college accounting

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Chapter
10
Skyline College
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Who Is an Employee?

• Works under the control of the employer
• Uses equipment provided by the employer
• Works hours that are set by the employer

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• Does not work under the direct supervision or
  control of the company
• Furnishes his or her own tools or equipment
• Sets his or her own working hours
• No withholding for independent contractors
• No payroll tax for independent contractors

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Employee Independent Contractor



Works under the control and direction of the
employer
Does not work under the direct supervision or
control of the company
Uses tools or equipment provided by the employer
Furnishes his or her own tools or equipment
Sets his or her own working hours
Works certain hours that are set by the employer
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The Fair Labor Standards Act of 1938

• Also referred to as the Wage and Hour Law
• Applies only to firms engaged directly or
  indirectly in interstate commerce
• Sets a minimum hourly rate of pay and maximum
  hours of work per week to be performed at the
  regular rate of pay

• Employees who work beyond 40 hours a week are
  entitled to
• time and a half.

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Time and a half
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Social Security Tax
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Social Security Tax
As of 2005
The amount of social security tax is determined
by

• rate

• 6.2

• 90,000

• earnings up to a calendar year earnings base

The rate (6.2 percent) has remained constant in
recent years.
The earnings base has increased each year.
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Medicare Tax
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Medicare Tax
As of 2005
The amount of Medicare tax is determined by

• rate

• 1.45

• total earnings

• earnings

The rate (1.45) has remained constant in recent
years.
The Medicare tax does not have an earnings base
limit.
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Gross Wages
Employee Earnings
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Lets assume an employee earns 100,000 in the
calendar year.
FICA Tax
Employee (withheld) 6.2 X 90,000
5,580.00
Medicare Tax
Employee (withheld) 1.45 X 100,000 1,450.00
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Social Security Tax and Medicare Tax
Social Security Tax
Medicare Tax
Earnings ?
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Social Security Tax and Medicare Tax
5,580.00
5,580.00
Social Security Tax
Tax payable
Medicare Tax
3,100.00
1,450.00
1,305.00
725.00
Earnings ?
Employee 150,000
Employee 290,000
Employee 3100,000
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Federal Income Tax
Employers are required to withhold an estimated
amount of federal income tax from the employees
earnings.
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Gross Wages
Employee Earnings
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State and Local Taxes

• Most states, and many local governments, may
  require employers to withhold income taxes from
  employees earnings to prepay the employees
  state and local income taxes.
• The rules are generally almost identical to those
  governing federal income tax withholding.

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Employers Payroll Taxes and Insurance Costs

• Employers withhold social security and Medicare
  taxes from employees earnings.
• In addition, employers pay social security and
  Medicare taxes on their employees earnings.
• Employers are also required to pay

• Federal unemployment tax
• State unemployment tax
• Workers compensation insurance

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The employer matches the social security tax
withheld from the employees earnings.
Employee Earnings
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The employer matches the Medicare tax withheld
from the employees earnings.
Employee Earnings
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Lets assume an employee earns 100,000 in the
calendar year.
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Federal Unemployment Tax FUTA
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State Unemployment Tax SUTA
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Unemployment Rate Taxes

• The FUTA and SUTA tax rates are applied to FUTA
  wages
• The federal tax rate is 6.2 percent.
• This can be reduced by the state tax rate (5.4
  percent for many states).
• This text assumes that the taxable earnings base
  per employee is 7000 per year.

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The SUTA-FUTA Connection
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Gross Wages
Employee Earnings
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Workers Compensation Insurance
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Employee Records Required by Law
Federal laws require that certain payroll records
be maintained. For each employee the employer
must keep a record of

• Employees name, address, social security
  number, and date of birth
• Hours worked each day and week, and wages paid
  at the regular and overtime rates (certain
  exceptions exist for employees who earn
  salaries)
• Cumulative wages paid during the year
• Amount of income tax, social security tax, and
  Medicare tax withheld for each pay period
• Proof that the employee is a United States
  citizen or has a valid work permit

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Meet Kent Furniture and Novelty Co.

• Kent Furniture and Novelty Co. imports furniture
  and novelty items to sell over the Internet.
• The firm is a sole proprietorship owned and
  managed by Sarah Kent.
• Kent Furniture and Novelty Co. has five
  employees.
• Payday is each Monday.

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The first step in preparing payroll is to compute
the gross wages or salary for each employee.
There are several ways to compute earnings.
Computing Total Earnings of Employees

• Hourly rate basis
• Salary basis
• Commission basis
• Piece-rate basis

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Determining Pay for Hourly Employees
Two pieces of data are needed to compute gross
pay for hourly rate basis employees

• number of hours worked during the payroll period
• rate of pay

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Hours Worked

• Many businesses use time clocks for hourly
  employees.
• Each employee has a time card and inserts it in
  the time clock to record the times of arrival and
  departure.
• The payroll clerk collects the cards at the end
  of the week.

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Computing Gross Pay
The gross pay for hourly employees for the week
ended January 6 is determined as follows
Alicia Martinez 40 hours X 10.00
400.00
Jorge Rodriguez 40 hours X 9.50
380.00
George Dunlap 40 hours X 9.00
360.00
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Overtime
George Dunlap earns 9.00 per hour. He worked 45
hours. He is paid 40 hours regular rate of pay
and 5 hours at time and a half.
Therefore, Dunlaps gross pay adds up to
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Withholdings for Hourly Employees Required by Law
Recall that federal law requires employers to
make three deductions from employees gross pay

• FICA (social security) tax
• Medicare tax
• Federal income tax withholding

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Tax-exempt Wages

• Earnings in excess of the base amount (90,000 as
  of 2005) are not subject to FICA withholding.
• If an employee works for more than one employer
  during the year, the FICA tax is deducted and
  matched by each employer.
• When the employee files a federal income tax
  return, any excess FICA tax withheld from the
  employees earnings is refunded by the government
  or is applied to payment of the employees
  federal income taxes.

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Social Security Tax
To determine the amount of social security
tax to withhold, multiply the taxable wages by
the social security tax rate and round off to the
nearest cent.
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Medicare Tax
To compute the Medicare tax to withhold from
the employees paycheck, multiply the wages by
the Medicare tax rate, 1.45 percent.
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The amount of federal income tax to withhold from
an employees earnings depends on

• Earnings during the pay period
• Length of the pay period
• Employees instructions
• Marital status
• Number of withholding allowances

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Withholding Allowances
In the simplest circumstances, a taxpayer claims
a withholding allowance for

• The taxpayer
• A spouse who does not also claim an allowance
• Each dependent for whom the taxpayer provides
  more than half the support during the year

As the number of withholding allowances
increases, the amount of federal income tax
withheld decreases.
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Computing Federal Income Tax Withholding

• The wage-bracket table method is the most common
  way to compute the federal income tax
  withholding.
• The wage-bracket tables are in Publication 15,
  Circular E or online on www.IRS.gov

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Wage-Bracket Table Method
Use the following steps to determine the
amount to withhold

• Choose the table for the pay period and the
  employees marital status.
• Find the row in the table that matches the wages
  earned. Find the column that matches the number
  of withholding allowances claimed on Form W-4.
  The income tax to withhold is the intersection of
  the row and the column.

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Cecilia Wu is married, claims two withholding
allowances, and earned 560 for the week.
The tax to withhold is 30 this is where the row
and column intersect.

1. Go to the table for married persons paid weekly.

1. Find the line covering wages between 560 and
   570.

Find the column for two withholding allowances.
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Other Deductions Required by Law

• Most states and some local governments require
  employers to withhold state and local income
  taxes from earnings.
• In some states employers are also required to
  withhold unemployment tax or disability tax.
• The procedures are similar to those for federal
  income tax withholding.
• Apply the tax rate to the earnings, or use
  withholding tables.

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There are many payroll deductions not required by
law but made by agreement between the employee
and the employer.

• Some examples are
• Group life insurance
• Group medical insurance
• Company retirement plans
• Bank or credit union savings plans or loan
  repayments
• United States savings bonds purchase plans
• Stocks and other investment purchase plans
• Employer loan repayments
• Union dues

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Determining Pay for Salaried Employees
A salaried employee earns a specific sum of money
for each payroll period.
Exempt employees are salaried employees who hold
supervisory or managerial positions who are not
subject to the maximum hour and overtime pay
provisions of the Wage and Hour Law.
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Withholdings for Salaried Employees Required by
Law

• The procedures for withholding taxes for salaried
  employees is the same as withholding for hourly
  employees.

• Apply the tax rate to the earnings or use
  withholding tables.

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Recording Payroll Information for Employees
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Completing the Payroll Register
Enter the employees name (Column A), number of
withholding allowances and marital status (Column
B), and rate of pay (Column E).
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Completing the Payroll Register
The Cumulative Earnings column (Column C) shows
the total earnings for the calendar year before
the current pay period. Since this is the first
payroll period for the year, there are no
cumulative earnings prior to the current pay
period.
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Completing the Payroll Register
In Column D enter the total number of hours
worked in the current period. This data comes
from the weekly time sheets. Note that all
employees were paid for eight hours on January 1,
a holiday.
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Completing the Payroll Register
Using the hours worked and the pay rate,
calculate regular pay (Column F), the overtime
pay (Column G), and gross pay (Column H).
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Completing the Payroll Register
Calculate the cumulative earnings after this pay
period (Column I).
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Completing the Payroll Register
The Taxable Wages columns shows the earnings
subject to taxes for social security (Column J),
Medicare (Column K), and FUTA (Column L). Only
the earnings at or under the earnings limit are
included in these columns.
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Completing the Payroll Register
The Deductions columns show the withholding for
social security tax (Column M), Medicare tax
(Column N), federal income tax (Column O), and
medical insurance (Column P).
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Completing the Payroll Register
Subtract the deductions (Columns M, N, O, and P)
from the gross earnings (Column H). Enter the
results in the Net Amount column (Column Q). This
is the amount paid to each employee.
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Completing the Payroll Register
Enter the check number in Column R.
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Completing the Payroll Register
The payroll registers last two columns classify
employee earnings as office salaries (Column S)
or shipping wages (Column T).
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The Payroll Register
When the payroll data for all employees has been
entered in the payroll register, total the
columns.
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Recording Payroll
Recording payroll information involves two
separate entries

1. Record the payroll expense
2. Pay the employees

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The information in the register is used for
recording the payroll expense.
20-- Jan. 8
Office Salaries Expense
480.00
Shipping Wages Expense
1,767.50
Social Security Tax Payable

139.35
Medicare Tax Payable

32.58
Employee Income Tax Payable

155.00
Health Insurance Premiums Payable

80.00
Salaries and Wages Payable
1,840.57
Payroll for week ending Jan. 6
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Each type of deduction is credited to a separate
liability account.
A separate liability account is set up for each
deduction.
20-- Jan. 8
Office Salaries Expense
480.00
Shipping Wages Expense
1,767.50
Social Security Tax Payable

139.35
Medicare Tax Payable

32.58
Employee Income Tax Payable

155.00
Health Insurance Premiums Payable

80.00
Salaries and Wages Payable
1,840.57
Payroll for week ending Jan. 6
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Net pay is credited to the liability account,
Salaries and Wages Payable.
20-- Jan. 8
Office Salaries Expense
480.00
Shipping Wages Expense
1,767.50
Social Security Tax Payable

139.35
Medicare Tax Payable

32.58
Employee Income Tax Payable

155.00
Health Insurance Premiums Payable

80.00
Salaries and Wages Payable
1,840.57
Payroll for week ending Jan. 6
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Paying Employees
Most businesses pay their employees by check or
by direct deposit. By using these methods, the
business avoids the inconvenience and risk
involved in dealing with currency.
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Wages Paid
On January 8 Kent Furniture and Novelty Co. wrote
five checks for payroll, Check numbers 1601-1605.
General Journal Format