Business Accounting

Chapter 12

Importance of Payroll Records

• Required by law –keep accurate payroll records –report employee earnings–pay payroll taxes

• Keep employees happy• Huge expense

The Payroll System

• Calculate Earnings • Calculate Deductions • Prepare Payroll Checks • Report Payroll Info to Government • Update the Payroll and Accounting Records

Payroll:

• list of employees and payments due to each employee for specific pay period

Pay Period:

• amount of time over which employee is paid– weekly– biweekly (every other Friday)– semimonthly (the 1st and the 15th) – monthly

Payroll Clerk:

• prepares payroll

Calculating Gross Earnings

• Gross Earnings: – amount of money earned for working

Wage:

• usually for manual or unskilled labor• regular hours worked * hourly pay rate

Time Card

• records arrival and departure times– written in manually or punched in on time clock– usually rounded to the nearest quarter hour

Electronic Badge Reader

• used for greater accuracy to the minute– id card is swiped through an electronic reader– recorded info is uploaded to payroll computers

Salary:

• usually for managers and supervisors• set amount of annual pay – (not based on hours worked)

Commission:

• paid a percentage of sales

Salary Plus:

• base salary plus commission on sales

Bonus:

• special pay for meeting certain performance standards

Overtime:

• (hrs worked > 40 per week) * hourly rate * 1.5– Fair Labor Standards Act of 1938– some employees are exempt from overtime laws

Payroll Deductions

• amounts subtracted (withheld)from gross earnings

Deductions Required by Law:

• Federal Income Tax Withholding– based on estimate of actual income tax

to be owed at end of year

• employee prepares Form W-4 for employer specifying:– marital status– allowances• usually one allowance for you and each dependent• more allowances equals less withholding• must withhold at least 90% of total tax liability or pay

penalty

Calculating federal Withholding

• employer uses a tax table from IRS to determine how much to withhold

• employer withholds money and forwards to the government for the employee– acts as a collection agent

• some employees are exempt from withholding if all the following apply:– no tax liability last year– expects no liability this year– if income more than $700 and includes nonwage

income, and not claimed as dependent on someone else’s tax return

FICA

• Federal Insurance Contribution Act of 1935• Social Security provides income to retired and

disabled persons• Medicare provides health insurance for the

elderly

• Tax rates are set by Congress (can change at any time)– Social Security 6.2% • on income up to $110,000 in 2010

up to $ 94,200 in 2005

– Medicare 1.45%– State and Local Taxes• some states use tables and some use rates

– Illinois uses a rate of 3%• some states do not charge income tax

Voluntary Deductions

• amounts that the employee asks the employer to withhold and forward for the employee

union dues

• easier for the union – one payment from employer,

not payments from thousands of employees

insurance premiums

• employees contribute a part or all of the premium – health– life– disability

pensions

• if a company still has an open pension plan– employees contribute percentage • if they want to participate

401(k) or 403(b)

• named after an IRS code section• one of the greatest inventions of all time– invest pretax dollars – grow tax deferred– possibly get company match• free money

direct deposits

– net pay is electronically deposited into bank account on pay day

charitable contributions

• automatic way to give back to community

GROSS EARNINGS – DEDUCTIONS

======================= NET PAY (TAKE-HOME PAY)

Payroll Records

• Payroll Register• Employee’s Earnings Record

Payroll Register

• summarizes information – all the employees’ earnings

for each period

• source document for payroll checks• source document for payroll journal entry

Employee’s Earnings Record

• all payroll information for one employee• includes column for accumulated earnings• totaled on a quarterly basis