2. Payroll Liabilities: Employee Payroll and Deductions

This focuses on payroll and deductions for employees of the company.

What are payroll liabilities?

Salaries and wages, employee benefits, and payroll taxes levied on the employer.

What is gross pay?

Total compensation an employee earns including wages, salaries, commissions, bonuses, and any compensation earned before deductions such as taxes.

What do wages usually refer to?

Usually refer to payments to employees at an hourly rate.

What do salaries usually refer to?

Usually refer to payments to employees at a monthly or yearly rate.

What is net pay (or take-home pay)

Gross pay minus all deductions.

What are payroll deductions (or withholdings)?

Amounts withheld from an employee's gross pay, either required or voluntary.

Where do required deductions result from?

Laws and include income taxes and Social Security taxes.

Where do voluntary deductions come from?

Employees can choose to include these. These include pension and health contributions, health and life insurance premiums, union date, and donations.

Review

Deductions at some companies, such as those for insurance coverage, are "required" under labor contracts

Review

The employer withholds payroll deductions from employees' pay and send this money to the designated group or government.

What does the employer record payroll deductions as?

As current liabilities until these amounts are sent.

Review figure 11.3 under employee payroll and deductions

What doe FICA stand for?

Federal Insurance Contributions Act

Employers withhold FICA taxes from employees’ pay. What are the two groups employer separate FICA taxes into?

1. Social Security taxes: withholdings to cover retirement, disability, and survivorship.

2. Medicare taxes: withholdings to cover medical benefits.

Are taxes for social security and medicaid computed separately?

Yes

For a recent year, what is the amount withheld from each employee’s pay for Social Security tax?

6.2% of the first $168,800 the employee earns in a calendar year.

For a recent year, what is the amount of medicare tax withheld?

1.45% of all amounts the employee earns, there is no maximum limit to medicare tax

What is the additional medicare tax imposed on and how much is it?

A 0.9% Additional Medicare Tax is imposed on the high-income employee for pay usually in excess of $200,000 based on filing status

Until the taxes are sent to the Internal Revenue Service (IRS) what are they included in?

Until the taxes are sent to the Internal Revenue Service (IRS), they are included in employer's current liabilities.

Review

Most employers withhold federal income tax from each employee's paycheck. The amount withheld is computed using IRS tables.

How is the amount of employee income tax determined?

The amount depends on the employee's income and the number of withholding allowances the employee claims.

What is an allowance?

Reduces taxes owed to the government.

Who can employees claim allowances for?

Themselves and their dependents.

Until employee income taxes are paid to the government, what are they reported as?

As part of the employer’s current liabilities.

Where do voluntary deduction withholdings come from?

From employee requests, contracts, unions, or other agreements. They include charitable giving, medical and life insurance premiums, pension contributions, and union dues.

Until they are paid to the government, what are voluntary witholdings reported as?

As part of the employer’s current liabilities.

What do employers do at the end of each pay period?

Employers accrue payroll expense and liabilities at the end of each pay period.

What is the employer’s entry to accrue payroll expense and liabilities for an employee?

debit Salaries Expense for pay before deductions, credit all accounts related to taxes that applies to the specific employee such as FICA - Social Security Taxes Payable, Employee Federal Income Taxes Payable, etc. credit Salaries Payable for amount after deductions.

What is the entry to record paying the employee?

debit Salaries Payable, credit Cash.

Review example under employee payroll recording.