
recording each type of fringe benefit.
To illustrate, assume that Exhibits International Limited pays 50 percent of the
dental, extended health care insurance, and life insurance for its employees. A general
journal entry recording the cost of fringe benefits relating to the March payroll is shown
below:
Group Insurance Expense (Dental, extended health care, and life)
3,780
Insurance premiums payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,780
To record the cost of fringe benefits provided to employees for the month of March
Journal entry to record the
cost of fringe benefits
I–10
TOPIC I Accounting for Payroll
The Total Cost of Employee Compensation
Our discussion of payrolls has been based upon the $270,000 March payroll of Exhibits
International Limited. Notice, however, that the company’s total payroll cost in March
actually amounts to $302,023—a figure substantially higher than the employees’ gross
pay. The “total payroll cost” includes the following elements:5
Employees cost more than
they are paid
Gross pay earned by employees . . . . . . . . . . . . . . .
Payroll taxes levied upon employer . . . . . . . . . . . . . .
Fringe benefits paid by employer . . . . . . . . . . . . . . .
Total employee compensation costs for the pay period
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
$270,000
28,243
3,780
$302,023
These results are not at all unusual. An employer’s total payroll cost generally exceeds employees’ gross pay by more than 10 percent.
Distinction between Employees and Independent
Contractors
Every business obtains personal services from employees and also from independent
contractors. The employer-employee relationship exists when the company paying for
the services has a right to direct and supervise the person rendering the services. Independent contractors, on the other hand, are retained to perform a specific task and exercise their own judgment as to the best method for performing the work. Examples of independent contractors include public accountants engaged to perform an audit, lawyers
retained to represent a company in a law suit, and a plumber called in to repair a broken pipe.
The fees paid to independent contractors are not included in payroll records and are
not subject to withholding or payroll deductions. However, in Ontario, these fees must
be included in the computation of the remittance for the Employment Health Tax and
Workplace Safety and Insurance Board (WSIB).
Visit the Internet site of the Canadian Payroll Association at:
www.payroll.ca
Check their journal called “Dialogue” for interesting features.
NET CONNECTIONS
Visit the Internet site of Ceridian at:
www.ceridian.ca
This is a large company that does payroll processing for many Canadian firms that outsource
their payroll function. See the services that they offer.
5
As noted earlier, the total costs will be much higher after the provincial payroll taxes are added.
I–11
Last A Head
END-OF-SUPPLEMENTAL TOPIC REVIEW
KEY TERMS INTRODUCED OR
EMPHASIZED IN SUPPLEMENTAL
TOPIC I
Canada Pension Plan (p. I-5) A national plan established by a
federal act that requires both the employer and the employee to
make contributions to the plan. Its purpose is to provide retirement, disability, and similar benefits.
Employment insurance (p. I-5) An insurance plan established
by federal legislation that imposes a premium contribution on
both the employer and the employee. Its purpose is to provide
relief from financial hardships for the unemployed.
Fringe benefits (p. I-4) Portions of the compensation package
offered to employees that are not paid directly to the employees.
Paid life insurance is an example.
Gross pay (p. I-4) The total amount earned by an employee that
is payable, at least in part, to that employee. Does not include
fringe benefits.
Independent contractor (p. I-10) A person or firm providing
services to a company for a fee or commission. Not controlled
or supervised by the client company. Not subject to payroll taxes.
Payroll register (p. I-6) A form of payroll record showing for
each pay period all payroll information for employees individually and in total.
Personal Tax Credit Return (TD1) (p. I-4) A form prepared
and signed by the employee that shows the total amount of
claims and the supporting details. It is used to determine the
proper amount of income tax to be withheld from the employee’s
remuneration.
Workplace Safety and Insurance Board (WSIB) (p. I-10) A
mandated insurance program insuring workers against job-related injuries. Premiums are charged to employers as a percentage of the employees’ wages and salaries. The amounts vary by
jurisdiction and by the employees’ occupations but, in some
cases, can be very substantial.
DEMONSTRATION PROBLEM
Geraldine, Cora, and Rose worked together for five years for Jenny Fong, Inc., a large manufacturing company. During the economic slow-down in the fall of 2001, the company restructured
and by year-end 2001 each of these ladies were without a job.
On a part-time basis, Geraldine had been making natural ingredient soaps in her basement.
She was selling these soaps on the Internet. On January 1, the three ladies entered into the business as partners. This would be a full-time venture doing business under the name of The Canadian Natural Soap Company. All sales would be made on the Internet.
Business was so good that, on July 1, 2002, they moved out of the basement to rented premises.
On that date the company hired two additional staff to package and ship orders. They also hired
a part-time accountant to do the bookkeeping and the weekly payroll.
Payroll was to be prepared on a bi-monthly (15th and end of month). The following is a list
of the bi-monthly salaries:
Each owner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Packers/shipper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part-time accountant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,800.00
$ 850.00
$ 400.00
Since January 1, when the partnership began, the owners had been doing their own payroll.
Up to June 30, 2002, each of the ladies had earned a gross pay of $21,600.
Instructions
Prepare the journal entries for
a. net take-home pay for the month of July.
b. remittance due to Canada Customs and Revenue Agency on the 15th of August. (Use a
20% tax rate.)
I–12
TOPIC I Accounting for Payroll
Solution to the Demonstration Problem
a. Calculation of July payroll cost
Gross payroll
Income tax deducted (20% $15,000)
Employment Insurance deducted
CPP deducted
Net Pay
b. Company cost for payroll
CPP (match)
EI (1.4% $337.50)
Total
$15,000.00
$ 3,000.00
$ 337.50 1
$ 607.38 2
$11,055.12
$
607.38
472.50
$ 1,079.88
Remittance amount to Canada Customs and Revenue Agency
Income Tax
$ 3,000.00
CPP ($607.38 $ 607.38)
$ 1,214.76
EI ($337.50 $472.50)
810.00
Total
$ 5,024.76
1
2
Maximum insurable earnings $39,000
No employee has earned this amount to date.
Owners: $3,600 per month 7 months $25,200
Packer/Shippers: $1,600 per month 1 months $1,600
Accountant: $800 per month 1 month $800
CPP Calculation:
Owners
Maximum pensionable earnings
$ 34,000
Owners’ earnings to date
21,600
$ 13,200
July earnings
3,600
Remainder
$
9,600
Each owners’ CPP: $3,600 4.3% $154.80
Each Packer/Shipper’s CPP: ($1,700 $291.67) 4.3% $60.56
Accountant’s CPP: ($800 $291.67) 4.3% $21.86
SELF-TEST QUESTIONS
1. Alison Ground receives a salary of $60,000 per year from Harrington Limited. Income taxes
withheld amounted to $17,112. Employment Insurance premiums and Canada Pension Plan
contributions withheld were $877.50 and $1,496.40 respectively. Registered pension plan of
$3,500 and union dues of $860 were also withheld. Ground’s take-home pay and the total
cost to Harrington of having Ground on the payroll are, respectively:
a. $77,112 and $34,925.60
b. $62,373.90 and $34,048.10
c. $57,626.10 and $37,014.10
d. $36,154.10 and $62,724.90
2. Each of the following indicates a significant weakness in internal control over payroll except:
a. The paymaster is responsible for timekeeping and for distributing paycheques to
employees.
b. The human resources department is responsible for hiring and firing employees and for
the distribution of paycheques.
c. The payroll department is responsible for preparing the payroll cheques for signature by
the paymaster, maintaining individual employees’ earnings records of earnings and
deductions, and filing required payroll reports with the government.
d. The payroll department prepares the payroll, the paymaster prepares and signs paycheques,
and the paycheques are distributed by the timekeeping department.
I–13
Discussion Questions
3. Identify all correct statements concerning payrolls and related payroll costs.
a. Both employers and employees pay Canada Pension Plan.
b. Workplace Safety and Insurance Board (WSIB) premiums are withheld from employees’
wages.
c. An employer’s total payroll costs usually exceed total wages expense by about 20 percent.
d. Under current law, employers are required to pay Canada Pension Plan payments on
employees’ earnings.
ASSIGNMENT MATERIAL
DISCUSSION QUESTIONS
1. Explain why an employer’s “total payroll cost” may exceed by a substantial amount the total wages and salaries earned by employees.
2. What are WSIB premiums? Who pays them? Who pays Canada Pension Plan premiums?
3. MetroScape has 210 employees, but no liability for accrued payroll appears in the company’s
balance sheet. Assuming no error has been made, how can this be? Explain.
4. The human resources department of Meadow Company failed to notify the payroll department that five hourly factory workers had been terminated at the end of the last pay period.
Assuming a normal subdivision of duties regarding human resources, timekeeping , preparation of payroll, and distribution of paycheques, what control procedure will prevent the
payroll department from preparing paycheques for these five employees in the current period?
5. Explain which of the following taxes relating to an employee’s wages are borne by the employee and which by the employer:
a. Employment Insurance
b. Canada Pension Plan
c. Income taxes
6. Is the Salaries Expense account equal to take-home pay or gross pay? Explain.
7. Why is the cost to an employer of having an employee on the payroll greater than that person’s gross pay?
8. Distinguish between an employee and an independent contractor. Why is this distinction important with respect to payroll accounting?
EXERCISES
A supervisor in the factory of Mark Haines Corporation, a large manufacturing company, discharged an employee but did not notify the human resources department of this action. The supervisor then began forging the employee’s signature on time cards. When giving out paycheques,
the supervisor diverted to his own use the paycheques drawn payable to the discharged worker.
What internal control measure would be most effective in preventing this fraudulent activity?
EXERCISE I-1
The monthly payroll record of Rochelle Gordon Incorporated for January showed the following
amounts for total earnings: sales employees, $16,000; office employees, $10,000. Amounts withheld consisted of Employment Insurance premiums, $702, Canada Pension Plan, $1,106, and income tax, $5,830.
EXERCISE I-2
Instructions
a. Prepare a general journal entry to record the payroll. Do not include taxes on the employer.
b. Prepare a general journal entry to record the payroll tax expense to Rochelle Gordon Incorporated relating to this payroll. Assume that the employer’s rate for Employment Insurance is
1.4 times the employees premium and that the employer’s contribution to Canada Pension Plan
is the same as that of the employee.
Internal Control over Payroll
LO 1
Journal Entries for Payroll and
Payroll Taxes
LO 2
I–14
TOPIC I Accounting for Payroll
EXERCISE I-3
The payroll of Brenedlyn Corporation may be summarized as follows:
Employer’s Payroll Tax
LO 2
Gross earnings of employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee earnings subject to Employment Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee earnings subject to Canada Pension Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$250,000
238,000
221,000
The employer is required to contribute Employment Insurance at 1.4 times the employee’s
rate of 2.25 percent and to contribute 4.30 percent to the Canada Pension Plan.
Instructions
Compute the amount of Brenedlyn Corporation’s payroll tax expense for the year. Show the amount
of each of the two taxes separately and prepare a general journal entry to record the company’s
payroll tax expense.
PROBLEMS
PROBLEM I-1
Payroll—A Short Problem
LO 2
The payroll records of Oakland Ltd. for the first week of January showed total salaries earned by
employees of $25,000.
The amounts withheld from employees’ pay consisted of Employment Insurance of $563,
Canada Pension Plan of $925, income taxes of $4,272, and union dues of $380.
As a fringe benefit, Oakland Ltd. contributes an amount equal to 2 percent of employees’ gross
pay to an employee group life insurance plan and 4 percent to an employee registered pension plan.
The weekly payroll is recorded on Friday, January 6, and paycheques will be issued to employees on Monday, January 9.
Instructions
a. Prepare separate general journal entries to record the (1) salaries earned by employees, amounts
withheld, and liability for net pay; (2) payroll taxes levied upon the employer; (3) cost of fringe
benefits; and (4) issuance of paycheques.
b. Compute the total cost to Oakland Ltd. of employee compensation for the first week of January.
c. Assuming no change in pay rates, tax rates, or number of employees, would you expect the
total cost of Oakland’s weekly payroll to increase or decrease as the year progresses? Explain.
PROBLEM I-2
Payroll—A Comprehensive
Problem
LO 2
The individual employees’ earnings records of Paul Williams Surveillance Systems show the following cumulative gross pay (earnings) as of year end.
Employee
Olivia Winters
Victor Newman
Beau Brady
Cumulative
Gross Pay
$28,500
42,000
60,000
Employee
Phyllis Sommers
Jack Abbott
Cumulative
Gross Pay
$35,000
49,600
Assume that the rate of Employment Insurance for employees is 2.25 percent and the rate for
the employer is 1.4 times that of the employees. The maximum annual insurable earnings for each
employee is $39,000. The rate for Canada Pension Plan is 4.30 percent for both the employees
and the employer. The rate is applied to the employees’ first $34,800 annual pensionable earnings that is, gross pay of $38,300 less $3,500 exemption.
During the year, the employer has withheld income taxes of $54,920 from employees’ pay and
has incurred costs of $23,120 related to fringe benefits.
Instructions
a. Prepare a schedule with four data columns for each employee. In the first column, enter the
employee’s name, in the second, the employee’s cumulative gross pay, as indicated above. In
the remaining two columns, indicate the amounts of the gross pay that were subject to (1) Employment Insurance and (2) Canada Pension Plan. Show totals for each column.
b. Compute the following total amounts for the current year (round amounts to the nearest dollar):
I–15
Analytical and Decision Problems and Cases
1. Total amount withheld from employees’ pay (combine all types of withholdings).
2. Employees’ net pay.
3. Payroll taxes levied upon the employer.
4. The employer’s total payroll costs.
c. Reconcile the total amount of employees’ net pay [b(2.)] with the total payroll costs incurred
by the employer [b(4.)].
The Genoa Daily Chronicle is a large business organization, with 1,500 employees. For illustrative purposes, however, we will demonstrate certain payroll procedures using the earnings of only
three of these employees for the month of July.
The monthly salaries of these three employees, and their cumulative gross pay for the year as
at June 30, appear below:
Employee
Adams . . . . . . . . . . . .
Colbert . . . . . . . . . . .
Henderson . . . . . . . . .
*Colbert started work in
................................
................................
................................
late March.
Monthly
Salary
Year-to-Date
June 30
$5,600
2,000
6,800
$33,600
6,500*
40,800
PROBLEM I-3
Payroll—A More
Comprehensive Problem
LO 2
This information is obtained from the employees’ individual earnings records.
Assume that the rate of Employment Insurance for employees is 2.25 percent and the rate for
the employer is 1.4 times that of the employees. The maximum annual insurable earnings for each
employee is $39,000. The rate for Canada Pension Plan is 4.30 percent for both the employees
and the employer and the rate is applied to the employees’ first $34,800 pensionable earnings (i.e.,
gross earnings of $38,300 less $3,500 exemption).
The Genoa Daily Chronicle provides the following fringe benefit to all employees:
• Paid group life insurance (cost: $100 per month for the three employees)
Liabilities relating to fringe benefits are paid at the end of each calendar quarter.
Instructions
a. Prepare a three-column schedule showing payroll data for each employee. In the first column,
enter each employee’s gross pay for July. In the remaining columns, show the amount of July’s
gross pay that is subject to (1) Employment Insurance and (2) Canada Pension Plan. (If none
of an employee’s July salary is subject to a particular tax, explain why not. If only part of the
employee’s July salary is subject to a particular type of tax, show a supporting computation.
Round amounts to the nearest dollar.)
Show totals in each of the three columns.
b. Prepare three separate general journal entries, each dated July 31, summarizing for the month:
1. The gross pay, amounts withheld, and net pay of these employees. In addition, the amounts
withheld for income taxes is $4,860. Paycheques will be issued on the next business day
(August 3).
2. The payroll taxes levied upon the employer.
3. The cost of fringe benefits.
c. Compute the total cost to The Genoa Daily Chronicle of having these three employees on the
payroll during the month of July.
d. List all of the current liabilities at July 31 resulting from this monthly payroll.
ANALYTICAL AND DECISION PROBLEMS AND CASES
Fenmore Department Stores Ltd. is a large department store with a highly automated accounting
system. The computer program used in processing payrolls includes all tax rates and withholding
A&D I-1
“Hey – Can’t We Do This By
Computer?”
LO 1
I–16
TOPIC I Accounting for Payroll
tables, employees’ individual earnings records, and every employee’s rate of compensation. Employees’ gross pay is determined as follows:
Wearhouse workers
Office workers and management
Salespeople
Hourly wages
Monthly salaries
Monthly salaries plus commissions
Sales commisions are based upon the sales generated by the individual salesperson during the pay
period.
Employees are paid twice each month. Every payroll period, the computer program compiles
a payroll register, updates the employees’ earnings records, prints paycheques, and records in the
general ledger both the payroll and the payroll taxes upon the employer.
Instructions
a. Indicate the additional information that must be entered into this computerized system each
pay period to enable the computer to perform the processing tasks described above. Suggest
means by which each type of additional information might be entered into the computerized
payroll system automatically instead of manually.
b. Describe a plan for distributing paycheques to the company’s employees that is both efficient
and contributes to strong internal control.
A&D I-2
Real-world Payroll Costs
LO 2
Interview the owner of a small business, or an employee responsible for payrolls. (You may find
this more interesting if you select a business in which the employees are exposed to some jobrelated risk of injury, such as construction.) Determine the items that cause differences between
gross wages and salaries expense earned by employees during a pay period and each of:
1. The employees’ take-home pay.
2. The employer’s total related payroll costs.
Also inquire whether any of these amounts tends to increase or decrease in later pay periods.
Be prepared to explain in class the relative size of each item as a percentage of gross wages
and salaries expense. Also be prepared to explain the absence of any of the payroll costs discussed
in this text.
(Note: All interviews are to be conducted in accordance with the guidelines discussed in the Preface of the textbook.)
INTERNET ASSIGNMENT
INTERNET I-1
Real Life Data
LO 2
Go to the Internet site of the Canadian Payroll Association at www.payroll.ca and answer the following questions:
1. What is the filing deadline for Workers’ Compensation in your province?
2. What amounts are included in the source deductions return for dependent children?
3. What is the amount of the TD1 credit for each of the following?
a. Basic Personal Amount
b. Age 65 Amount
c. Disability Amount
d. Education Amount – Full Time
e. Education Amount – Part Time
ANSWERS TO SELF-TEST QUESTIONS
1. d
2. d
3. a, c, d