Payroll Liabilities and Tax RecordsPayroll Liabilities and Tax RecordsMaking Accounting Relevant

Federal, state, and local governments

pass tax laws in order to generate

revenue for government services.

Making Accounting Relevant

Federal, state, and local governments

pass tax laws in order to generate

revenue for government services.

Can you name some uses for your tax dollars?

JOURNALIZING AND POSTING PAYROLL

JOURNALIZING AND POSTING PAYROLL

What You’ll Learn

How to compute the business

payroll deductions.

How to record the payroll entry in

the general journal.

What You’ll Learn

How to compute the business

payroll deductions.

How to record the payroll entry in

the general journal.

Payroll BasicsPayroll Basics

Employees, ranging from

design engineers at Ford

Motor Company to the

waitresses at a

neighborhood coffee shop,

expect their payroll checks to

arrive on time and be

accurate!

Employee earnings are a

normal operating expense of

every business.

Employees, ranging from

design engineers at Ford

Motor Company to the

waitresses at a

neighborhood coffee shop,

expect their payroll checks to

arrive on time and be

accurate!

Employee earnings are a

normal operating expense of

every business.

Analyzing the Payroll TransactionAnalyzing the Payroll Transaction

The business has to keep accurate payroll records. Therefore, JOURNAL ENTRIES summarizing all of the payroll details must be recorded each pay period.

First let’s look at the debit!

• The total earnings of all of your employees are recorded under an account called Salaries Expense.

The business has to keep accurate payroll records. Therefore, JOURNAL ENTRIES summarizing all of the payroll details must be recorded each pay period.

First let’s look at the debit!

• The total earnings of all of your employees are recorded under an account called Salaries Expense.

Analyzing the Payroll TransactionAnalyzing the Payroll Transaction

• What about the credits?• Various deductions, such as income

and FICA taxes, are withheld from gross earnings each pay period.– The employer retains the amounts withheld

until it is time to pay the appropriate government agencies and businesses.

– The amounts withheld but not yet paid are the liabilities, or the amounts owed, of a business. Each part of the payroll liabilities are recorded in their own separate account.

– Liabilities all have normal credit balances.

Journalizing the PayrollJournalizing the Payroll

JOURNAL ENTRY

Does the employer owe taxes too?Does the employer owe taxes too?

• YES, THEY DO!

• In ADDITION to the amounts withheld from employees’ payroll checks, the employer owes taxes based on the weekly payroll.

• These taxes are also liabilities of the business.

The Employer’s FICA TaxesThe Employer’s FICA Taxes

The current rates are 6.2% for social security tax and 1.45% for Medicare tax.

The employer and the employee pay social security tax on gross earnings up to the maximum taxable limit per employee.

The employer and the employee pay Medicare tax on all gross earnings; there is no maximum taxable limit.

The current rates are 6.2% for social security tax and 1.45% for Medicare tax.

The employer and the employee pay social security tax on gross earnings up to the maximum taxable limit per employee.

The employer and the employee pay Medicare tax on all gross earnings; there is no maximum taxable limit.

Federal and State Unemployment TaxesFederal and State Unemployment Taxes

The Federal Unemployment Tax Act (FUTA) and the State Unemployment Tax Act (SUTA) require employers to pay federal and state unemployment taxes.

The maximum federal unemployment tax is 6.2% on the first $7,000 of an employee’s annual wages.

State unemployment tax rates and maximum taxable amounts vary among states.

The Federal Unemployment Tax Act (FUTA) and the State Unemployment Tax Act (SUTA) require employers to pay federal and state unemployment taxes.

The maximum federal unemployment tax is 6.2% on the first $7,000 of an employee’s annual wages.

State unemployment tax rates and maximum taxable amounts vary among states.

Journalizing the Employer’s Payroll TaxesJournalizing the Employer’s Payroll Taxes The employer’s payroll taxes are

business expenses recorded in the Payroll Tax Expense account.

Use the Social Security Tax Payable and the Medicare Tax Payable accounts to record both the employees’ and the employer’s FICA taxes.

Record the employer’s unemployment taxes in the Federal Unemployment Tax Payable and State Unemployment Tax Payable accounts.

The employer’s payroll taxes are business expenses recorded in the Payroll Tax Expense account.

Use the Social Security Tax Payable and the Medicare Tax Payable accounts to record both the employees’ and the employer’s FICA taxes.

Record the employer’s unemployment taxes in the Federal Unemployment Tax Payable and State Unemployment Tax Payable accounts.

Journalizing the Employer’s Payroll Taxes (cont'd.)

Journalizing the Employer’s Payroll Taxes (cont'd.)

JOURNAL ENTRY

Paying the Payroll Tax Liabilities

Business owners must pay their payroll

liabilities and file payroll tax reports

promptly and accurately.

Paying the Payroll Tax Liabilities

Business owners must pay their payroll

liabilities and file payroll tax reports

promptly and accurately.

FICA and Federal Income Taxes

One payment is made for:

FICA and Federal Income Taxes

One payment is made for:

Social Security and Medicare taxes (both the employees’ and the employer’s shares) and

employees’ federal income taxes withheld.

The Federal Tax Deposit Coupon (Form 8109) is prepared and sent with the check. The form identifies the type of tax and the tax period.

Separate payments and journal entries are used to record the other payroll taxes.

Social Security and Medicare taxes (both the employees’ and the employer’s shares) and

employees’ federal income taxes withheld.

The Federal Tax Deposit Coupon (Form 8109) is prepared and sent with the check. The form identifies the type of tax and the tax period.

Separate payments and journal entries are used to record the other payroll taxes.

Payment of Federal Payroll Tax LiabilitiesPayment of Federal Payroll Tax Liabilities

JOURNAL ENTRY

JOURNAL ENTRY

Payment of State Income TaxesPayment of State Income Taxes

JOURNAL ENTRY

Payment of Federal Unemployment TaxesPayment of Federal Unemployment Taxes

JOURNAL ENTRY

Payment of State Unemployment TaxesPayment of State Unemployment Taxes

Payment of Other Payroll LiabilitiesPayment of Other Payroll LiabilitiesFor example: insurance premiums union dues charitable contributions

For example: insurance premiums union dues charitable contributions

JOURNAL ENTRY

Preparing Payroll Tax ReportsPreparing Payroll Tax Reports

Forms that employers must complete: Form W-2 summarizes an employee’s

earnings and withholdings for the calendar year.• Employees must receive these by

January 31 of the following year. Form 940 is used to report the employer’s

unemployment (state and federal) taxes. Form 941 is the employer’s quarterly

federal tax return on which accumulated amounts of FICA and federal income tax withheld from employees’ earnings, as well as FICA tax owned by the employer, are reported.

Forms that employers must complete: Form W-2 summarizes an employee’s

earnings and withholdings for the calendar year.• Employees must receive these by

January 31 of the following year. Form 940 is used to report the employer’s

unemployment (state and federal) taxes. Form 941 is the employer’s quarterly

federal tax return on which accumulated amounts of FICA and federal income tax withheld from employees’ earnings, as well as FICA tax owned by the employer, are reported.

Transmittal of Wage and Tax Statements

• Employers must file a Form W-3 with the federal government by February 28.

• This form summarizes the information contained on the employees’ W-2.

Transmittal of Wage and Tax Statements

• Employers must file a Form W-3 with the federal government by February 28.

• This form summarizes the information contained on the employees’ W-2.