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Extension_Chapter 9

Payroll Accounting and taxes

9-2

Liabilities
Legal obligations require future
payments of cash or services or
the creation of other liabilities as
a result of past transactions.
Current liabilities: obligations
must be fulfilled in one year or
one operating cycle, whichever is
longer.
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Current Liabilities
Examples of current liabilities with definite amount
as a result of a business transaction:
A/P (accounts payable)
N/P (notes payable including commercial paper
issued)
Current maturity portion of a long-term debt
Sales taxes payable
Accrued liabilities (taxes payable, interest payable,
wage payable)
Payroll taxes withholdings
Unearned revenues
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Sales Taxes Payable


Sales taxes are taxes levied by states on retail sales, not on
manufacturers.
Sales taxes are expressed as a stated percentage of the sales
price.

The rate varies state by state (for example, Starting 4/1/2009,


California has a statewide sales tax at 8.25% with a local
supplementary tax for up to 10.75%).

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Sales Taxes Payable


Either rung up separately or included in
total receipts.
Retailers charge their customers the
sales taxes in addition to the price of
the merchandise.
The retailers have to forward the
collected sales taxes to the state at
regular intervals.
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Sales Taxes-Example (1)


Assume that the 12/22/2009 sales of Macys in
California totaled $2,000,000. The state tax
rate is 8.25%. The business would record the
days sales as follows:
Cash
2,165,000
Sales Revenue
2,000,000
Sales Taxes Payable
165,000

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Sales Taxes-Example (2)


1. Warkentinne Company rings up sales and sales
taxes separately on its cash register. On April 10, the
register totals are sales $30,000 and sales taxes
$1,500.
2. Rivera Company does not segregate sales and
sales taxes. Its register total for April 15 is $23,540,
which includes a 7% sales tax.
Instructions: Prepare the entry to record the sales
transactions and related taxes for each client.
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9-8

Sales Taxes-Example (2)


1. Warkentinne Company rings up sales and sales taxes
separately on its cash register. On April 10, the register
totals are sales $30,000 and sales taxes $1,500.
Cash
Sales Revenues
Sales tax payable

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31,500
30,000
1,500

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Sales Taxes-Example (2)


2. Rivera Company does not segregate sales and sales
taxes. Its register total for April 15 is $23,540, which
includes a 7% sales tax.
$23,540 / 1.07 = $22,000
Cash
Sales Revenues
Sales tax payable

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23,540
22,000
1,540

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9-10

Payroll Accounting
The term payroll pertains to both:
Salaries - managerial, administrative, and sales
personnel (monthly or yearly rate).
Wages - store clerks, factory employees, and
manual laborers (rate per hour).
Determining the payroll involves computing three
amounts: (1) gross earnings, (2) payroll deductions,
and (3) net pay.

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Determining the payroll


Gross Earnings
Total compensation earned by an employee (wages
or salaries, plus any bonuses and commissions).

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9-12

Determining the payroll


Payroll Deductions
Mandatory:
FICA tax (Social
Security and
Medicare)
Federal income tax
State income tax

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Voluntary:
Charity
Union dues
Health and life insurance
Pension plans

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9-13

FICA Taxes
FICA (Federal Insurance Contributions Act)
established a tax that transfers money from
workers to aged retirees or suffering from a
disability.
Social Security Taxes
Proceeds used for
Pension payments
after a worker has
reached 62 years
Disability benefits for
disabled worker

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Medicare Taxes
Proceeds used for
medical insurance for
eligible people age 65
or over

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FICA Taxes
The social security tax is a designated percentage of
income, up to a certain maximum level of annual income
per employee. After the amount is reached, no further
amounts are due for that year.
6.2% (max earnings taxable is $106,800 for 2009)
The medicare tax is also a designated percentage of
income. However, there is no limit on maximum earnings
taxable. The tax is levied on every dollar of gross income,
without regard to the employees total earnings
1.45%
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Calculating FICA Taxes


Week Earnings

1,119.16$

Cumulative earnings to date

32,890$

FICA

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Social Security rate

6.2%

Medical Rate

1.45%

FICA Social Security Deduction


(1,119.16$*0.062)

69.39$

FICA Medicare Deduction


(1,119.16$*0.0145)

16.23$

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Federal Income Tax


Payroll Deductions
Mandatory:
FICA tax
Federal income tax
State income tax

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Employers are required to


withhold income taxes from
employees pay.
Withholding amounts are
based on gross wages and
the number of allowances
claimed.

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State Income Tax


Payroll Deductions
Mandatory:
FICA tax
Federal income tax
State income tax

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Most states (and some


cities) require employers
to withhold income taxes
from employees earnings.

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Payroll Tax Components

State unemployment tax (SUTA)

Levied only on the employer in most states


Rate varies by state (5.4%)
Pays subsistence benefits to unemployed workers

Federal unemployment tax (FUTA)

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Levied only on the employer


Rate varies (0.8%)
Used to administer federal unemployment fund

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Journalize Payroll Tax


Expense Entry
Payroll

taxes are an expense of doing


business
Debit Payroll Tax Expense
Credit associated payable accounts
General Journal
Date
2005
Oct.

Description
7 Payroll Tax Expense
FICA Tax Payable
State Unemployment Tax Payable
Federal Unemployment Tax Payable
To record employer's share of FICA tax and
employer's state and federal unemployment taxes.

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Page 9
Post.
Ref.

Debit

Credit
1,261.35
1,206.22
48.02
7.11

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Other employee deductions

Other employee deductions typically occur for employee


contributions to retirement or savings plans, charitable
contributions, contributions to tax-advantaged health and child care
savings programs, health care insurance programs

As soon as the company remits the withheld amounts to the appropriate


entities, it will debit the related Payable Accounts and credit Cash.

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9-21

Net Pay
Net Pay
Gross earnings less payroll deductions.

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9-22

Payroll Records
Maintaining Payroll Department Records
Employer required by law to keep a cumulative
record of each employees gross earnings,
deductions, and net pay during the year.

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Payroll Records
Maintaining Payroll Department Records

Many companies find it useful to prepare a payroll


register. This record accumulates the gross
earnings, deductions, and net pay by employee for
each pay period.

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Recognizing payroll expenses


and liabilities
Enter information into accounting system
Gross payroll is debited
Each withholding tax is a liability
All other payroll deductions are liabilities as
well

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Recognizing payroll expenses


and liabilities

Joyce Kieffers regular hourly wage rate is $15, and she


receives a wage of 1.5 times the regular hourly rate for
work in excess of 40 hours. During a March weekly pay
period Joyce worked 42 hours. Her gross earnings prior
to the current week were $6,000. She pays for federal
tax 55$. Her only voluntary deduction is for group
hospitalization insurance at $25 per week. For state
income tax, assume a 2.0% rate.

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Recognizing payroll expenses


andJoyces
liabilities
Record
pay, assuming she is an office computer
operator.

Wages expense
FICA tax payable

51.60 **

Federal tax payable

55.00

State tax payable

12.90 ****

Insurance payable

25.00

Wages payable
*

645.00 *

500.50

(40 x $15) + (2 x $22.50) = $645

** $645 x 8% (rounded) = $51.60


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**** $645 x 2% = $12.90

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Recording payment of payroll


Recording Payment of the Payroll

Wages payable
Cash

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500.50
500.50

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Employer payroll taxes


According to a payroll register summary of Ruiz Company,
the amount of employees gross pay in December was
$850,000, of which $90,000 was not subject to FICA
tax and $750,000 was not subject to state and federal
unemployment taxes.
Instructions:
Prepare the journal entry to record December payroll tax
expense. Use the following rates: FICA 8%, state
unemployment 5.4%, federal unemployment 0.8%.

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Employer payroll taxes


Prepare the journal entry to record December payroll tax
expense. Use the following rates: FICA 8%, state
unemployment 5.4%, federal unemployment 0.8%.
Payroll tax expense

67,000

FICA tax payable

60,800 *

State unemployment tax payable

5,400 **

Federal unemployment tax payable

800 ***

$760,000 x 8% = $60,800

*** $100,000 x 0.8% = $800

** $100,000 x 5.4% = $5,400


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Post-Retirement Benefits
Post-retirement benefits are benefits that employers
provide to retired employees for (1) pensions and (2)
health care and life insurance.
Companies account for post-retirement benefits on the
accrual basis.
Pension plans that involve employee contributions result in liability
for the employer

The cost of post-retirement benefits is getting steep.

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Pensions
Post-Retirement Benefits
A pension plan is an agreement whereby employers
provide benefits to employees after they retire.
There are two types of pension plans:
A defined-contribution plan
A defined-benefit plan

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Pensions
Post-Retirement Benefits
In a defined-contribution plan, the plan defines the contribution
that an employer will make but not the benefit that the employee
will receive at retirement.
pension funds that might be invested in stocks, bonds or other investments.
the risk is transferred to the employee
the company merely expenses the periodic contribution as incurred

In a defined-benefit plan, the employer agrees to pay a defined


amount to retirees, based on employees meeting certain eligibility
standards.
ex. make annual pension payments in proportion to the average salary during the last three years of
employment
the company records the amount of expense attributed to each year (estimation). If the company
has failed to fund all the amounts expensed, a pension liability is reported on its balance sheet.

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