8.3

Overview of Payroll Liabilities
  • Payroll liabilities include costs associated with both employees and employers.
Employee Costs
  • Federal and State Income Taxes: Employers are required to withhold income taxes from employees' earnings based on their filing status.
    • Example: In states with no state income tax, such as Florida, only federal income tax is withheld.
  • FICA Taxes: Employees pay a portion for Social Security (6.2% up to a maximum base) and Medicare (1.45% with no maximum). These together are known as FICA taxes.
  • Insurance Contributions: Employees may contribute to health, dental, disability, and life insurance premiums, as well as retirement or savings plans.
Employer Costs
  • Employer Matching Contributions: Employers must match the employee's FICA contributions, which is recorded as a payroll expense.
  • Unemployment Taxes: Employers are required to pay federal and state unemployment taxes which fund unemployment benefits.
  • Fringe Benefits: Additional employer costs can include insurance and retirement contributions.
Accounting for Payroll Expenses
  • Example Scenario: Hawaiian Travel Agency has a payroll of $100,000 in January for 20 employees.
    • After withholdings, they record:
    • Federal & State Income Taxes Payable: $24,000
    • FICA Taxes Payable from Employees: $7,650 (7.65% of $100,000)
    • Employers pay health insurance premiums: $5,000
    • Contribution to retirement plans: $10,000
  • Total unemployment tax recorded at 6.2%.
Journal Entries

  1. Recording Employee Salary Expense:

    • Debit Salary Expense: $100,000
    • Credit Income Tax Payable: $24,000
    • Credit FICA Taxes Payable: $7,650
    • Credit Salaries Payable or Cash: Remaining employee take home pay.

  2. Recording Employer Provided Fringe Benefits:

    • Debit Salary Expense (increased by benefits): Health insurance premiums and retirement contributions.
    • Record liabilities for insurance and retirement plans.

  3. Recording Employer Payroll Taxes:

    • Debit Payroll Tax Expense (or Salary Expense for total taxes): $13,850
    • Credit FICA Taxes Payable (employer's share): Same as employee side.
    • Credit Unemployment Tax Payable: $6,200
Key Takeaways
  • FICA taxes require employer matching, almost doubling contributions into social security.
  • Payroll costs for the employee mainly consist of federal/state income tax, FICA taxes, and other contributions.
  • Employer costs encompass FICA employer match, unemployment taxes, and fringe benefits which are essential for reporting payroll liabilities effectively.