Chapter 12

Current Liabilities and

Payroll

Problem 10 (HW)
Assume all adjusting entries are done at year end
only.

Payroll Control
Segregation of duties
Authorization of employee and rate, reporting hours, preparing payroll,
signing checks, distributing checks, reconciling payroll bank account

Only HR can change employee information

Proper procedures for recording time
Pay by check only
Audit payroll periodically
Unclaimed payroll checks should be returned to controller

Fair Labor Standards Act (FLSA)

Commonly known as the federal wage and hour law, covers such things as equal
pay for equal work, recordkeeping requirements, minimum wages rates, and
overtime pay.
Employers must keep records for time worked for hourly employees, such as W-4
Regular pay is a 40 hour work week
Not 8 hours per day

Overtime must be paid at 1.5 times

These are the minimum federal laws, state laws can be more stringent

Payroll Journal Entries

2 separate and distinct entries:
The entry to record the payroll
The entry to record the payroll taxes

Payroll Entry
All item on employee payroll check
Gross Pay = Rate * Hours
Federal Income Tax
Sliding scale based on W-4

Social Security Tax (FICA)

6.2% on first $118,500 for 2015, plus
Medicare - 1.45% on all income

State Income Tax

Miscellaneous Deduction
Health Insurance, 401K, union dues, etc

Net Pay
Gross Pay all above payroll deductions

Payroll Journals
Wages and Salaries
Federal Income Tax Payable
State Income Tax Payable
FICA
Health Insurance Payable
Wages Payable

49,000

Wages Payable
Cash

28,297

13,720
2,254
3,749
980
28,297

28,297

Payroll Taxes Entry

Paid by the employer
Federal Unemployment Tax Act (FUTA)
6.0% on first $7,000

State Unemployment Tax Act (SUTA)

Employers can take credit on FUTA % based on SUTA %
Up to 5.4% credit

SUTA is based on experience by company

NV ranges between 0.25%-5.4% on first $26,400
New firms 2.95%

Social Security Tax

FICA-6.2% on first $118,500 for 2015
Medicare - 1.45% on all income

Payroll Tax Journal

This is for amounts paid by employer
Payroll Tax Expense
FICA Tax Payable
Federal Unemployment Tax Payable
State Unemployment Tax Payable

6,787
3,749
392
2,646

When taxes are due is based on amount of taxes

Both employer and employee paid taxes need to be paid together
Actual cost to employer for the employee is actually $55,787 not $49,000
This does not include any additional fringe benefits such as PTO, workers comp expense, insurance,
401K matching

Problem 17 (modified)
Given the following payroll information what would be the Payroll Basis and
Payroll Tax journals?
Salary
Federal Income Tax Rate
State Income Tax Rate
FICA Rate
Federal Unemployment (FUTA) Rate
State Unemployment (SUTA) Rate
Employee Contribution to Health Plan

$32,000
28%
5.4%
7.65%
6.2%
5.2%
$45

Problem 17 (modified)
What would be the Payroll Basis journal?
Remember Payroll Basis is also called the Employee Journal

Problem 17 (modified)
What would be the Payroll Tax journal?
This is the amount the employer is responsible for