Chapter 11 Payroll Liabilities

1. Chapter 11Payroll Liabilities Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

2. In this chapter… Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

3. Payroll Accounting • Payroll Accounting is responsible for: • Recording cash payments made to employees • Providing information about labour costs • For many companies, labour cost is their most consistent and costly expense • Accounting for amounts withheld from employee pay • Accounting for employee benefits • Providing means through which employers can comply with government regulations regarding employee compensation Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

4. Payroll Deductions • Payroll deductions are amounts withheld from the wages of employees • note: amounts are withheld from wages actually paid • The amount withheld is determined by • their wage amount • The amount of personal tax credits • A look-up table is supplied by CCRA to help employers calculate the amount to be withheld based on the above • Employers remit withholdings monthly • The amount of personal tax credits is determined when the employee completes their TD1 form • A TD1 form is usually completed by an employee within the first few days of starting work with the employer. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

5. Canada Pension Plan (ignore QPP) • Every working person between ages 18 and 70 must pay CPP • The deduction is based on a percentage of wages to a maximum amount (now $50,100 , but use your books number of $42,800) • The employer matches 100% the employee contribution and remits both • Self-employed individuals must make the remittance for both the employee and employer • An easy way to calculate CPP • Determine the amount of pay (in terms of weeks or months) • Determine exemption amount • If paid in weeks, take $3500 / 52 weeks = $67.31 / week exemption • If paid in months, take $3500 / 12 months = $291.67 / month exemption • CPP Deduction = (the weekly or monthly pay - exemption) * .0495 • Employer contribution = Employee CPP deduction Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

6. Employment Insurance • EI coverage is extended to all Canadians who are not self-employed • Employers must deduct and amount based on a percentage of gross income to a maximum amount (now $45,900, but use the books number of $42300). • Employers must pay an amount 1.4 times that of the employees’ amount and remit the combined amount. • An easy way to calculate EI deductions • Determine the amount of pay • EI Deduction = .0173 * amount of pay • Note the rate is currently 0.0183, but use the books rate of 0.0173 • Employer contribution = Employee contribution * 1.4 Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

7. Income Tax • Income taxes vary by province due to the provincial amount • Easiest way to calculate Income Tax is to use look-up tables • Determine how the employees are paid (monthly or weekly) • Determine the individual employees’ TD1 Claim Code • Ensure you are using the right look-up tables • There are look-up tables for monthly or weekly amounts – choose the right one • Look up the federal amount for the proper TD1 Claim Code • Look up the provincial amount for the proper TD1 Claim Code • Add ‘em up, • Income Tax Deduction = Fed Amount + Prov Amount • There is no employer contribution for tax. They pay their own taxes. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

8. Withholding Tables • Wage bracket withholding tables make the calculation to determine amounts to be withheld for CCP (or QPP) and EI easy for employers. • The tables can be downloaded from a government website. • These tables are also available in electronic format so payroll and accounting software applications can use them. • These tables are updated on (usually) a semi-annual basis. • Exhibit 11.3 illustrates examples of deductions tables • The tables use gross pay (regular + overtime) as the look-up amount • The income tax deduction amounts are based on gross pay less amounts deducted for CPP and EI • In effect we are not taxed on amounts paid to CPP and EI • This is done for you if you use the tax tables Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

9. T4 Form • The T4 Statement is the report that employers provide to CCRA and to employees that summarizes their gross wages and source deductions • It usually includes • Total Gross Wages • Taxable benefits received from employers • Income taxes withheld • Deductions for a registered pension • CPP contributions • EI deductions Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

10. The Payroll Register • Payroll Register is a simple table that summarizes the pay given to the employees each pay • Exhibit 11.2 provides an example • It contains the following by employee name: • Hours worked (or salary earned) • Overtime (OT) hours if applicable • Calculates gross pay based on regular time and over time • Outlines amounts deducted for CPP, EI, and Tax • Shows net pay Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

11. Recording the Journal Entries • EI Payable, Income Tax Payable, CPP Payable and EI Payable are current liabilities the employer is responsible for • Salaries Payable is what is owed to employees on the next pay • Other deductions might be employee contributions to a health plan Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

12. Recording the Journal Entries • When actually paying the employees, the journal entry becomes • When paying out EI, CPP and Taxes, the journal entry is: Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

13. Mid-chapter Demo Problem • Lets try the Mid-chapter demo problem • Prepare a Payroll Register that summarizes 3 employees’ pay for the week • Determine the EI, CPP and Tax to be deducted • Illustrate how the other deductions are considered in the calculation of net pay • Show the journal entry for the 3 employees Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

14. The Employer Side • For both CPP and EI, employers must supplement the amount paid by employees. • The amounts contributed by employers are remitted at the same time as those for employees and so are usually held in the same payables and expense accounts • These amounts are considered payroll related expenses and are recorded as EI or CPP Expenses (refer to page 561 for an example) Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

15. Employee Benefits • Workers Compensation • Employers are required to insure their employees against injury or disability resulting from employment • Employer Contributions to Employee Insurance or Retirement • Sometimes employers will pay or will match employee contributions to a benefit. (Refer to bottom of p 563) • The amount may be calculated in a number of ways (% of income, set amount, etc), but the journal entry would be: Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

16. Vacation • Vacation Pay • Employers must allow vacation time. • Full time regular employees use the vacation allotment as time. • Contractors may be paid vacation allotment in advance • Some companies set up a vacation pay liability drawn on when employees go on vacation. Others just pay it as regular income when the employee is on vacation • Vacation pay is calculated as a % of gross earnings. Example: • If 2 weeks of vacation are offered per year, the percent of gross income allocated per pay period for vacation is • 2/(52-2) = .04 or 4% • If 3 weeks are allowed • 3/(52-3) = 6.12% Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

17. Journal Entries for Vacation • The employer assigns a vacation amount to a liability: • When employees take vacation, they draw on the liability and pay EI, CPP and Taxes: Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

18. Demonstration Problem • Check out the End of Chapter Demo problem • This is a good comprehensive problem Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

19. Exercises • Try Exercises • 11-4 • 11-6 • Try Problems • 11-1A • 11-3A Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD