Transcript Slide 1

Chapter 7
Employee Earnings
and Deductions
1
College Accounting
10th Edition
McQuaig
McQuaig
Bille
Bille
Nobles
PowerPoint presented by Douglas Cloud
Professor Emeritus of Accounting, Pepperdine University
7–1
© 2011 Cengage Learning
Key Terms
 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.
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Laws Affecting Employees’
Pay Deductions
 The Fair Labor Standards Act of 1938
provides for minimum standards for
both wages and overtime.
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Laws Affecting Employees’
Pay Deductions
 The Current Tax Payment Act of 1943
requires employers not only to withhold
the tax and then pay it to the U.S.
Treasury but also to keep records of
the names and addresses of persons
employed.
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Laws Affecting Employees’
Pay Deductions
 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 percent on the first $117,000 (for
2014) earned in a calendar year.
 Employees contribute 1.45 percent on all earnings
in a calendar year with no limit for Medicare.
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Laws Affecting Employer’s
Payroll Tax Contributions
 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.
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Laws Affecting Employer’s
Payroll Tax Contributions
 Each state is responsible for paying its own state
unemployment tax. This tax is paid by
employers only at the rate of 5.4 percent on the
first $7,000 earned by each employee.
 Illinois 2014
 Unemployment tax applies to $12,900 of wages
 4.15% for new companies
 After the 1st year, rated .55% - 8.95%, based on experience
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Laws Affecting Employer’s
Payroll Tax Contributions
 The Federal Unemployment Tax Act
is to provide financial support for the
maintenance of government-run
employment offices. This tax is paid
only by employers only. The rate is
0.8 percent of the first $7,000 of
earnings.
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Laws Affecting Employer’s
Payroll Tax Contributions

Workers’ compensation laws protect
employees and their dependents
against losses due to death or injury
incurred on the job.
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The following table presents a summary of the
various payroll taxes and who is responsible for
each:
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How Employees Get Paid
 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.
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Calculating Wages
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. It pays him double time for any work he does
on Sundays and holidays.
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Calculating Salaries
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.
$
$
$
$
per month x 12
per year ÷ 52 weeks
per week ÷ 40 hours
per regular hour x 1.5
=
=
=
=
Earnings for 44 hours:
40 hours at straight time (from above)
4 hours overtime
(4 x $
Total gross earnings
=
)=
$
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Piece-Rate
 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?
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Commissions
 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 pays her a 5 percent commission on sales during the
year in excess of $200,000. Her total sales are $445,000.
Regular salary
Commission:
$
Total earnings
$
Common Deductions
from Total Earnings
1. Federal income tax withholding
2. State income tax withholding
3. FICA taxes (Social Security and Medicare),
employee’s share
4. Union dues
5. Medical insurance premiums and medical
expenses under a flexible spending plan
6. Contributions to charitable organizations
7. Repayment of personal loans from the company.
8. Savings through the company 401(k) plan
9. Dependent care expenses under a flexible
spending plan (subject to a $5,000 limit)
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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).
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Publication 15 (Circular E), Employer’s
Tax Guide and Publication 15-T
 Publication 15 (Circular E) contains the rules for
depositing federal income, Social Security, and
Medicare taxes.
 Publication 15-T contains the withholding tables
for these taxes.
 Both publications are provided free of charge by
the Internal Revenue Service.
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Wage-Bracket Tax Tables
• Tables providing the amounts to be deducted for
income taxes based on earnings, marital status,
and number of allowances claimed
• Payment periods covered
–
–
–
–
–
Monthly
Semimonthly
Biweekly
Weekly
Daily
Using the Tables
to Determine Deductions
• Step 1: Select correct table for payment period
and marital status.
• Step 2: Locate gross pay in first two columns.
• Step 3: Find column for number of withholding
allowances.
• Intersection shows amount of federal income tax
to withhold from paycheck.
• Be careful of:
– “At least”
– “But less than”
State Income Tax Withholding
• Use state tables to determine withholding.
Or
• Use percentage of federal income tax deduction.
– Textbook assumes that employee’s state income tax
deduction is 20% of the federal income tax deduction.
FICA Taxes
Social Security Taxes
• Federal taxes levied
on employees and
employers
• Proceeds used for:
Medicare Taxes
• Federal taxes levied
on employees and
employers
• Proceeds used for
medical insurance for
– Pension payments after
a worker has reached
eligible people age 65
62 years
or over
– Disability benefits for
disabled worker and
dependents
FICA Taxes (cont’d)
• Text assumes a 2006 Social Security rate of
6.2% (number equivalent = .062).
– Only the first $94,200 of earnings are taxed.
• Medicare rate is 1.45%
(number equivalent = .0145).
– All earnings are taxed.
• Applied to gross earnings during a calendar year
• Calculated separately because of the different
upper limits for two types of taxes
Calculating FICA Taxes
Mark Amano
Week’s Earnings =
Cumulative Earnings to Date =
FICA
Social Security Maximum
Social Security Rate
Medicare Rate
FICA Social Security Deduction
FICA Medicare Deduction
$1,124.58
$44,960.00
$94,200.00
6.20%
1.45%
Employees’ Federal
Income Tax Withholding
 The payroll register is a manual or
computerized schedule prepared for each
payroll period listing the earnings,
deductions, and net pay for each
employee.
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Analysis of Payroll Register
Taken from
Amount earned
First 40 hours
Overtime
Beginning
employees’ time
Regular earnings
The untaxed
between Jan.
1
multiplied
multiplied
by
by overtime
cumulative
records.
plus
and Sept. regular
30
hourly
employee’s
earningsportion
plus of the
employee’s first
rate overtime rate
total earnings
$7,000
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Analysis of Payroll Register
Column (I)Column
x
(J)
x
Weekly payroll
Employees’
Weekly payroll
DeductionDeduction
based
based0.062
The deductions
0.0145 voluntary
amount subject
amount subject
on federal wageon state wageand taxes
to Social
withholdings
to Medicarebracket
tax
tables
bracket
tables
summed
(continued)
Security tax
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Analysis of Payroll Register
Employees
EachNumber
employee’s
involved in office
Employees
of each
take-home
pay
involved in salesactivities
employee’s
activities
payroll check
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The Payroll Entry
 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.
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Payroll Journal Entry:
Expenses and Payables
Although Social Security and Medicare taxes are
calculated separately, they are treated as a single
payable because they will be paid at the same time.
General Journal
Date
20-Oct.
Description
7 Sales Wages Expense
Office Wages Expense
Employees’ Federal Income Tax Payable
FICA Tax Payable
Employees' State Income Tax Payable
Employees' Medical Insurance Payable
Employees' United Way Payable
Accounts Receivable
Wages Payable
page 5
Post.
Ref.
Debit
Credit
14,332.15
4,467.28
Payroll Register, page 56, for week ended Oct. 7.
Equivalent to sum of take-home pay for all employees
2,838.00
1,431.33
567.60
320.70
185.00
30.00
13,426.80
Special Payroll Bank
Account—An Alternative
 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.
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Employee Earnings Record
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