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FPAYROLL ACCOUNTING

Accounting, Fifth Edition

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After studying this chapter, you should be able to:

1. Compute and record the payroll for a pay period.

2. Describe and record employer payroll taxes.

3. Discuss the objectives of internal control for payroll.

Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

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“Payroll” pertains to both:

Salaries - managerial, administrative, and sales personnel

(monthly or yearly rate).

Wages - store clerks, factory employees, and manual

laborers (rate per hour).

Determining the payroll involves computing three amounts: (1) gross earnings, (2) payroll deductions, and (3) net pay..

Accounting for PayrollAccounting for PayrollAccounting for PayrollAccounting for Payroll

LO 1 Compute and record the payroll for a pay period.

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Total compensation earned by an employee (wages or

salaries, plus any bonuses and commissions).

LO 1 Compute and record the payroll for a pay period.

Illustration F-1

Determining the PayrollDetermining the PayrollDetermining the PayrollDetermining the Payroll

Gross Earnings

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Mandatory:

FICA tax

Federal income tax

State and City

income tax

Payroll Deductions

LO 1 Compute and record the payroll for a pay period.

Voluntary:

Charity

Insurance and Pensions

Determining the PayrollDetermining the PayrollDetermining the PayrollDetermining the Payroll

Other:

Union dues

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Payroll Deductions

LO 1 Compute and record the payroll for a pay period.

Social Security taxes

► Supplemental retirement,

employment disability, and

medical benefits.

► In 2012, the rate was 7.65%

(6.2% Social Security plus

1.45% Medicare) on the first

$110,100 of gross earnings

for each employee.

Determining the PayrollDetermining the PayrollDetermining the PayrollDetermining the Payroll

Mandatory:

FICA tax

Federal income tax

State and City

income tax

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Payroll Deductions

LO 1 Compute and record the payroll for a pay period.

► Employers are required to

withhold income taxes from

employees pay.

► Withholding amounts are

based on

1. gross earnings,

2. number of allowances

claimed, and

3. length of pay period.

Determining the PayrollDetermining the PayrollDetermining the PayrollDetermining the Payroll

Mandatory:

FICA tax

Federal income tax

State and City

income tax

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Employee must complete an Employee’s Withholding Allowance Certificate (Form W-4).

LO 1 Compute and record the payroll for a pay period.

Illustration F-5

Determining the PayrollDetermining the PayrollDetermining the PayrollDetermining the Payroll

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Payroll Deductions

LO 1 Compute and record the payroll for a pay period.

► Most states (and some

cities) require employers

to withhold income taxes

from employees’ earnings.

Mandatory:

FICA tax

Federal income tax

State income tax

Determining the PayrollDetermining the PayrollDetermining the PayrollDetermining the Payroll

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Gross earnings minus payroll deductions.

Net Pay

LO 1 Compute and record the payroll for a pay period.

Illustration F-7

Determining the PayrollDetermining the PayrollDetermining the PayrollDetermining the Payroll

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Employer required by law to keep a cumulative record of each employee’s gross earnings, deductions, and net pay during the year.

Maintaining Payroll Department Records

LO 1

Illustration F-8 Employee earnings record

Recording the PayrollRecording the PayrollRecording the PayrollRecording the Payroll

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Maintaining Payroll Department Records

Recording the PayrollRecording the PayrollRecording the PayrollRecording the Payroll

Illustration F-9

LO 1

F- 14 LO 1 Compute and record the payroll for a pay period.

Recording the PayrollRecording the PayrollRecording the PayrollRecording the Payroll

Recognizing Payroll Expenses and Liabilities

From the payroll register in Illustration F-9, a journal entry is made to record the payroll for the week ending January 14.

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Payroll tax expense results from three taxes that governmental agencies levy on employers.

LO 2 Describe and record employer payroll taxes.

Employer Payroll TaxesEmployer Payroll TaxesEmployer Payroll TaxesEmployer Payroll Taxes

These taxes are:

FICA tax

Federal

unemployment tax

State

unemployment tax

► Same rate and maximum

earnings as the employee’s.

► In 2012, the rate was 7.65%

(6.2% Social Security plus

1.45% Medicare) on the first

$110,000 of gross earnings

for each employee.

F- 16 LO 2 Describe and record employer payroll taxes.

Employer Payroll TaxesEmployer Payroll TaxesEmployer Payroll TaxesEmployer Payroll Taxes

► FUTA tax rate is 6.2% of first

$7,000 of taxable wages.

► Employers who pay the state

unemployment tax on a timely

basis will receive an offset

credit of up to 5.4%.

Therefore, the net federal tax

rate is generally 0.8%.

These taxes are:

FICA tax

Federal

unemployment tax

State

unemployment tax

Payroll tax expense results from three taxes that governmental agencies levy on employers.

F- 17 LO 2 Describe and record employer payroll taxes.

Employer Payroll TaxesEmployer Payroll TaxesEmployer Payroll TaxesEmployer Payroll Taxes

► SUTA basic rate is usually

5.4% on the first $7,000 of

wages paid.

These taxes are:

FICA tax

Federal

unemployment tax

State

unemployment tax

Payroll tax expense results from three taxes that governmental agencies levy on employers.

F- 18 LO 2 Describe and record employer payroll taxes.

Employer Payroll TaxesEmployer Payroll TaxesEmployer Payroll TaxesEmployer Payroll Taxes

Recording Employer Payroll Taxes

The entire amount of gross pay ($17,210.00) shown in the

payroll register in Illustration F-9 is subject to each of the three

taxes mentioned above. Accordingly, the entry to record the

payroll tax expense associated with the January 14 payroll is:

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Employer payroll taxes do not include:

a. Federal unemployment taxes.

b. State unemployment taxes.

c. Federal income taxes.

d. FICA taxes.

Question

LO 2 Describe and record employer payroll taxes.

Employer Payroll TaxesEmployer Payroll TaxesEmployer Payroll TaxesEmployer Payroll Taxes

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Companies must report FICA taxes and federal income taxes

withheld no later than one month following the close of each

quarter.

Companies generally file and remit federal unemployment

taxes annually on or before January 31 of the subsequent

year. Companies usually file and pay state unemployment

taxes by the end of the month following each quarter.

Employers must provide each employee with a Wage and Tax

Statement (Form W-2) by January 31.

LO 2 Describe and record employer payroll taxes.

Filing and Remitting Payroll TaxesFiling and Remitting Payroll TaxesFiling and Remitting Payroll TaxesFiling and Remitting Payroll Taxes

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Filing and Remitting Payroll TaxesFiling and Remitting Payroll TaxesFiling and Remitting Payroll TaxesFiling and Remitting Payroll Taxes

Illustration F-12

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As applied to payroll, the objectives of internal control are to

1. safeguard company assets against unauthorized payments of payrolls, and

2. ensure the accuracy and reliability of the accounting records pertaining to payrolls.

LO 3 Discuss the objectives of internal control for payroll.

Internal Control for PayrollInternal Control for PayrollInternal Control for PayrollInternal Control for Payroll

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Internal control feature:

Human Resources

department documents and

authorizes employment.

Fraud prevented:

Fictitious employees are not

added to payroll.

LO 3 Discuss the objectives of internal control for payroll.

Internal Control for PayrollInternal Control for PayrollInternal Control for PayrollInternal Control for Payroll

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Internal control feature:

Supervisors monitor hours

worked through time cards

and time reports.

Fraud prevented:

Employee works appropriate

hours.

LO 3 Discuss the objectives of internal control for payroll.

Internal Control for PayrollInternal Control for PayrollInternal Control for PayrollInternal Control for Payroll

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Internal control feature:

Two (or more) employees

verify payroll amounts;

supervisor approves.

Fraud prevented:

Payroll calculations are

accurate and relevant.

LO 3 Discuss the objectives of internal control for payroll.

Internal Control for PayrollInternal Control for PayrollInternal Control for PayrollInternal Control for Payroll

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Internal control feature:

Treasurer signs and

distributes prenumbered

checks.

Fraud prevented:

Checks lost through theft;

falsely endorsed used to pay

for hours not worked.

LO 3 Discuss the objectives of internal control for payroll.

Internal Control for PayrollInternal Control for PayrollInternal Control for PayrollInternal Control for Payroll

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