employee earnings 7 and deductions · chapter 7 employee earnings and deductions solution page 1...

TEACHING TIPSNew to this edition:

1. FICA Social Security employee withholding rate is 4.2% or (0.042).

2. FICA Social Security employer rate remains the same at 6.2% or (0.062).

3. FICA Medicare employee and employer rate remains same at 1.45% or (0.0145).

4. As we go to print, Congress is debating changes to the current payroll tax laws. If changes are made, a summary of these changes will be posted on the Instructor’scompanion site.

Suggested in-class problems:

● Exercise 7-1 (calculating gross pay)

● Exercise 7-2 (calculating gross and net pay)

● Exercise 7-3 (calculating gross and net pay, using income withholding table)

● Exercise 7-6 (recording payroll in the general journal)

● Demo Problem (located in the Instructor’s Resource Manual)

Suggested homework:

● Problem 7-1 (compute regular pay, overtime pay, gross pay, net pay)

● Problem 7-2 (complete payroll register, prepare payroll journal entry)

Scavenger Hunt/Internet Activity:

Have students go to the IRS website at www.irs.gov. On this website, have students see who can find various regulations and forms the quickest. This exercise can be done individually or in groups. Ideas of items to include in your scavenger hunt:

● 941 Report/Instructions ● W-2

● 940 Report/Instructions ● 1099

● Publication 15 (Circular E)—Current Year ● Definition of an independent

● W-4 contractor

You may also want expand the search to your local city, state taxing authority or your state unemployment website(s).

LEARNING OBJECTIVES1. Recognize the role of income tax laws that affect payroll deductions and contributions.

2. Calculate total earnings based on an hourly, salary, piece-rate, or commission basis.

3. Determine deductions from gross pay, such as federal income tax withheld, Social Security tax, and Medicare tax, to calculate net pay.

4. Complete a payroll register.

5. Journalize the payroll entry from a payroll register.

6. Maintain employees’ individual earnings records.

7Employee Earningsand Deductions

7-1© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 7 Employee Earnings and Deductions

ACCOUNTING LANGUAGECalendar year Medicare taxesCurrent Tax Payment Act Net payEmployee Payroll bank accountEmployee’s individual earnings record Payroll registerEmployee’s Withholding Allowance Pre-tax deductions Certificate (Form W-4) Social Security Act of 1935Exemption Social Security taxesFair Labor Standards Act Taxable earningsFICA taxes Wage-bracket tax tablesGross pay Withholding allowanceIndependent contractor Workers’ compensation laws

KEY POINTS1. Payroll accounting is a vital tool for anyone employed in accounting.

2. There is a distinction between an employee and an independent contractor.

3. There are many federal and state laws pertaining to employment.

4. The payroll register summarizes the information about employees’ wages and salaries for a given payroll period.

5. It is necessary to make a journal entry in order to record the information from the payroll register in the ledger accounts.

6. The information in the payroll register is transferred to the employees’ individual earnings records each payday.

LECTURE OUTLINEI. Employer/employee relationship: Deductions are made only for employees, not for

independent contractors.

A. Employee: One who is under the direction and control of the employer, such as an office clerk, assistant, or factory worker.

B. Independent contractor: A person or company engaged to perform a definite job or service who may choose her or his own means of doing the work. Examples are a roofing company, a janitorial service, or a CPA (public accountant).

II. Calculations of employee earnings: Other terms for earnings are remuneration and compensation

A. Hourly wages.

1. Straight time: Number of regular hours worked × pay rate.

2. Overtime: Bonus payment for additional hours worked.

a. Time-and-a-half: The Federal Labor Standards Act requires employers whose products enter interstate commerce to pay employees one and one-half times each employee’s regular rate for hours worked in excess of 40 per week. The list of eligible employers is gradually being extended to include motels and others.

b. Double time: Union contracts frequently stipulate overtime at two timesan employer’s regular rate for work performed on Sundays and holidays.

B. Salaries, piece-rate compensation, commissions, and bonuses.



III. Deductions from employee’s earnings: Reasons for the difference between gross pay and net pay.

A. Federal income tax (Current Tax Payment Act): 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.

1. Employee withholding allowances (exemptions): The amount of income tax to be withheld depends on the number of an employee’s 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.

2. Employee’s Withholding Allowance Certificate (Form W-4): This gives the employer the authority to withhold for federal income tax.

3. Withholding tables: This information can be found in Publication 15 (Circular E). Showing the class a copy would be helpful. You can find the electronic version at www.irs.gov.

B. State income tax: Discuss any state income tax implications that apply in your state. The text assumes a state income tax rate of 20% of the federal income tax rate.

C. FICA (Federal Insurance Contributions Act) taxes (Social Security and Medicare), employee’s share.

1. This provides for retirement pensions after a worker reaches age 62, disability benefits, and a health insurance program after age 65 (Medicare).

2. Withholdings are based on earnings during the calendar year. The text uses an assumed rate for Social Security of 4.2 percent for employee withholding, on the first $106,800 and an assumed rate for Medicare of 1.45 percent on all earnings. Tables for withholding Social Security and Medicare taxes are given in Publication 15 (Circular E).

D. Other deductions: Discuss other possible deductions, such as for United Way,union dues, and company loan payments.

IV. The payroll register: This is a form on which a company’s payroll for a particular pay period is recorded.

A. Earnings columns: Based on each employee’s hours worked and rate of pay, the regular, overtime, and total earnings are determined.

B. Taxable Earnings columns: These columns are used to calculate both employees’ and employer’s taxes.

1. FICA: These taxes are paid if an employee’s total earnings during the year are less than the maximum ($106,800 for Social Security and all earnings for Medicare) before the amount of earnings for this pay period are recorded.

2. State unemployment (SUTA): This tax is paid only by the employer in most states. A maximum of $7,000 earnings for each employee during the calendar year is assumed. If an employee’s 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. The maximum amount varies from state to state.



3. Federal unemployment (FUTA): This tax is paid only by the employer. A maximum of $7,000 is assumed. If an employee’s 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.

C. Deductions columns: Amounts in each column are determined separately.

1. Federal Income Tax: The amount is stated in a table in Publication 15 (Circular E).

2. State Income Tax: Most states have a state income tax. The amounts vary by state.

3. 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).

4. Other deduction columns: Amounts depend on the agreement between the employee and the employer.

D. Payments, Net Amount: Total earnings minus total deductions.

E. Expense Account Debited: Used for distributing salaries or wages expense.

V. The payroll entry: It is taken directly from the payroll register. Relate the payroll entry shown in Figure 5 of the text to the payroll register in Figure 4, 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).

A. Payroll bank account: One check is issued from the firm’s regular bank account. Individual payroll checks are issued from the special payroll account.

B. Employee’s individual earnings record: Show students how to trace data from the payroll register to the employee’s individual earnings record.

DEMONSTRATION PROBLEMNorthwest Sales Company’s payroll register reveals the following information concerning its two employees for the month ended July 31 of this year:

D. C. Garcia T. C. Bennett

Total earnings 4,000.00$ Total earnings 3,600.00$

Federal income tax withheld (321.17) Federal income tax withheld (261.17)

Social Security tax withheld (168.00) Social Security tax withheld (151.20)

Medicare tax withheld (58.00) Medicare tax withheld (52.20)

United Way withheld (258.00) United Way withheld (125.00)

Net amount (Ck. No. 6701) 3,194.83$ Net amount (Ck. No. 6702) 3,010.43$

The employees are paid by checks issued on the firm’s regular bank account.

Instructions

Prepare the entry to record the payroll in a general journal.



SOLUTIONPAGE

1 20— 1

2 July 31 Salary Expense 7,600.00 2

3 Employees’ Federal Income Tax Payable 582.34 3

4 FICA Taxes Payable 429.40 4

5 ($168.00 + $151.20 + $58.00 + $52.20) 5

6 United Way Payable 383.00 6

7 Cash 6,205.26 7

8 Paid salaries for the month 8

9 (D. C. Garcia, $3,194.83, Ck. No. 6701; 9

10 T. C. Bennett, $3,010.43, Ck. No. 6702). 10

11 11

12 12

DISCUSSION QUESTIONS

Suggested Responses

1. The employee’s individual earnings record satisfies a government requirement and isa source of information for each employee’s W-2 form.

2. An employee’s individual earnings record contains current data on that employee’s earnings, deductions, and net pay for all pay periods, as well as cumulative earnings.

3. The purpose of the payroll register is to summarize the information about employees’ wages and salaries, withholdings, and deductions for a period of time.

4. An employee’s gross earnings are the total earnings before any deductions. Net earnings are the earnings remaining after deductions have been made and represent the employee’s take-home pay.

5. One check for the entire payroll is drawn from the regular bank account and deposited in a special payroll bank account. This avoids overloading a company’s regular bank account with numerous payroll checks, and it makes the bank statement for the regular bank account easier to reconcile.

6. Possible required deductions are federal income taxes, state income taxes, Social Security taxes, and Medicare taxes. Possible voluntary deductions are medical insurance premiums, union dues, charitable contributions, and payments to 401(k) plans.

7. An employee is a person who works under the direction and control of an employer. An independent contractor is a person who is engaged for a definite job or service and may choose his or her own means of doing the work. Examples of independent contractors are electricians, doctors, lawyers, architects, plumbers, exterminators, and carpenters who are not considered employees of a company.

8. To use the wage-bracket withholding table, you need to know the employee’s wage, filing status, number of exemptions, and frequency of pay. The tables are found in Publication 15 (Circular E).

DESCRIPTION DEBITPOST.REF.

GENERAL JOURNAL

CREDITDATE



SOLUTIONS TO EXERCISES AND PROBLEMS

Exercise 7-1

a. 40 hours at straight time × $25.00 per hour $1,000.00

5 hours overtime × $37.50 per hour 187.50

Total gross pay $1,187.50

b. 40 hours at straight time × $20.00 per hour $ 800.00


Total gross pay $1,040.00

c. × 0.10 $2,365.00

d. $95,500 ÷ 52 weeks = $1,836.54 per week

$1,836.54 per week ÷ 40 hours = $45.91 per regular hour

40 hours at straight time (as calculated above) $1,836.54


$2,249.76

Exercise 7-2

a. 40 hours at straight time × $37.00 per hour $1,480.00

b. 10 hours overtime × $55.00 per hour 550.00

c. Total gross pay $2,030.00

d. Federal income tax withholding $256.81

e. Social Security tax withholding at 4.2 percent 85.47

f. Medicare tax withholding at 1.45 percent 29.51

g. Total withholding 371.79

h. Net pay $1,658.21

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PAGE

1 20— 1

2 Jan. 21 Sales Salary Expense 14,960.00 2

3 Driver Salary Expense 10,692.00 3

4 Office Salary Expense 8,670.00 4

5 Employees' Federal Income Tax 5

6 Payable 3,975.00 6

7 FICA Taxes Payable 1,939.19 7

8 ($1,441.52 + $497.67) 8

9 Employees' Union Dues Payable 560.00 9

10 Salaries Payable 27,847.81 10

11 From payroll register. 11

12 12

Ringness Total

$2,618.00 $6,118.00120.00 266.00

$2,738.00 $6,384.00

$ 131.87 $ 399.9426.37 79.98

115.00 268.1339.70 92.5797.00 132.00

$ 409.94 $ 972.62

$ 2,328.06 $5,411.38

CREDITDATE

GENERAL JOURNAL

Brown

Exercise 7-6

DESCRIPTION DEBITPOST.REF.

Regular earnings …………………………………… $ 3,500.00

Overtime earnings …………………………………… 146.00

Total earnings ……………………………………… $ 3,646.00

Federal income tax withheld ………………………… $ 268.07

State income tax withheld …………………………… 53.61Social Security tax withheld ………………………… 153.13

Exercise 7-7

Total deductions ……………………………………… $ 562.68

Net pay ……………………………………………… $3,083.32

Medicare tax withheld ……………………………… 52.87

Charity withheld ……………………………………… 35.00



PAGE

1 20— 1

2 Sept. 30 Salary Expense 6,384.00 2


4 Payable 399.94 4

5 Employees' State Income Tax 5

6 Payable 79.98 6


8 ($268.13 + $92.57) 8

9 Charity Payable 132.00 9

10 3,083.32 10

11 2,328.06 11

12 Issued checks 981 and 982 12

13 for the month of September. 13

14 14

Cash—Ringness

Exercise 7-8

DEBIT CREDIT

Cash—Brown

DATE DESCRIPTIONPOST.REF.

GENERAL JOURNAL


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1 20— 1

2 Feb. 21 Wages Expense 4,966.00 2


4 Payable 401.15 4


6 ($208.57 + $72.00) 6

7 Wages Payable 4,284.28 7

8 Payroll register for week ended 8

9 February 21. 9

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11 21 Wages Payable 4,284.28 11

12 Cash—Payroll Bank Account 4,284.28 12

13 Paid wages for week ended 13

14 February 21. 14

15 15

Problem 7-2A (concluded)

GENERAL JOURNAL

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PAGE

1 20— 1

2 Oct. 14 Wages Expense 8,753.24 2


4 Payable 866.06 4


6 ($323.12 + $126.92) 6


8 Payroll register for week 8

9 ended October 14. 9

10 10

11 14 Wages Payable 7,437.14 11



14 October 14. 14

15 15



GENERAL JOURNAL


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PAGE

1 20— 1

2 Dec. 22 Sales Salary Expense 12,890.00 2



5 Payable 1,806.04 5


7 ($488.28 + $212.68) 7

8 Accounts Receivable 165.00 8

9 Employees' United Way Payable 195.00 9


11 Payroll register for week ended 11

12 December 22. 12

13 13

14 22 Salaries Payable 11,800.00 14


16 Paid salaries for week ended 16

17 December 22. 17

18 18


GENERAL JOURNAL



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PAGE

1 20— 1

2 Apr. 14 Wages Expense 4,553.58 2


4 Payable 297.00 4


6 ($191.25 + $66.03) 6



9 ended April 14. 9

10 10

11 14 Wages Payable 3,999.30 11



14 April 14. 14

15 15


Problem 7-2B (concluded)

GENERAL JOURNAL


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PAGE

1 20— 1

2 Sept. 21 Wages Expense 10,668.25 2


4 Payable 1,214.37 4


6 ($325.43 + $154.70) 6



9 ended September 21. 9

10 10

11 21 Wages Payable 8,973.75 11



14 September 21. 14

15 15


GENERAL JOURNAL



CH

AP

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PAGE

1 20— 1

2 Dec. 29 Sales Salary Expense 9,121.00 2



5 Payable 1,482.67 5


7 ($467.50 + $183.15) 7

8 Accounts Receivable 150.00 8

9 Employees' United Way Payable 150.00 9



12 ended December 29. 12

13 13

14 29 Salaries Payable 10,197.68 14


16 Paid salaries for week ended 16

17 December 29. 17

18 18

19 19

20 20

21 21

22 22

23 23

24 24

25 25

26 26



GENERAL JOURNAL


CH

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SOLUTIONS TO ACTIVITIES

WHY DOES IT MATTER?

Suggested Responses

Student answers may vary, but answers should include the following:

1. Since payroll and payroll taxes affect a company’s net income, timeliness and accuracy are important to make sure that the financial statements reflect the proper information.

2. Payroll and payroll taxes are subject to various state and federal laws. Failure to comply could expose REI to various fines and penalties.

3. Payroll errors and/or irregularities could have a significant impact on employee morale. REI most likely would not be voted one of the top 100 companies to work for if employees had numerous payroll concerns.

WHAT WOULD YOU SAY?

Suggested Response

It is true that a second bank reconciliation would be necessary if there were a payroll bank account. There might also be additional service charges, depending on the bank and the type of checking account. However, the primary advantage of using a second account dedicated to payroll is that payroll funds are separated from the general checking account funds. The reconciliation of both accounts is simplified because of the separation of checking accounts, and it limits the number of people who have access to the payroll records.

WHAT WOULD YOU DO?

Suggested Response

This action is neither unethical nor illegal. An employee may claim fewer allowances than he or she is entitled to claim. Some people choose to have more taxes deducted because they do not want to owe taxes on April 15 of the next year. However, this practice is not encouraged unless one is extremely familiar with his or her tax position. Penalties may occur if an employee does not pay in enough taxes during the year.


employee earnings 7 and deductions · chapter 7 employee earnings and deductions solution page 1...

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