Analyzing & Journalizing Payroll Transactions

1. CHAPTER 6 Payroll Accounting 2013 Bernard J. Bieg and Judith A. Toland ANALYZING & JOURNALIZING PAYROLL TRANSACTIONS Developed by Lisa Swallow, CPA CMA MS

2. Learning Objectives • Record payrolls in appropriate records • Understand various deductions taken from employees’ gross pay • Journalize entries to record payroll and payroll taxes • Post to general ledger • Explain recording of payroll tax deposits • Understand need for end-of-period adjustments

3. 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 LO-1

4. Payroll Register First – record info in 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* LO-1

5. Employees’ Earnings Records Second – transfer info to employees’ earnings records • Used to track cumulative totals (wages and taxes) • Enter row of data for 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 • Used to prepare payroll analyses - various internal and external reports • Might be used to settle employee grievances LO-1

6. Recording Gross Payroll & Withholdings Third - enter information into accounting system • Gross payroll is debited • Each withholding tax is credited to a liability • All other payroll deductions are liabilities as well LO-1

7. Problem • 6 – 15A

8. Recording Gross Payroll & Withholdings • Any deduction that the employer makes from employee’s paycheck goes into a liability account (because they owe it to someone) such as: • Group life insurance premiums • Health insurance premiums • Purchase of government savings bonds • Union dues • Wage garnishments • Pension and retirement contributions LO-2

9. Garnishments • A creditor can, through the courts, seek repayment of his/her money by garnishment • Employer is required to comply with garnishment order • Employer must withhold funds from employee’s paycheck and submit it to appropriate authorities • Garnishments limited based upon Consumer Credit Protection Act (CCPA) - other than for federal tax levies • Priority for attachments are: (1) bankruptcy* (2) federal tax levy/child support (3) creditor, student loan, federal administrative wage garnishments *Chapter13 bankruptcy orders have highest priority over all other claims LO-2

10. Child Support • Family Support Act requires immediate withholding for child-support payments • Employer 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 vary between 50-65% of disposable earnings depending on other obligations and number of weeks in arrears LO-2

11. Federal Tax Levy • Take second priority after wages withheld for child support (if received prior to tax levy) • These levies are suspended if debtor declares bankruptcy • Amount of taxpayer’s standard deduction is only amount that is exempt from a federal tax levy • $5,950 for single and $11,900 for married • IRS publishes tables that can be used to figure amount exempt from tax levies • Employer required to withhold until Form 668-D (Release of Levy/Release of Property from Levy) received LO-2

12. 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 employees in company’s plan and deduct contributions from pay LO-2

13. Problem • 6 – 1A , 6 – 2 A

14. Methods of Paying Wages & Salaries • Check • Sometimes separate payroll account maintained to make bank reconciliation process easier • Electronic payment methods • EFTS (electronic funds transfer system) • Electronic records created showing bank, account # and net pay • Pay cards allow employer to deposit payroll into prepaid card • Card utilized like debit or credit card • Many employees who do not have bank accounts use these • Electronic paystubs alleviate need for paper paystubs • Final pay • Many states set time limit between termination and final wage pay out (depends upon whether worker left voluntarily) • CA and MI require immediate payment if employee is fired LO-3

15. Journal Entries to Record Payroll • Journal Entry #1- Record gross wages, withholdings and net pay • Journal Entry #2 - Record employer’s 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). LO-3

16. 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 1,845.00 • FICA Taxes Payable - OASDI 77.49 • FICA Taxes Payable - HI 26.75 • Employees FIT Payable 174.00 • SIT Payable 50.00 • Group Insurance Payments W/H 191.00 • Cash 1,325.76 LO-3

17. Journal Entry #2 • Debit Payroll Tax Expense for total of all payroll taxes that employer pays • Credit each account - they are all liabilities • Calculate all employer taxes utilizing varying wage bases and percentages • Journal entry #2 • Payroll Tax Expense 190.89 • FUTA Taxes Payable 3.69 • SUTA Taxes Payable 46.06 • FICA Taxes Payable - OASDI 114.39 • FICA Taxes Payable - HI 26.75 LO-3

18. Problem • 6 – 5 A, 6 – 7 A, 6 – 8 A

19. Recording Deposit of Payroll Taxes Look in general ledger for amounts due • Deposit 941 taxes • Deposit SIT • Deposit SUTA LO-5

20. Workers’ Compensation Insurance • 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 often calculated based on employment classification – stated in terms of $100 per 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 LO-5

21. Journal Entry for Workers’ 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 Workers’ Comp. Insurance Payable 99.67 LO-5

22. Problem • 6 – 10A

23. Journalize Period-End Accruals • Accrued wages should be recorded for wages earned by workers, but not yet paid Journal entry Wage Expense 1,589.96 Wages Payable 1,589.96 • Accrued vacation pay should be recorded for amount of vacation pay owed employees - many employers now merging sick time and vacation time Journal entry Vacation Benefits Expense 520.00 Vacation Benefits Payable 520.00 Note: Not necessary to accrue payroll tax expense at year-end LO-6

24. Problem • 6 – 16A