Employee Earnings and Deductions College Accounting Teacher … · 2015. 4. 9. · 7–2 • Gross pay is the total amount of an employee’s pay before deductions. • Net pay is

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

College Accounting

11th Edition

Employee Earnings and

Deductions

Teacher Version

ch

ap

ter

7

7–1


The employer is required to

keep records of the following

information:

• Personal data on

employee

• Data on wage payments

• Amount of taxable wages

paid

• Amount of tax withheld

from each employee’s

earnings by pay period

Objectives of Payroll

Records and Accounting

7–2

• Gross pay is the total amount

of an employee’s pay before

deductions.

• Net pay is the take-home

pay.

• An employee is one who is

under the direction and

control of the employer.

• An independent contractor

is engaged for a definite job

or service and may choose

his or her own means of

doing the work.

Key Terms


Laws Affecting Payroll

• Fair Labor Standards Act of 1938, referred to as “the Act”

or “FLSA” provides minimum standards for both wages

and overtime.

• Also includes child labor and equal pay for equal work

provisions

• Also exempts specified employees or groups from some

provisions.

• Current Tax Payment Act (1943) requires employers to

keep records (names, addresses, earnings, withholdings,

and payment dates)

7–3


What is the federal minimum wage today?

$7.25 if employer pays health insurance

$8.25 without health insurance

What is the NJ minimum wage today?

$8.38

What was the minimum wage in 1938?

$0.25 per hour


FICA Taxes: Employees’ Share

• The Social Security Act of 1935 (FICA) began as an

attempt to provide retired workers with benefits based

upon their work history.

• Currently, FICA consists of Social Security and

Medicare. For Social Security, employees contribute

6.2% on the first $106,800 earned in a calendar year.

• Employees contribute 1.45% on all earnings in a

calendar year with no limit for Medicare.

7–5


• The employer has to match the amount of FICA taxes withheld

from the employee’s wages, and this amount is recorded by

debiting Payroll Tax Expense.

• Each state is responsible for paying its own state

unemployment tax, at a of 5.4% on the

first $7,000 earned by each employee.

• The Federal Unemployment Tax Act is to provide

financial support for the maintenance of

government-run employment offices, paid at a rate

of 0.8% of the first $7,000 of earnings.

• Workers’ compensation laws protect employees and their

dependents against losses due to death or injury incurred on the

job.

FICA Taxes: Employers’ Share

These two

taxes (SUTA

and FUTA)

are paid by

employer’s

only

7–6


Laws Affecting Employer’s Payroll Tax Contributions

7–7


• Money paid to a person for managerial or administrative

services is usually called a salary, and the time period

covered is generally a month or a year.

• Money paid for either skilled or unskilled labor is usually

called wages, and the time period covered is hours or

weeks.

• A company may also supplement an employee’s salary or

wage by other benefits such as commissions, bonuses,

cost-of-living adjustments, and profit-sharing plans.

How Employees Get Paid

7–8


Practice Exercise 1

7–9

Social Security taxes (limited to first $106,800) 106,800 x .062 = 6621.60

Medicare taxes 150,000 x .0145 = 2175.00

Total FICA taxes 8796.60


Mark Anderson’s pay information:

• regular rate of pay is $22.95 per

hour

• Time and a half for hours in

excess of 40 hours

• Double-time for work on

Sundays and holidays

• Mark has ½-hour lunch during

an 8 ½ hour work day. He is not

paid for lunch.

• He is not paid for minutes before

8:00 am or after 4:30 unless the

overtime hours have been

authorized in advance. 7–10

Mark Anderson, who works for Green Sales Company, is

paid $22.95 per hour. The company pays time-and-a-half for

hours worked in excess of 40 per week. The company pays

him double time for any work he does on Sundays and

holidays. His time card for the week ending on October 7

follows.


Calculating Wages:

40 hours regular time 40 x $ 22.95 per hour = $ 918.00

2 hours overtime (Thursday) 2 x 34.43 per hour = 68.86



hour


excess of 40 hours

($22.95 x 1.5 = $34.43)

1 hour overtime (Friday) 1 x 34.43 per hour = 34.43

3 hours overtime (Saturday) 3 x 34.43 per hour = 103.29

$1,124.58 46

First Method

7–11


Calculating Wages:

46 x $ 22.95 per hour = $1,055.70



hour


excess of 40 hours

($22.95 / 2 = $11.48)

6 x 11.48 per hour = 68.88

$1,124.58 46

Second Method

46 hours regular time

6 hours overtime

7–12


• Some salaried employees

may also be entitled to

extra pay for overtime.

Madeline Huan receives a

salary of $4,350 per month. She is

entitled to overtime pay for all hours

worked in excess of 40 during a week at

time-and-a-half her regular rate. This

past week she worked 44 hours.

Salaries

7–13


• Workers under the piece-

rate system are paid at

the rate of so much per

unit of production.

If John Joseph, a

strawberry picker, is paid $3

for each box of strawberries

picked, how much would he

earn if he picked 24 boxes?

Piece-Rate

7–14


• Some salespersons are paid on a purely commissions

basis.

• A more common arrangement is a salary plus a

commission or bonus.

• Lora Brown receives an annual salary of $44,000. Her

employer agrees to pay her a 5 percent commission

on all sales during the year in excess of $200,000.

Her sales for the year totaled $445,000.

Commissions

7–15


Commissions

• Some salespeople are

paid on a purely

commission basis.

• More commonly is a

salary plus commission or

bonus arrangement.

Consider Lora Brown who receives

an annual salary of $44,000. Her

employer agrees to pay her a 5%

commission on all her sales during

the year in excess of $200,000. Her

sales for the year total $445,000.

7–16


Practice Exercise 2

7–17

Now complete exercise 7-1, page 319 Use the

excel form and save.


• Federal income tax withholding

• State income tax withholding

• FICA taxes (Social Security and Medicare), employee’s share

• Union dues

• Medical insurance premiums and medical expenses under a

flexible spending plan

• Contributions to charitable organizations

• Repayment of personal loans from the company.

• Savings through the company 401(k) plan

• Dependent care expenses under a flexible spending plan (subject

to a $5,000 limit)

Common Deductions from Total Earnings

7–18


Employees’ Federal Income Tax Withholding

• Employers are required to withhold employees’ taxes

and then pay them to the U.S. Treasury.

• Employers have to keep records of the names and

addresses of persons employed.

• A withholding allowance is an amount of an

individual’s earnings that is exempt from income

taxes.

• Each employee has to fill out an Employee’s

Withholding Allowance Certificate (Form W-4).

7–19


7–20


• Publication 15 (Circular E) contains the rules for

depositing federal income, Social Security, and

Medicare taxes.

• Publication 15-T contains the wage-bracket tax

tables.

• Both publications are provided free of charge by the

Internal Revenue Service.

Publication 15 (Circular E), Employer’s Tax Guide

and Publication 15-T

7–21


Mark Anderson, claiming one allowance as of the

October 7 payroll, has gross wages of $1,124.58.

7–22


Practice Exercise 3

7–23

$155 withheld M-1, weekly, $1360

Social Security Tax: 1360 x .062 = 84.32

Medicare Tax: 1360 x .0145 = 19.72


(1) (2) (3) (4) (5) (6)

7–24

• The payroll register is a manual

or computerized schedule

prepared for each payroll period

listing the earnings, deductions,

and net pay for each employee.


(7A)

(7A) – payroll earnings for the period, not to exceed $7,000,

are listed in the Unemployment column.

(7B)

(7B) – payroll earnings for the period, not to exceed $106,800,

are listed in the Social Security column.

(7C)

(7C) – all earnings for the period are listed in the Medicare

column.

7–25


(8A) (8B) (8C) (8D) (8F)

7–26

(8E)


(9A) (9B) (10A) (10B)

7–27


Practice Exercise 4

7–28


© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7–30


• Because the payroll register summarizes the payroll

data for the period, it is used as the basis for

recording the payroll in the ledger accounts.

• The accountant records the total cost to the company

for services of employees as debits to the Wages

Expense accounts.

• Total Social Security tax deductions and total

Medicare tax deductions are combined to become

FICA Taxes Payable.

The Payroll Entry

7–31


Note: total Social

Security and total

Medicare are

combined to become

FICA Taxes Payable

7–32


• A firm with a large number of employees would probably open a

special payroll bank account.

• One check drawn on the regular bank account is made payable to

the special payroll bank account for the amount of the total net pay

for a payroll period.

• All payroll checks are then written on the special payroll bank

account.

Special Payroll Bank Account—An Alternative

7–33


7–34


Practice Exercise 5

7–35


7–36


Employee Earnings and Deductions College Accounting Teacher … · 2015. 4. 9. · 7–2 • Gross pay is the total amount of an employee’s pay before deductions. • Net pay is

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