Appendix D 1. Appendix D 2 Payroll Accounting Financial Accounting, Seventh Edition Appendix D

Appendix D 1

Appendix D 2

Payroll AccountingPayroll Accounting

Financial Accounting, Seventh Edition

Appendix Appendix DDAppendix Appendix DD

Appendix D 3

1. Discuss the objectives of internal control for payroll.

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

3. Describe and record employer payroll taxes.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

Appendix D 4

The term “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).

Payroll AccountingPayroll AccountingPayroll AccountingPayroll Accounting

Determining the payroll involves computing three amounts:

(1)gross earnings,

(2) payroll deductions, and

(3) net pay.

Appendix D 5

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

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

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

SO 1 Discuss the objectives of internal control for payroll.

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

Appendix D 6

Internal control feature:Human Resourcesdepartment documents andauthorizes employment.

Fraud prevented:Fictitious employeesbeing added to payroll.



Appendix D 7

Internal control feature:Supervisors monitor hoursworked through time cardsand time reports.

Fraud prevented:Employee paid for hours not worked.



Appendix D 8

Internal control feature:Two (or more) employeesverify payroll amounts;supervisor approves.

Fraud prevented:Payroll calculation errors and inappropriate amounts being paid to an employee.



Appendix D 9

Internal control feature:Treasurer signs anddistributes prenumberedchecks.

Fraud prevented:Checks lost through theft; falsely endorsed used to pay for hours not worked.



Appendix D 10

Total compensation earned by an employee (wages or salaries, plus any bonuses and commissions).

Gross EarningsGross Earnings

SO 2 Compute and record the payroll for a pay period.

Determining the PayrollDetermining the PayrollDetermining the PayrollDetermining the Payroll

Illustration D-3

Appendix D 11

Mandatory:

FICA taxes

Federal income tax

State income tax

Payroll DeductionsPayroll Deductions



Voluntary:

Charity

Retirement

Union dues

Health and life insurance

Pension plans

Appendix D 12

Mandatory:

FICA taxes

Federal income tax

State income tax




Social Security taxes

Supplemental retirement, employment disability, and medical benefits.

In 2009, the rate was 7.65% (6.2% Social Security plus 1.45% Medicare) on the first $106,800 of gross earnings for each employee.

Appendix D 13

Mandatory:

FICA taxes

Federal income tax

State income tax




Employers are required to withhold income taxes from employees pay.

Withholding amounts are based on gross wages and the number of allowances claimed.

Appendix D 14

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



Illustration D-5

Appendix D 15

Mandatory:

FICA taxes

Federal income tax

State income tax




Most states (and some cities) require employers to withhold income taxes from employees’ earnings.

Appendix D 16

Gross earnings minus payroll deductions.

Net PayNet Pay



Illustration D-7

Appendix D 17

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 Maintaining Payroll Department RecordsRecords


Recording the PayrollRecording the PayrollRecording the PayrollRecording the Payroll

Illustration D-8 Employee earnings record

Appendix D 18

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 Maintaining Payroll Department RecordsRecords



Illustration D-9

Payroll register

Appendix D 19

Exercise: Sandy Teter’s regular hourly wage rate is $16, and she receives an 1 ½ hourly rate of $24 for work in excess of 40 hours. During a January pay period, Sandy works 45 hours. Sandy’s federal income tax withholding is $95, and she has no voluntary deductions. Utilize 8% for FICA taxes withheld.

Instructions: Compute Sandy Teter’s gross earnings and net pay for the pay period.

Recognizing Payroll Expenses and Recognizing Payroll Expenses and LiabilitiesLiabilities



Appendix D 20

Exercise: Compute Sandy Teter’s gross earnings and net pay for the pay period.



Gross earnings – Regular pay $640.00

Overtime pay 120.00 $760.00

Gross earnings $760.00

Less: FICA taxes payable ($760 × 8%) (60.80)

Federal income taxes payable (95.00)

Net pay $604.20

Appendix D 21

Using the facts from the previous Exercise.

Recording Payment of the PayrollRecording Payment of the Payroll



Wages Payable 604.20

Cash604.20

Appendix D 22 SO 2 Compute and record the payroll for a pay

period.

Recording the Payroll – An example Recording the Payroll – An example of a tax tableof a tax tableRecording the Payroll – An example Recording the Payroll – An example of a tax tableof a tax table

Federal income tax withholding

forMarried,Weekly,

$650 ~ $660,3 allowances

Illustration D-6

Appendix D 23

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

SO 3 Describe and record employer payroll taxes.

Employer Payroll TaxesEmployer Payroll TaxesEmployer Payroll TaxesEmployer Payroll Taxes

These taxes are:

FICA taxes

Federal unemployment tax

State unemployment tax

Same rate and maximum earnings as the employee’s.

In 2009, the rate was 7.65% (6.2% Social Security plus 1.45% Medicare) on the first $106,800 of gross earnings for each employee.

Appendix D 24




These taxes are:

FICA 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%.

Appendix D 25




These taxes are:

FICA taxes



SUTA basic rate is usually 5.4% on the first $7,000 of wages paid.

Appendix D 26

Exercise: In January, gross earnings in Yoon Company totaled $90,000. All earnings are subject to 8% FICA taxes, 5.4% state unemployment taxes, and 0.8% federal unemployment taxes.

Instructions: Prepare the entry to record January payroll tax expense.



Appendix D 27

Exercise: Prepare the journal entry for Yoon Company in January. Gross earnings in totaled $90,000, all earnings are subject to 8% FICA taxes, 5.4% state unemployment taxes, and 0.8% federal unemployment taxes.Jan. 31Payroll Tax Expense 12,780

FICA Taxes Payable 7,200 *Federal Unemployment Taxes Payable

720 **State Unemployment Taxes Payable

4,860 ***

* FICA - $90,000 x 8% = $7,200** FUTA - $90,000 x 0.8% = $720*** SUTA - $90,000 x 5.4% = $4,860SO 3 Describe and record employer payroll taxes.


Appendix D 28

Employer payroll taxes do not include:

a. Federal unemployment taxes.

b. State unemployment taxes.

c. Federal income taxes.

d. FICA taxes.

QuestionQuestion



Appendix D 29

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.


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

Appendix D 30

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Appendix D 1. Appendix D 2 Payroll Accounting Financial Accounting, Seventh Edition Appendix D