Analyzing & Journalizing Payroll Transactions

1. Payroll Accounting 2009 Bernard J. Bieg and Judith A. Toland CHAPTER 6 ANALYZING & JOURNALIZING PAYROLL TRANSACTIONS Developed by Lisa Swallow, CPA CMA MS

2. Accounting for Payroll Transactions • Payroll requires entering data (in order) in the following places: • Payroll Register • Employee Earnings Records • General Journal • Journalize gross wages and withholdings • Journalize payroll taxes and workers’ compensation • Journalize period-end accruals • Post to General Ledger

3. Payroll Register • Payroll register lists employees in rows and shows following information for each • Gross wages • Taxes withheld and other deductions • Net pay • Payroll register shows (in columns) • Total of gross wages, each deduction and net • When completed, should “foot” or prove payroll register by ensuring that columns and rows all total to bottom right hand number *Use payroll register to journalize*

4. Employee’s Earnings Record • Employee Earnings Record used to track cumulative totals (wages and taxes) • Enter row of data each pay period • Important because different wage caps for FUTA, SUTA and OASDI taxes • Need to track cumulative totals in order to issue W-2s and do quarterly SUTA reports • Prepare payroll analyses - various internal and external reports

5. Recording Gross Payroll & Withholdings • Next screens show how to enter information into accounting system • Gross payroll is debited • Each withholding tax is a liability • Advanced EIC reduces FIT Payable • All other payroll deductions are liabilities as well

6. Other Deductions from Payroll • Any deduction that the ER makes from EE paycheck goes into a liability account (because they owe it to someone) such as: • Group life insurance premiums • Health insurance premiums • Purchase government savings bonds • Union dues • Deferred compensation (contributions to pension plan) • Child support/other garnishments

7. Garnishments • A creditor can, through the courts, seek repayment of his/her money by garnishment • Employer is required to comply with garnishment order • ER must withhold funds from EE’s paycheck and submit it to appropriate authorities • Child support (see next slide) • Creditor garnishments limited depending upon state • Administrative wage and student loan garnishments limited to 15% of disposable earnings

8. Child Support • Family Support Act of 1988 requires immediate withholding for child- support payments • ER can withhold a state mandated fee for administration • Some states now require electronic submission of garnished child support payments • Maximum amount that can be withheld from a person’s weekly disposable earnings varies according to different support orders, but can be as high as 50-65% of disposable earnings

9. Pension & Retirement Contributions • Pension plans that involve employee contributions result in liability for the employer • Recorded in payroll entry • Pension Protection Act of 2006 gives company ability to automatically enroll EEs in company’s plan and deduct contributions from pay

10. Methods of Paying Wages/Salaries • Cash/check • Electronic payment methods • EFTS (Electronic funds transfer system) • Distribute electronic pay stub • Pay Cards • Cards that allow ER to deposit payroll into prepaid card; card then utilized like debit or credit card • As of 2006, 30 states allow their use • Final pay • Many states set time limit between termination and final wage pay out • CA and MI require immediate payment if EE is fired

11. Journal Entries to Record Payroll • Journal Entry #1- Record gross wages, withholdings and net pay • Journal Entry #2 - Record employer payroll tax expense These two journal entries are always the same in format. You must make both of them every time you issue any paycheck (even if cutting a check for one day’s wages, for example).

12. Journal Entry #1 • Debit Wage Expense for gross payroll • Credit each withholding account - they are all liabilities • Credit cash (or wages payable) for net payroll • Journal entry #1 • Wage Expense 1845.00 • OASDI Payable 114.39 • HI Payable 26.75 • FIT Payable 174.00 • SIT Payable 50.00 • Insurance Payable 191.00 • Cash 1,288.86

13. Journal Entry #2 • Debit Payroll Tax Expense for total of all payroll taxes that ER pays • Credit each account - they are all liabilities • Calculate all employer taxes utilizing varying wage bases and percentages • Journal entry #2 • Payroll Tax Expense 188.92 • FUTA Payable 1.72 • SUTA Payable 46.06 • OASDI Payable 114.39 • HI Payable 26.75

14. Recording Deposit of Payroll Taxes • Look in general ledger, in each applicable liability account, for amount due • Deposit 941 taxes Note: Don’t forget to double OASDI and HI • Deposit state income tax • Deposit SUTA

15. Workers’ Compensation • Workers’ compensation is an expense for the employer, who is required to purchase insurance to protect employees against work related injuries/disabilities • Laws differ by state • Premiums are calculated based on employment classification - per $100 of payroll • Pay premiums in advance based on projected wages • Then, at year-end, report actual wages and pay additional premium • Or may receive credit towards next year

16. Journal Entry forWorkers’ Compensation • Debit Work Comp. Insurance Expense for premium paid • Credit Cash (if paying) or Insurance Payable (if accruing) • Journal entry • Workers’ Comp. Insurance Expense 99.67 • Cash or Insurance Payable 99.67

17. Journalize Period-End Accruals • Accrued wages should be recorded for wages earned by workers but not yet paid; • To record unpaid wages Wage Expense 1589.96 Wages Payable 1589.96 • Accrued vacation pay should be recorded for amount of vacation pay owed employees • Many ER’s now merging sick time and vacation time Vacation Benefits Expense 520.00 Vacation Benefits Payable 520.00

18. Summary of Accounts Used

19. Summary of Accounts Used