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ACC 111 Chapter 7 Lecture Notes

This document summarizes key aspects of payroll including maintaining accurate records, complying with relevant laws, and keeping data confidential. It describes the distinction between employees and independent contractors and the different tax treatment for each. Key laws affecting wages are outlined, including minimum wage, overtime pay, income tax withholding, Social Security, unemployment insurance, and workers' compensation. The steps for calculating earnings, deductions, and the payroll register, journal entry, and checks are defined. Employee earnings records are maintained to track annual compensation.

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180 views

ACC 111 Chapter 7 Lecture Notes

This document summarizes key aspects of payroll including maintaining accurate records, complying with relevant laws, and keeping data confidential. It describes the distinction between employees and independent contractors and the different tax treatment for each. Key laws affecting wages are outlined, including minimum wage, overtime pay, income tax withholding, Social Security, unemployment insurance, and workers' compensation. The steps for calculating earnings, deductions, and the payroll register, journal entry, and checks are defined. Employee earnings records are maintained to track annual compensation.

Uploaded by

Lori
Copyright
© © All Rights Reserved
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Download as DOC, PDF, TXT or read online on Scribd
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Chapter 7 Lecture Notes Employee Earnings and Deductions

The keys to doing payroll


You must maintain accurate payroll records
Payroll must be prepared on time
You must comply with the appropriate federal, state, and local laws governing payroll
matters.
Not only must these laws be complied with but they must be current
Keep all payroll data and correspondence confidential.
Employer/employee relationship
Deductions are made only for employees, not for independent contractors.
Employee Someone who is under the direction and control of the employer, such as an
office clerk, assistant, or factory worker.
Employees have taxes deducted from their paychecks and a W2 is sent to them at the end
of the year.
Independent contractor - A person or company who follows an independent trade,
business, or profession which services are offered to the public. Examples: a roofing
company, a janitorial service, or a CPA (public accountant).
Independent contractors do not have taxes deducted from their payments. They receive a
Form 1099 at the end of the year for payments over $600. They pay their own taxes
based on the businesss net earnings.
Laws Affecting Wages

Fair Labor Standards Act (FLSA) of 1938 this law provides the minimum standards
for both wages and overtime. It is a very inclusive law. It also includes child labor laws
and equal pay for equal work.
Current Tax Payment Act requires employers to withhold, deposit, and maintain
records of federal income tax on their employees. This act was passed in 1943.
Social Security Act of 1935 also known as FICA. This act attempts to maintain funds
for the retired and disabled based on their work history. It is made up of two parts
OASDI or Old Age, Survivors, Disability Insurance and HI or Hospital Insurance, better
known as Medicare.
OASDI and HI are deducted from each employees wages. Their employer matches the
amount deducted.
State Unemployment Taxes or SUTA this is an amount paid into each state for
unemployment benefits. When an employee is laid off from a job SUTA funds is where
that employees benefits are drawn from. In some states both the employee and employer
pay into the SUTA funds, however in North Carolina only the employer is responsible for
paying into SUTA.
SUTA has a maximum wage base which changes each year. Once an employee earns
wages above the wage base then the employer does not have to pay any additional SUTA
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taxes for that year. The percentage of SUTA tax that an employer pays is based on the
usage of the funds by that employer. The less employees that have been laid off and
drawn unemployment, the lower the rate the employer will pay.
Federal Unemployment Taxes or FUTA this is the amount that is paid on the federal
level and it covers the administrative cost of running the unemployment services. In all
states it is totally the responsibility of the employer to pay the FUTA taxes.
FUTAs wage base is $7,000 per employee per year. The percentage is 0.6%.
Workers Compensation this is insurance to cover employees against losses due to
work related death or injuries. In North Carolina any business with three or more
employees must carry Workers Compensation Insurance.

Calculations of employee earnings

Employees can be paid weekly, biweekly, semimonthly, or monthly.


Biweekly is every two weeks.
Semimonthly is twice a month or 24 checks in a year.
Hourly wages for straight time = Number of regular hours worked pay rate.
The current Federal Minimum Wage is $7.25 per hour. A state can have a minimum
wage that is different from the federal minimum wage as long as it is higher.
Overtime - The Federal Labor Standards Act requires employers to pay employees one
and one-half times each employees regular rate for hours worked in excess of 40 per
week.
For overtime in any pay period each week is looked at separately. According to
FLSA it is over 40 hours in a week not a pay period. So an employee who is paid
biweekly (every 2 weeks) and has 35 hours in week 1 and 45 hours in week 2, even
though the total hours for the two week pay period is 80 hours the employee would still
receive 5 hours overtime for week 2.
Some employers pay overtime at double time. This is not required by the law (FLSA).
Some employers do this to get employees to work Saturdays, Sundays, and holidays.
Also you may find union contracts that stipulate overtime at double time.
Other methods to pay wages than hourly: salaries, piece-rate compensation, commissions,
and bonuses.
There are two methods of overtime calculations:
o The first method is probably the most common. Simply take the overtime hours
and multiply them by 1.5.
o The second method is known as the Overtime Premium Approach. This is used
when the business needs to separate out the cost of the actual overtime hours.
You multiple the total hours, including the overtime hours, by the regular rate.
Then you multiply the overtime hours by 0.5 and add the two figures together.

Deductions from employees earnings

Deductions are the reasons for the difference between gross earnings/pay and net
earnings/pay.
Federal income tax - Employers are required to withhold the tax and then pay it to the
U.S. Treasury. Employers must also keep records concerning payroll information for each
employee.
o Employee withholding allowances (exemptions): The amount of income tax to
be withheld depends on the number of an employees allowances. Each employee
is entitled to one personal allowance, an additional allowance for a spouse, an
allowance for each dependent and additional allowances for excess itemized
deductions.
o Employees Withholding Allowance Certificate (Form W-4): This gives the
employer the authority to withhold for federal income tax.
o Withholding tables: This information can be found in Publication 15 (Circular
E). You can find the electronic version at www.irs.gov.
o There are two methods to calculate the taxes: using the wage-bracket tax tables
and the percentage method.
State income tax: The NC State Income tax tables are set up like the federal tables. You
can find them on the web at the NC Department of Revenue.
FICA (Federal Insurance Contributions Act) taxes (Social Security and Medicare),
employees share.
o This provides for retirement pensions after a worker reaches age 62, disability
benefits, and a health insurance program after age 65 (Medicare).
o Withholdings are based on earnings during the calendar year.
o The text uses an assumed rate for Social Security of 4.2 percent for employee
withholding, on the first $113,700 and an assumed rate for Medicare of 1.45
percent on all earnings (these are 2013 figures). Tables for withholding Social
Security and Medicare taxes are given in Publication 15 (Circular E).
Other possible deductions can include items such as United Way, union dues, health
insurance premiums, and 401(k) retirement plans.

The Payroll Register

This is a multicolumn form on which a companys payroll for a particular pay period is
recorded.
There is one payroll register for each pay period.

Earnings columns: Based on each employees hours worked and rate of pay, the regular,
overtime, and total earnings are determined.
Taxable Earnings columns: These columns are used to calculate both employees and
employers taxes.
o FICA: These taxes are paid if an employees total earnings during the year are
less than the maximum ($113,700 for Social Security and all earnings for
Medicare) before the amount of earnings for this pay period are recorded.
o State unemployment (SUTA): This tax is paid only by the employer in most
states. The maximum amount varies from state to state. In North Carolina the
employer is responsible for paying this tax.
o Federal unemployment (FUTA): This tax is paid only by the employer. The
maximum wage base is $7,000. If an employees total earnings before this pay
period are less than $7,000, the amount of earnings for this pay period or the
amount needed to bring the total to $7,000 is recorded.
Deductions columns: Amounts in each column are determined separately.
o Federal Income Tax: The amount is stated in a table in Publication 15 (Circular
E).
o State Income Tax: Most states have a state income tax. The amounts vary by
state.
o FICA: Social Security tax equals the amount in the Social Security Taxable
Earnings column times the Social Security tax rate. Medicare tax equals the
amount in the Medicare Taxable Earnings column times the Medicare tax rate.
The amounts of the taxes are also given in Publication 15 (Circular E).
o Other deduction columns: Amounts depend on the agreement between the
employee and the employer.
Payments, Net Amount: Total earnings minus total deductions.
Expense Account Debited: Used for distributing salaries or wages expense.

The Payroll Journal Entry

The payroll journal entry is taken directly from the payroll register.
Look at the payroll journal entry in Figure 5 and compare it to the payroll register in
Figure 4.
You will see how the entry is debiting the salary expense accounts, crediting the
deductions payable, and crediting Wages Payable for the amount of the Net Amount
column (take-home pay for all employees).

Paychecks

Many businesses have a Payroll Bank Account. They issue one check from the firms
regular bank account to the Payroll Bank Account.
Individual employee payroll checks are then issued from this special payroll account.
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A journal entry must be made to move the funds from the Regular Bank Account to the
Payroll Bank Account in the accounting records.

Employee Earnings Record

Employees earnings record This is a payroll record for each employee that is used to
provide complete information about the accumulated annual earnings of each employee.
All data on the employees earnings record is obtained from the payroll register.
There is one employees earnings record per employee in the company each year.
Look at Figure 7 for an example of the employees earnings record.

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