TAXES AND SPENDING

Obj. 4.01: Explain taxes on income.

IMPORTANCE OF PAYROLL RECORDS

Payroll is a major expense for most companies and all records must be accurately maintained.

Payroll

A list of employees and the payments due to each one for a specific pay period.

Pay Period

The amount of time over which an employee is paid; such as weekly, biweekly (every two weeks), semimonthly (twice a month), or monthly pay periods.

Payroll ClerkPerson who is responsible for preparing

the payroll. The payroll clerk: Makes sure employees are paid on time. Makes sure each employee is paid the

correct amount. Completes payroll records. Submits payroll reports. Pays payroll taxes.

PAYROLL SYSTEMAll payroll systems have certain tasks in

common, as shown below: Calculates earnings Calculates deductions Prepares payroll checks Reports payroll information to government Records earnings and deductions in payroll

and accounting records

CALCULATING GROSS EARNINGS

Gross Earnings is the total amount of money an employee earns in a pay period. The calculation of gross earnings depends on the basis an employee is paid.

CALCULATING GROSS EARNINGS

An employee’s pay can be based on:SalaryHourly wageCommissionSalary plus commission or bonusOvertime pay

CALCULATING GROSS EARNINGS

Salary is a fixed amount of money paid to an employee for each pay period.

Example: John Doe, an administrator, is paid a salary of $2,000 a month.

CALCULATING GROSS EARNINGS

Wage is an amount of money paid to an employee at a specified rate per hour worked. The number of hours worked multiplied by the hourly wage equals the gross earnings for the pay period.

CALCULATING GROSS EARNINGS

For example: Sally Smith, a delivery driver for Roadrunner, is paid $6.75 per hour. During the last weekly pay period, she worked 36 hours.

Sally's gross earnings are:

36 x $6.75 = $243

CALCULATING GROSS EARNINGS

Electronic Badge Reader is an identification badge with a magnetic strip that contains employee information used to record starting and ending work hours.

CALCULATING GROSS EARNINGS

Commission is an amount paid to an employee based on a percentage of the employee’s sales.

For example: Sue Smith is paid a 5% commission on all her sales. Last week Sue's total sales were $8,254.

Sue's gross earnings for the week are:

$8,254 x .05 = $412.70

CALCULATING GROSS EARNINGS

Overtime rate, set by the Fair Labor Standards Act of 1938, is 1 1/2 (1.5) times the employee’s regular hourly pay rate.

CALCULATING GROSS EARNINGS

For example, John Dubow, a photo-lab clerk at Wal-Mart, worked 43 hours last week. His rate of pay is $6.60. His gross earnings for the week are $293.70 determined as follows:

Regular 40 x $6.60 = $264.00

Overtime 3 x $9.90 = 29.70

Total $293.70

Deduction

Is an amount that is subtracted from gross earnings.

Deductions Required by Law:

Federal Income TaxSocial Security TaxState and Local Taxes

Voluntary Deductions

Federal Income Tax

Most people pay the federal government a tax based on their annual income. Employers are required to withhold a certain amount of money from each payroll check.

Federal Income TaxAn employee's withholding allowance

certificate that shows the number of allowances claimed for federal and state income taxes. The amount withheld for federal income taxes depends on three factors: The employee's marital status. The number of allowances claimed by the

employee. The employee's gross earnings.

Federal Income Tax

An employee who does not pay federal income tax can be "exempt" from withholding if he or she:

Did not have a federal income tax liability in the previous year.

Expects no tax liability this year.

Federal Income Tax Exemptions Continued:

Has income of $700 or less including nonwage income such as interest on a savings account.

Cannot be claimed as a dependent on someone else's tax return.

If an employee writes "EXEMPT" on form W-4, the employer will not withhold federal income taxes.

Federal Income Tax

Allowance reduces the amount of income tax to be withheld. The greater the number of allowances claimed by a taxpayer, the lower the amount of income tax withheld from earnings.

Federal Income TaxTax Table shows the amount of

taxes to be withheld from employees each pay period based on their filing status, such as single, married, etc. A tax table for Single and Married Persons Weekly Payroll Period is included in this section.

Federal Income Tax Let's use the tables to determine the tax

withheld for James Tuck. James is single and claims no allowances.

For the week ending June 30, he earned $232.83. This amount falls between $230 and $240 on the tax table for single persons. Reading across this line to the column for zero withholding allowances, you find that $28 is withheld from his gross earnings for federal income taxes.

Federal Income Tax A simulation module for completing

a W-4 can be found by clicking on the link below:

http://www.irs.gov/app/understandingTaxes/jsp/hows/module01/sm_m01_01.jsp

Social Security Tax

Employers also collect social security taxes for the federal government. The Federal Insurance Contributions Act (FICA) established the present social security system in 1935.

Social Security Tax The FICA taxes finance programs that provide

income to certain individuals:

The old age and disability insurance programs provide income to retired and disabled persons and their dependent children.

The survivor's benefits program provides income to the spouse and dependent children of a deceased worker.

The Medicare program provides health insurance benefits for the elderly.

Social Security Tax

There are two FICA taxes: social security and Medicare. Each tax is separately recorded on payroll documents. The tax rates are as follows:

Social Security tax 6.20% Medicare tax +1.45% Total FICA taxes 7.65%

Social Security Tax The social security tax is deducted

from each employee's earnings until the maximum taxable earnings amount for the year is reached. The amount increases each year. For 2010, the maximum taxable earnings amount is $106,800. Therefore, the maximum amount of social security tax that can be withheld from an employee in one year is $6,621.60 ($106,800.00 x .062).

Medicare Tax

There is no maximum taxable earnings amount for the Medicare tax.

Social Security Tax For example. Lisa Rochelle earns $75,000 per

year as a manager at an accounting firm. The $5,328.30 in FICA taxes withheld from her earnings is calculated as follows:

Social Sec tax $75,000 x .062 = $4,650.00 Medicare tax $75,000 x .0145 = $1,087.50 Total withheld

$5,737.50

Social Security Tax Problem: John Wayne earns $210,000 per year

as a doctor. How much in FICA taxes is withheld from his earnings?

Social Sec tax $97,500 x .062 = $6,045.00 Medicare tax $210,000 x .0145 = $3,045.00 Total withheld $9,090.00

State and Local Income Taxes

Most states and cities tax the earnings of the people who live or work within their boundaries. In some states and cities, the tax rates are set as a percentage of gross earnings, like social security taxes.

Voluntary Deductions

Most employers agree to deduct other amounts from their employees' payroll check to accommodate the wishes of the employees. The employee must initiate the request.

Voluntary Deductions

Common voluntary deductions include:

Union dues Health insurance payments Life insurance payments Credit union deposits and payments U.S. Savings Bonds

Voluntary Deductions Common voluntary deductions include: Charitable contributions Pension and other retirement

contributions (example: 401 (k) plans, which are a personal employee retirement plan and all earned income, are exempted from taxes.