chapter
Employee Earnings and
Deductions
7
Teacher Version
College Accounting
11th Edition
© 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.
7–1
Objectives of Payroll
Records and Accounting
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
Key Terms
• 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.
© 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.
7–2
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
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What is the federal minimum wage today?
$7.25 if employer pays health insurance
$8.25 without health insurance
What is the NJ minimum wage today?
$8.38
What was the minimum wage in 1938?
$0.25 per hour
© 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
6.2% 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.
7–5
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FICA Taxes: Employers’ Share
• 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
These two
unemployment tax, at a of 5.4% on the
taxes (SUTA
first $7,000 earned by each employee.
and FUTA)
are paid by
The Federal Unemployment Tax Act is to provide
employer’s
financial support for the maintenance of
only
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.
7–6
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Laws Affecting Employer’s Payroll Tax Contributions
7–7
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How Employees Get Paid
• 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.
7–8
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Practice Exercise 1
Social Security taxes (limited to first $106,800)
Medicare taxes
Total FICA taxes
106,800 x .062 = 6621.60
150,000 x .0145 = 2175.00
8796.60
© 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.
7–9
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.
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.
© 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.
7–10
Calculating Wages: First Method
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)
40 hours regular time
2 hours overtime (Thursday)
1 hour overtime (Friday)
3 hours overtime (Saturday)
40
2
1
3
x $ 22.95 per hour = $ 918.00
x 34.43 per hour =
68.86
x 34.43 per hour =
34.43
x 34.43 per hour = 103.29
46
$1,124.58
7–11
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Calculating Wages: Second Method
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)
46 hours regular time
6 hours overtime
46 x $ 22.95 per hour = $1,055.70
6 x 11.48 per hour =
46
68.88
$1,124.58
7–12
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Salaries
• 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.
7–13
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Piece-Rate
• Workers under the piecerate 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?
7–14
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Commissions
• 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.
7–15
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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.
7–16
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Practice Exercise 2
Now complete exercise 7-1, page 319 Use the
excel form and save.
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7–17
Common Deductions from Total Earnings
•
•
•
•
•
•
•
•
•
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)
7–18
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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).
7–19
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7–20
© 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), Employer’s Tax Guide
and Publication 15-T
• 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.
7–21
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Mark Anderson, claiming one allowance as of the
October 7 payroll, has gross wages of $1,124.58.
7–22
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Practice Exercise 3
$155 withheld M-1, weekly, $1360
Social Security Tax: 1360 x .062 = 84.32
Medicare Tax: 1360 x .0145 = 19.72
© 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.
7–23
•
The payroll register is a manual
or computerized schedule
prepared for each payroll period
listing the earnings, deductions,
and net pay for each employee.
(1)
(2)
(3)
(4)
(5)
(6)
7–24
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(7A)
(7B)
(7C)
(7A) – payroll earnings for the period, not to exceed $7,000,
– in
payroll
earnings for the
period, not to exceed $106,800,
are (7B)
listed(7C)
the
column.
– allUnemployment
earnings for the
period are listed in the Medicare
are listed in the Social Security column.
column.
7–25
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(8A)
(8B)
(8C)
(8D)
(8E)
(8F)
7–26
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(9A)
(9B)
(10A)
(10B)
7–27
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Practice Exercise 4
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7–28
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© 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.
7–30
The Payroll Entry
• 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.
7–31
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Note: total Social
Security and total
Medicare are
combined to become
FICA Taxes Payable
7–32
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Special Payroll Bank Account—An Alternative
• 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.
7–33
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7–34
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Practice Exercise 5
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7–35
7–36
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© 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.