Using a Payroll SystemA payroll is a list of employees and payments due to each employee for a specific pay period. Businesses with many employees can have a payroll clerk.
A well-designed payroll system achieves the following goals: The collection and processing of all information needed to prepare
and issue payroll checks. The generation of payroll records needed for accounting purposes
and for reporting to government agencies, management, and others.
Computing Gross PayThe amount of money an employee earns in a pay period is called gross earnings, or gross pay. Employees are grouped into different pay categories to help the employer compute the gross pay:
salary hourly wage commission salary plus commission or bonus piece rate
Hourly WageAnother common method of paying employees is the hourly wage, an amount of money paid at a specified rate per hour worked. Employees are sometimes required to use a time card to record hours worked.
Some businesses use electronic badge readers to track employees’ work hours.
Overtime PayEmployers are generally required to pay overtime when employees work more than 40 hours per week. The overtime rate, as set by the Fair Labor Standards Act of 1938, is 1.5 times the employee’s regular pay rate. Salaried employees are sometimes entitled to overtime pay as well.
Deductions Required by LawAn amount subtracted from gross earnings is a deduction. Deductions include those required by law and those an employee wishes to have withheld.
An employer is required by law to withhold payroll taxes. These taxes include:
Federal income tax Social security tax City and state income tax
Deductions Required by LawFederal Income TaxEmployers withhold income tax based on the estimated income tax the employee will owe. If too much is withheld the Internal Revenue Service (IRS) refunds the overpayment.
Deductions Required by LawSocial Security TaxSocial security taxes are also collected by employers. The Federal Insurance Contributions Act (FICA) established social security taxes in 1935.
FICA taxes have two components: social security–provided as old age and disability
insurance and survivors’ benefits Medicare–provides health insurance for people
Voluntary DeductionsEmployers can also deduct voluntary amounts from their employee’s check at the employee’s request. These types of deductions can include:
union dues health insurance payments life insurance payments U.S. savings bonds charitable contributions pensions credit union deposits and payments
Paying EmployeesSmall businesses write payroll checks straight from the company’s regular checking account. Large businesses have a separate payroll checking account to issue payroll checks. Employees can be paid by check or by direct deposit (net pay is electronically deposited in the employee’s personal bank account).
The Employee’s Earning RecordAn employer must also keep an employee’s earnings record. The earnings record and the payroll register have the same amount columns. In addition, it has the accumulated earnings column, an employee’s year-to-date gross earnings.
Many companies use computers and special software to prepare payroll to reduce errors and improve productivity.
Managerial Implications for Payroll AccountingBecause wages and salaries are a large part of a company’s expenses, accurate payroll records are important. Payroll records can be used
to determine if overtime is justified, and to compare actual amounts to budgeted amounts to
