3. Payroll Liabilities: Employer Payroll Taxes

This section focuses on computing and recording employer payroll expenses and liabilities. It also includes the rest of the sections under Payroll Liabilities such as Internal Control of Payroll and Multi-Period Known Libilities

In addition to payroll taxes required of employees, what else must companies pay?

Employers must pay payroll taxes in addition to those required of employees.

What do employer taxes include?

Include FICA and unemployment taxes.

What must employers pay FICA taxes on?

Employers must pay FICA taxes on their payroll.

For a recent year, what is the percentage the employer must pay for Social Security tax?

6.2% on the first $168,600 earned by each employee

For a recent year, what is the percentage the employer must pay for Medicare tax?

1.45% on all earnings of each employee.

Review 

When it says "the employer must pay Social Security tax of 6.2% on the first $168,600 earned by each employee", this means the employer must pay 6.2% toward Social Security until $168,600 total is earned by an employee and then they don't have to pay anymore for that employee. This means if other employees have not reached the $168,600 threshold then they still have to pay the 6.2% for that employee.

Which account is the employer’s tax credited to?

FICA Taxes Payable accounts used to record Social Security and Medicare taxes withheld from employees (FICA - Social Security Taxes Payable and FICA - Medicare Taxes Payable).

What taxes must a self-employed person pay?

Must pay both the employee and employer FICA taxes.

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The federal government works with states in a joint federal and state unemployment insurance program. Each state has its own program. These programs provide unemployment benefits to qualified workers

What does FUTA stand for?

Federal Unemployment Tax Act

What must employers pay a federal unemployment tax on?

Employers must pay a federal unemployment tax on wages and salaries earned by their employees.

For the recent year, what was the percentage of FUTA taxes?

As much as 6.0% of the first $7,000 earned by each employee.

How can the federal unemployment tax be reduced?

Can be reduced by a credit of up to 5.4% for taxes paid to a state program.

Since federal tax can be reduced by a credit of up to 5.4% for taxes paid to a state program, what is often the net federal unemployment tax rate?

It is often 0.6%

What does SUTA stand for?

State Unemployment Tax Act

How do all states fund their unemployment insurance programs?

By placing a payroll tax on employers.

(A few states require employees to make a contribution. In the book's assignments, we assume this tax is only levied on the employer.)

In most states what is the base rate for SUTA taxes?

5.4% of the first $7,000 earned by each employee (the dollar level varies by state). This base rate is adjusted according to an employer's merit rating.

What does the state assign a merit rating based on?

A company’s stability in employing workers.

What does a good merit rating reflect?

Reflects stability in employment and means an employer can pay less than the 5.4% base rate.

What does a low merit rating mean?

High turnover or seasonal hiring and layoffs.

What type of account is employer payroll taxes?

An added expense beyond the wages and salaries earned by employees.

Are employer payroll taxes often recorded in an entry separate from the one recording payroll expense and deductions (employees)?

Yes. These taxes are often recorded in an entry separate from the one recording payroll expense and deductions.

What is the entry to record the employer’s payroll tax expense and related liabilities?

debit Payroll Taxes Expense for all taxes added together, credit all tax accounts needed to be taxed.

What are the tax accounts an employer would usually need to credit when making recording their payroll tax expense and related liabilities?

FICA - Social security Taxes Payable

FICA - Medicare Taxes Payable

State Unemployment Taxes Payable

Federal Unemployment Taxes Payable

What are the tax accounts an employer would usually need to credit when recording employee’s payroll and deductions?

FICA - Social Security Taxes Payable

FICA - Medicare Taxes Payable

Employee Federal Income Taxes Payable

Employee Medical Insurance Payable

Employee Union Dues Payable (if employee in union)

Review example under recording employer payroll taxes under employer payroll taxes.

Review chart under employee and employer payroll taxes summary

Why are internal controls crucial for payroll?

Because of high risk of fraud and error.

Describe the duty part of employee hiring (internal controls in payroll).

Authorize, hire, and fire.

Describe the aim part of employee hiring (internal controls in payroll).

Keep fake workers off payroll.

Describe the duty part of payroll preparation (internal controls in payroll).

Verify tax rates and payroll amounts.

Describe the aim part of payroll preparation (internal controls in payroll).

Rates updated and amounts accurate.

Describe the duty part of timekeeping (internal controls in payroll).

Track and verify time worked.

Describe the aim part of timekeeping (internal controls in payroll).

paid for time worked only

Describe the duty part of payroll payment (internal controls in payroll).

Sign and issue prenumbered checks.

Describe the aim part of payroll payment (internal controls in payroll).

Checks valid, secured, and correct.

Review figure under Internal Control of payroll.

What types of liabilities often extend over multiple periods?

Many known liabilities such as unearned revenues and notes payable.

If a company sells a three year subscription and it records this amount received in an Unearned Revenues account, are these liabilities current or long term?

They are both. The portion of Unearned Revenues account that will be fulfilled in the next year is reported as a current liability. The remaining portion is reported as a long-term liability.

This same analysis applies to note payable.

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For example, a borrower reports a three-year note payable as a long-term liability in the first two it is outstanding. In the third year, the borrower reclassifies this note as a current liability because it is due within one y ear.

What is the current portion of long-term debt?

The part of long-term debt due within one year.

Where is long-term debt reported under (the noncurrent portion)?

Long-term liabilities.

Where is the current portion of long-term debt reported under?

Under current liabilities.

Assume that a $7,500 debt is paid in installments of $1,500 per year for five years. What is the part that is reported as a current liability?

The $1,500 due within the year is reported as a current liability.

When do we classify amounts of debts as either current or long term?

When the balance sheet is prepared.

Review Need-To-Know 11-2