Prepared by
Coby Harmon
University of California, Santa Barbara
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Westmont College


Appendix I

Payroll Accounting

Learning Objectives

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1

Record the payroll for a pay period.

2

Record employer payroll taxes.

3

Discuss the objectives of internal control for payroll.


LEARNING
OBJECTIVE

1

Record the payroll for a pay period.

“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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LO 1


Determining the Payroll

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

Illustration I-1
Computation of total wages

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LO 1



Determining the Payroll

PAYROLL DEDUCTIONS
Mandatory:

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Voluntary:



FICA tax



Charity



Federal income tax



Insurance



State income tax




Union dues



Pension plans

LO 1


Determining the Payroll

PAYROLL DEDUCTIONS
Mandatory:



FICA tax

Social Security and Medicare tax

Supplemental retirement, employment disability, and medical
benefits.



Federal income tax




State income tax
Illustration I-3
FICA tax rate and tax base

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LO 1


Determining the Payroll

PAYROLL DEDUCTIONS
Mandatory:

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

FICA tax



Federal income tax



State income tax




Employers are required to withhold income taxes from
employees’ pay.



Withholding amounts are based on gross wages and the
number of allowances claimed.

LO 1


Determining the Payroll

PAYROLL DEDUCTIONS
Mandatory:

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

FICA tax



Federal income tax



State income tax


Most states (and some cities) require employers to
withhold income taxes from employees’ earnings.

LO 1


Determining the Payroll

NET PAY
Gross earnings minus payroll deductions.

Illustration I-6
Computation of net pay

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LO 1


Recording the Payroll

Illustration I-7
Employee earnings record
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LO 1


Recording the Payroll


Illustration I-8
Payroll register

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LO 1


Recording the Payroll

RECOGNIZING PAYROLL EXPENSES AND LIABILITIES

Illustration: Prepare the entry Academy Company would make to record the payroll for the week ending January 14.

Salaries and Wages Expense

17,210.00

FICA Taxes Payable
Federal Income Taxes Payable

3,490.00

State Income Taxes Payable

344.20

United Fund Payable

421.50


Union Dues Payable

115.00

Salaries and Wages Payable
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1,316.57

11,522.73
LO 1


Recording the Payroll

RECORDING PAYMENT OF THE PAYROLL
Illustration: Prepare the entry Academy Company would make to record the payment of the payroll.

Salaries and Wages Payable
Cash

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11,522.73

11,522.73

LO 1



RECORDING PAYMENT OF THE PAYROLL

Illustration I-9
Paycheck and statement of
earnings

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LO 1


LEARNING

2

OBJECTIVE

Record employer payroll taxes.

Payroll tax expense results from three taxes that governmental agencies levy on employers.

These taxes are:

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

FICA taxes




Federal unemployment tax



State unemployment tax

Same rate and maximum earnings as the employee’s.

LO 2


Employer Payroll Taxes

Payroll tax expense results from three taxes that governmental agencies levy on employers.

These taxes are:



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

FUTA tax rate is 6.2% of first $7,000 of taxable wages.



Employers who pay the state unemployment tax on a


FICA tax



Federal unemployment tax



State unemployment tax

timely basis will receive an offset credit of up to 5.4%.
Therefore, the net federal tax rate is generally 0.8%.

LO 2


Employer Payroll Taxes

Payroll tax expense results from three taxes that governmental agencies levy on employers.

These taxes are:



FICA tax



Federal unemployment tax




State unemployment tax
SUTA basic rate is usually 5.4% on the first $7,000 of wages
paid.

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LO 2


Recording Employer Payroll Taxes

Illustration: Academy records the payroll tax expense associated with the January 14 payroll with the
following entry. Use the following rates: FICA 8%, state unemployment 5.4%, federal unemployment 0.8%.

Payroll Tax Expense

2,383.59
*

FICA Taxes Payable
Federal Unemployment Taxes Payable

1,316.57
137.68

State Unemployment Taxes Payable


**
***

929.34

* $ 17,210.00 x 7.65% = $1,316.57
** $17,210 x .8% = $137.68
*** $17,210.00 x 5.4% = $929.34
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LO 2


Recording Employer Payroll Taxes

Question
Employer payroll taxes do not include:

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a.

Federal unemployment taxes.

b.

State unemployment taxes.

c.


Federal income taxes.

d.

FICA taxes.

LO 2


Filing and Remitting Payroll Taxes

Companies must report FICA taxes and federal income taxes withheld no later than one month following
the close of each quarter.

Companies generally file and remit federal unemployment taxes annually on or before January 31 of the
subsequent year. Companies usually file and pay state unemployment taxes by the end of the month
following each quarter.

Employers must provide each employee with a Wage and Tax Statement (Form W-2) by January 31.

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LO 2


Filing and Remitting Payroll Taxes

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APPENDIX


Illustration I-11

LO 2


LEARNING
OBJECTIVE

3

Discuss the objectives of internal control for payroll.

As applied to payrolls, the objectives of internal control are

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1.

to safeguard company assets against unauthorized payments of payrolls, and

2.

to ensure the accuracy and reliability of the accounting records pertaining to payrolls.

LO 3


Filing and Remitting Payroll Taxes


APPENDIX

Illustration I-12
Internal control for payroll

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LO 3


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