© Paradigm Publishing, Inc.1 Chapter 11 Accounting for Payroll: Employee Earnings and Deductions.

© Paradigm Publishing, Inc. 1

Chapter 11

Accounting for Payroll: Employee Earnings and Deductions

1. Describe the importance of payroll records.

2. Calculate gross earnings for employees.

3. Explain the nature of payroll deductions.

4. Calculate payroll deductions and net pay.


Learning Objectives

5. Complete the payroll register and use it to record and pay the payroll.

6. Make accounting entries for employee earnings and deductions and for payment of the payroll.


Learning Objectives


Learning Objective 1

Describe the importance of payroll records

To accumulate the information needed to calculate To accumulate the information needed to calculate the pay of each employee for each payroll periodthe pay of each employee for each payroll period

To provide information needed to complete the To provide information needed to complete the various payroll reports that are required by federal various payroll reports that are required by federal and state regulationsand state regulations


The distinction between employees and The distinction between employees and independent contractors is important.independent contractors is important.

EmployeesEmployees

Under the direct control of an employer on a Under the direct control of an employer on a continuing basiscontinuing basis

Payroll accounting appliesPayroll accounting applies


Wendy

Add a mouse click here so the first sentence and the bullet point don't start on the slide.

Independent ContractorIndependent Contractor

Agrees to perform and complete a specific job Agrees to perform and complete a specific job or or task and is left to determine the ways and task and is left to determine the ways and

methods of achieving that job or taskmethods of achieving that job or task

Personally responsible for paying their own Personally responsible for paying their own taxestaxes


Salaried Employee Salaried Employee — an individual who works for — an individual who works for a fixed amount of pay for a definite period of time, a fixed amount of pay for a definite period of time, such as a week, a month, or a yearsuch as a week, a month, or a year

Salary Salary — — a fixed amount paid to employees for a a fixed amount paid to employees for a certain period of time, such as a week, month, or certain period of time, such as a week, month, or yearyear

Hourly Worker Hourly Worker — an individual who works for a — an individual who works for a fixed hourly rate, usually referred to as a wagefixed hourly rate, usually referred to as a wage


Establishes standards forEstablishes standards for

Minimum wageMinimum wage

Overtime payOvertime pay

Child laborChild labor

Required payroll record keepingRequired payroll record keeping

Equal pay for equal work regardless of sexEqual pay for equal work regardless of sex


Wendy

Capitalize the 1st 3 bulleted words:Minimum WageOvertime PayChild Labor

Administered by the Wage and Hour Division of Administered by the Wage and Hour Division of the US Department of Laborthe US Department of Labor

Applies Applies onlyonly to firms engaged in interstate to firms engaged in interstate commercecommerce


Employees covered by the Act are guaranteed a Employees covered by the Act are guaranteed a minimum wageminimum wage and and overtime payovertime pay if they work if they work more than 40 hours in one weekmore than 40 hours in one week

Minimum Wage Minimum Wage — the lowest hourly rate that can — the lowest hourly rate that can be paid to employees covered by the Actbe paid to employees covered by the Act

Overtime Pay Overtime Pay — a minimum of one and one-half — a minimum of one and one-half times the regular rate of pay for all hours worked times the regular rate of pay for all hours worked over 40 during a weekover 40 during a week


Example

Assume William Heedy earns $17 per hour and worked 48 hours during the current week.His employer is required to pay time-and-a-half for all hours over 40 per week.William’s gross pay for the week would equal:


40 regular hours40 regular hours X $17X $17 = $680= $680

8 overtime hours8 overtime hours X $25.50 ($17 x 1.5)X $25.50 ($17 x 1.5) = 204= 204

Gross payGross pay $884$884


Quick Check

Peggy Browning earns $14 per hour and worked 50 Peggy Browning earns $14 per hour and worked 50 hours during the current week. Her employer is hours during the current week. Her employer is required to pay time-and-a-half for all hours over 40 required to pay time-and-a-half for all hours over 40 per week. Her gross pay for the week would equalper week. Her gross pay for the week would equal

a.a. $700.$700.

b.b. $560.$560.

c.c. $770.$770.

d.d. $1,050.$1,050.

e.e. $630.$630.

Usually factory workersUsually factory workers

Pays a certain rate for each unit worker completesPays a certain rate for each unit worker completes


Wendy

On 2nd bullet ad 'a' before worker: Pays a certain rate for each unit a worker completes

Example


Assume a factory worker is paid $.06 for each unit produced. The employee processed 4,800 units in a given week. The employee’s earnings for that week are calculated as follows:


Calculate gross earnings for employees


An employee’s earnings before any amount are An employee’s earnings before any amount are deducted by the employer.deducted by the employer.

The employee is usually hired for an annual salary; The employee is usually hired for an annual salary; the annual salary is then divided by the number of the annual salary is then divided by the number of pay periods in the year.pay periods in the year.

The most common pay periods are weekly, The most common pay periods are weekly, biweekly, semimonthly, and monthly.biweekly, semimonthly, and monthly.


Wendy

Bullet #1 - I wanted to say change 'are' to 'is': An employee's earnings before any amount is deducted by the employer, but it was changed from IS before. Should it be 'amounts' (plural) then? It doesn't read right this way.

Example


Assuming an employee is hired at an annual salary of $28,080, the gross pay per pay period would be:

Type of Pay Period

Number of Pay Periods in a Year

Gross Earnings per Pay Period

WeeklyWeekly 5252 $28,080 $28,080 ÷ 52 = $540÷ 52 = $540

BiweeklyBiweekly 2626

SemimonthlySemimonthly 2424

MonthlyMonthly 1212

$28,080 $28,080 ÷ 26 = $1,080÷ 26 = $1,080

$28,080 $28,080 ÷ 24 = $1,170÷ 24 = $1,170

$28,080 $28,080 ÷ 12 = $2,340÷ 12 = $2,340

Review Quiz 11-1

Joy Jackson worked 45 hours this week. Her hourly Joy Jackson worked 45 hours this week. Her hourly wage is $8.00, and she receives overtime pay at a wage is $8.00, and she receives overtime pay at a rate of time-and-a-half. Calculate her gross earnings.rate of time-and-a-half. Calculate her gross earnings.


40 hrs40 hrs ×× $8/hr $8/hr == $320$320

$8/hr$8/hr × 1.5 = × 1.5 = $12/hr$12/hr

$12/hr ×$12/hr ×5 hr 5 hr = = $60$60

$320 + $320 + $60 $60 = = $380$380


Explain the nature of payroll deductions


An amount withheld from the pay of an employeeAn amount withheld from the pay of an employee

May be mandatory or voluntaryMay be mandatory or voluntary

Mandatory deductions includeMandatory deductions include

• Social Security taxesSocial Security taxes

• Federal income taxesFederal income taxes

• Certain taxes for state and local agenciesCertain taxes for state and local agencies


Voluntary deductions includeVoluntary deductions include

• Amount for insurance premiumsAmount for insurance premiums

• CharitiesCharities

• Retirement plansRetirement plans

• Union duesUnion dues



Calculate payroll deductions and net pay


The Federal Insurance Contributions Act (FICA) is used The Federal Insurance Contributions Act (FICA) is used to financeto finance

Old-Age, survivors, and Disability Insurance Old-Age, survivors, and Disability Insurance (OASDI)(OASDI)

Hospital Insurance (HI) plan, or MedicareHospital Insurance (HI) plan, or Medicare

Both the employee and the employer contribute equal Both the employee and the employer contribute equal amounts to the tax.amounts to the tax.

We will concentrate in this chapter on the employee’s We will concentrate in this chapter on the employee’s share of the tax.share of the tax.


Wendy

on sub-bullet 1, should Survivors be capitalized?

The maximum amount of earnings during a The maximum amount of earnings during a calendar year that is subject to OASDI taxescalendar year that is subject to OASDI taxes

Presently $102,000Presently $102,000

Should an employee’s earnings reach or exceed Should an employee’s earnings reach or exceed this amount, no additional OASDI taxes will be this amount, no additional OASDI taxes will be withheld for the remainder of the yearwithheld for the remainder of the year

OASDI tax rate = 6.2%OASDI tax rate = 6.2%


No maximum wage base for HI taxes; all earnings No maximum wage base for HI taxes; all earnings are subject to HI regardless of the amount.are subject to HI regardless of the amount.

HI tax rate = 1.45%HI tax rate = 1.45%


Assume an employee earns $600 for the current Assume an employee earns $600 for the current pay period. The cumulative year-to-date earnings pay period. The cumulative year-to-date earnings for the employee are $15,700.for the employee are $15,700.

The OASDI and HI taxes withheld from the The OASDI and HI taxes withheld from the employee would be:employee would be:


OASDIOASDI $600 × .062$600 × .062 = $37.20= $37.20

HIHI $600 × .0145$600 × .0145 = 8.70= 8.70

Total FICA taxTotal FICA tax $45.90$45.90


Quick Check

Tom Smith earns $3,000 per month. Using the FICA Tom Smith earns $3,000 per month. Using the FICA tax rates given in the textbook, Tom’s OASDI and HI tax rates given in the textbook, Tom’s OASDI and HI taxes for the current month would be, respectivelytaxes for the current month would be, respectively

a.a. $229.50 and $186.00.$229.50 and $186.00.

b.b. $186.00 and $229.50.$186.00 and $229.50.

c.c. $43.50 and $229.50.$43.50 and $229.50.

d.d. $186.00 and $43.50.$186.00 and $43.50.

e.e. $43.50 and $180.00.$43.50 and $180.00.

Review Quiz 11-2


Employee Earnings before This Pay Period

Earnings This Pay Period

FICA

OASDI HI

AA $ 15,400$ 15,400 $ 412$ 412 $ 25.54$ 25.54

BB 101,600101,600 1,2501,250 24.80 24.80 18.1318.13

CC 69,30069,300 825825 51.1551.15

DD 32,40032,400 618618 38.3238.32

$ 5.97$ 5.97

11.9611.96

8.968.96

The federal government’s main source of revenue The federal government’s main source of revenue is the income tax imposed on personal incomes.is the income tax imposed on personal incomes.

Unless specifically exempted, all income (legal and Unless specifically exempted, all income (legal and illegal) is subject to personal income tax.illegal) is subject to personal income tax.


The amount of personal income tax to be withheld The amount of personal income tax to be withheld depends on three factors:depends on three factors:

The employee’s gross earningsThe employee’s gross earnings

The employee’s marital statusThe employee’s marital status

The number of withholding allowances claimed The number of withholding allowances claimed by the employeeby the employee


At the start of a new job, or when personal At the start of a new job, or when personal information changes, an employee is required to information changes, an employee is required to complete a W-4 form, which is kept on file by the complete a W-4 form, which is kept on file by the employer.employer.



Uses government-issued tables to compute the Uses government-issued tables to compute the amount of federal income tax to be withheld from amount of federal income tax to be withheld from employees.employees.

The process of withholding state income taxes is The process of withholding state income taxes is virtually the same as withholding federal income virtually the same as withholding federal income taxes.taxes.

State governments also provide tax tables based State governments also provide tax tables based on an employee’s earnings, pay period, marital on an employee’s earnings, pay period, marital status, and number of exemptions.status, and number of exemptions.



Review Quiz 11-3

Calculate the FICA tax and federal income tax for Joy Calculate the FICA tax and federal income tax for Joy Jackson.Jackson.

Gross weekly earning is $380Gross weekly earning is $380

MarriedMarried

Claims zero withholdingClaims zero withholding


OASDIOASDI == $380 × .062$380 × .062 == $23.56$23.56

HIHI == $380 × 0.145$380 × 0.145 == 5.515.51

$29.07$29.07 = FICA= FICA

Federal income tax = $23Federal income tax = $23

Most state governments require an employer to Most state governments require an employer to withhold an income tax from earnings of withhold an income tax from earnings of employees.employees.

The state income tax is based on an employee’s The state income tax is based on an employee’s marital status, the amount of earnings, and the marital status, the amount of earnings, and the number of withholding allowances claimed.number of withholding allowances claimed.


Other deductions include amountsOther deductions include amounts

Donated to charitiesDonated to charities

For health and life insurance or union duesFor health and life insurance or union dues

Invested in US savings bonds or retirement Invested in US savings bonds or retirement plansplans


Net earnings is the amount of earnings after all Net earnings is the amount of earnings after all payroll deductions have been made; it is the payroll deductions have been made; it is the actual amount of the employee’s paycheck, or actual amount of the employee’s paycheck, or take-home pay.take-home pay.


Assume Sam Morgan has gross earnings of $360 Assume Sam Morgan has gross earnings of $360 with the following deductions:with the following deductions:


OASDIOASDI $22.32$22.32

HIHI 5.225.22

Federal income taxesFederal income taxes 8.008.00

State income taxesState income taxes 5.005.00

Medical insurance deductionMedical insurance deduction 15.0015.00

Savings bonds deductionSavings bonds deduction 10.0010.00

Union dues deductionUnion dues deduction 5.005.00

Total deductionsTotal deductions $70.54$70.54

Sam’s net pay is equal to his gross pay less all his Sam’s net pay is equal to his gross pay less all his deductions:deductions:

$360 – $70.54 = $289.46$360 – $70.54 = $289.46




Quick Check

Mary Watts earns $3,000 per month. Mary’s federalMary Watts earns $3,000 per month. Mary’s federalincome tax deduction is $260, her state income taxincome tax deduction is $260, her state income taxdeduction is $75, and she has $20 deducted for Uniteddeduction is $75, and she has $20 deducted for UnitedWay. Using the FICA tax rates given in the textbook,Way. Using the FICA tax rates given in the textbook,Mary’s net pay for the month isMary’s net pay for the month is

a.a. $2,479.00.$2,479.00.

b.b. $2,435.50.$2,435.50.

c.c. $2,645.00.$2,645.00.

d.d. $2,415.50.$2,415.50.

e.e. $2,770.50.$2,770.50.

Review Quiz 11-4

What is the amount of Joy Jackson’s net earnings?What is the amount of Joy Jackson’s net earnings?


Gross EarningsGross Earnings $380.00$380.00

Less Deductions:Less Deductions:

FICA — OASDIFICA — OASDI $23.56$23.56

FICA — HIFICA — HI 5.515.51

Federal income taxFederal income tax 23.0023.00

State income taxState income tax 11.4011.40

Medical insuranceMedical insurance 15.0015.00

Savings bondsSavings bonds 25.0025.00

Total DeductionsTotal Deductions 103.47103.47

Net EarningsNet Earnings $276.53$276.53

Wendy

I think the net earnings answer (in yellow) should come in on a mouse click...shouldn't be on the slide right away.


Complete the payroll register and use it to record and pay the payroll


To provide management with up-to-date payrollTo provide management with up-to-date payrollinformation and to comply with various federal, state,information and to comply with various federal, state,and local laws, an employer must maintain payrolland local laws, an employer must maintain payrollrecords that will supply the following information forrecords that will supply the following information foreach employee:each employee:

Name, address, and Social Security numberName, address, and Social Security number

The amount of gross earnings for each payrollThe amount of gross earnings for each payroll


The period of employment covered by each payrollThe period of employment covered by each payroll

The year-to-date gross earningsThe year-to-date gross earnings

The amount of taxes and other deductionsThe amount of taxes and other deductions

The date each payroll was paidThe date each payroll was paid


A summary of the gross earnings, deductions, and A summary of the gross earnings, deductions, and net pay for all employees for a specific payroll net pay for all employees for a specific payroll period.period.



The Status column shows the employee’s marital status and the number of withholding allowances being claimed by the employee.


The employee’s year-to-date earnings before this payroll are recorded in the Cumulative Earnings column.


The Unemployment column shows the amount of earnings on which the employer will pay unemployment taxes. As we will learn in chapter 12, employers pay federal unemployment taxes on the first $7,000 earned by each employee during the year.


These amounts are not taxes, but amounts subject to the tax rates.



These columns show the amounts withheld from the pay of employees.


Take-home pay


A record maintained for each employee that A record maintained for each employee that contains basic employee information and a contains basic employee information and a summary of payroll data for that employee.summary of payroll data for that employee.



Manual systemManual system

The payroll register is prepared first, and the The payroll register is prepared first, and the information is transferred to the information is transferred to the

employee’s employee’s earnings record.earnings record.

A totally manual payroll system is rare today.A totally manual payroll system is rare today.


Wendy

Capitalize System on the top bullet

Wendy

Remove periods (they aren't on the next slide)

Computerized systemComputerized system

Increase processing speed and accuracyIncrease processing speed and accuracy

Generate payroll reports automaticallyGenerate payroll reports automatically

Can save the payroll personnel hours of Can save the payroll personnel hours of tedious, tedious, repetitive payroll calculationsrepetitive payroll calculations


Wendy

Capitalize System on the top bullet


Make accounting entries for employee earnings and deductions

and for payment of the payroll


Provides all the information necessary to record the Provides all the information necessary to record the payrollpayroll

Can use as a special journal and post the column Can use as a special journal and post the column totals directly to the ledgertotals directly to the ledger

Can use as an information source for recording the Can use as an information source for recording the payroll in either the general journal or the cash payroll in either the general journal or the cash payments journalpayments journal

In recording employee earnings and the deductions In recording employee earnings and the deductions from earnings, separate accounts should be from earnings, separate accounts should be maintained for the earnings and for each deductionmaintained for the earnings and for each deduction


An operating expense account used to record the An operating expense account used to record the gross amountgross amount of the payrollof the payroll


Expense accounts are always debited to show an increase.

A liability account used to record the amount of A liability account used to record the amount of OASDI tax withheld from the earnings of OASDI tax withheld from the earnings of employees and is also used to record the liability employees and is also used to record the liability for the employer’s share of OASDI taxesfor the employer’s share of OASDI taxes

Credited when OASDI taxes are withheldCredited when OASDI taxes are withheld

Debited when OASDI taxes are sent inDebited when OASDI taxes are sent in



Liability accounts are always credited to show an increase and debited to show a decrease.

A liability account used to recordA liability account used to record

The amount of HI (Medicare) tax withheld from The amount of HI (Medicare) tax withheld from the earnings of employeesthe earnings of employees

The liability for the employer’s share of HI taxesThe liability for the employer’s share of HI taxes

Credited when HI taxes are withheldCredited when HI taxes are withheld

Debited when HI taxes are sent inDebited when HI taxes are sent in



A liability account used to record the amount of A liability account used to record the amount of federal income taxes withheld from the earnings of federal income taxes withheld from the earnings of employeesemployees

Credited when income taxes are withheldCredited when income taxes are withheld

Debited when the taxes are sent inDebited when the taxes are sent in



Recorded in an appropriate liability accountRecorded in an appropriate liability account

State income tax withheld — in the State Income State income tax withheld — in the State Income Tax Payable accountTax Payable account

Union dues withheld — in the Union Dues Payable Union dues withheld — in the Union Dues Payable accountaccount

These accounts, and similar liability accountsThese accounts, and similar liability accounts

Credited when amounts are withheldCredited when amounts are withheld

Debited when payment is made to the Debited when payment is made to the appropriate agencyappropriate agency



The gross amount of thepayroll is recorded in the Sales and Office Salaries Expense accounts.

120X3Nov. Sales Salaries Expense 205500 1

2 Office Salaries Expense 140900 2

18

Wendy

Expand your box on the right, the text has spilled out


Each amount withheld is recorded in a liability account.

120X3Nov. 1

Office Salaries Expense 2

FICA Tax Payable - OASDI

FICA Tax Payable - HI

Federal Income Tax Payable

State Income Tax Payable

Medical Insurance Payable

Savings Bonds Payable

Union Dues Payable

34100

5023

13944

13212

6900

5500

1500

3

4

5

6

7

8

9

3

4

5

6

7

8

9

2 140900

Sales Salaries Expense 20550018


120X3Nov. Sales Salaries Expense 205500 1

2 Office Salaries Expense

5500

2

FICA Tax Payable - OASDI

FICA Tax Payable - HI

Federal Income Tax Payable

State Income Tax Payable

Medical Insurance Payable

Savings Bonds Payable

Union Dues Payable

5023

13944

140900

34100

13212

6900

3

4

5

6

7

8

9

3

4

5

6

78

9

The net amount of the payroll is recorded in the Salaries Payable account. The Cash account would be credited if payment were made immediately. However, recording the net amount in the Salaries Payable account allows the payroll to be recorded before the paychecks are prepared.

10

11

Salaries Payable

Recorded payroll of November 18.

1500

266221 10

11

18


Review Quiz 11-5

Information from the payroll register of Northwest Information from the payroll register of Northwest Company for the payroll period ended February 6, Company for the payroll period ended February 6, 20X3, is shown on page 524. The following is the 20X3, is shown on page 524. The following is the general journal entry necessary to record employee general journal entry necessary to record employee earnings and deductions.earnings and deductions.


Wendy

Should the general journal entry come in on a separate mouse click?

Wendy

Manuscript says you are to have the callouts show on the left side.

Wendy

Comment on manuscript says you show rows 1 & 2 with first callout, then rows 3-9 with second call out, then 10-11 with last callout.


- liability- liability- asset- asset

1.1. Record the payroll information in the payroll Record the payroll information in the payroll register.register.

2.2. Use the payroll register as an information source Use the payroll register as an information source to record a journal entry for employee earnings to record a journal entry for employee earnings and deductions.and deductions.

3.3. Record a journal entry for payment of the payroll.Record a journal entry for payment of the payroll.


Review Quiz 11-6

The following is the entry to record the payment of The following is the entry to record the payment of the payroll from Review Quiz 11-5.the payroll from Review Quiz 11-5.


Wendy

Should the journal come in on a mouse click, or is it okay to show the answer right away?


Focus on Ethics

What internal control procedures could the owner have instituted to prevent this type of scheme?

Refer to the Focus on Ethics box on page 526 Refer to the Focus on Ethics box on page 526 in your text.in your text.


Joining the Pieces

Procedures for Procedures for Recording the Recording the PayrollPayroll

© Paradigm Publishing, Inc.1 Chapter 11 Accounting for Payroll: Employee Earnings and Deductions.

Documents

week paradigm publishing

deductions paradigm

wage paradigm publishing

taxes paradigm publishing

sex paradigm publishing

payroll periodto

net pay

nature of payroll deductions