10-1 Skyline College Chapter 10. 10-2 An employee is a person who is hired by and works under the direction of the employer. Who Is an Employee? Works

10-1

Skyline College

Chapter

10

10-2

An employee is a person who is hired by and works under the direction of the employer.

Who Is an Employee?

Works under the control of the employer

Uses equipment provided by the employer

Works hours that are set by the employer

10-3

An independent contractor is one who is paid by a company to carry out a specific task or job but is not under the direct supervision or control of the company.

Does not work under the direct supervision or control of the company

Furnishes his or her own tools or equipment

Sets his or her own working hours

No withholding for independent contractors

No payroll tax for independent contractors

10-4

How do employees differ from independent contractors?

Employee Independent Contractor

Works under the control and direction of the employer

Does not work under the direct supervision or control of the company

Uses tools or equipment provided by the employer

Works certain hours that are set by the employer

Sets his or her own working hours

Furnishes his or her own tools or equipment

10-5

Also referred to as the Wage and Hour Law

Applies only to firms engaged directly or indirectly in interstate commerce

Sets a minimum hourly rate of pay and maximum hours of work per week to be performed at the regular rate of pay

Employees who work beyond 40 hours a week are entitled to“time and a half.”

The Fair Labor Standards Act of 1938

The Fair Labor Standards Act of 1938

10-6

Time and a half is the rate of pay for an employee’s work in excess of 40 hours a week.

It is one and one-half times the regular hourly rate of pay.

Time and a half

10-7

Social security tax is a tax imposed by the Federal Insurance Contributions Act (FICA) and collected on employee earnings to provide retirement and disability benefits.

Social Security Tax

10-8

Social Security Tax

The rate (6.2 percent) has remained constant in recent years.

The earnings base has increased each year.

The amount of social security tax is determined by:

As of 2005

rate earnings up to a calendar year earnings base $90,000

6.2%

10-9

Medicare tax is a tax on employees and employers to provide medical care for the employee and the employee’s spouse after each has reached age 65.

Medicare Tax

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Medicare TaxMedicare Tax

The rate (1.45%) has remained constant in recent years.

The Medicare tax does not have an earnings base limit.

The amount of Medicare tax is determined by:

As of 2005

rate earnings total earnings

1.45%

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Medicare tax (1.45%) social security tax (6.2% up to an earnings base limit)

Employee Earnings

Gross

Wages

FICA Tax

Employee (withheld) 6.2% X $90,000 = $5,580.00

Medicare Tax


Let’s assume an employee earns $100,000 in the calendar year.

Social Security Tax and Medicare Tax

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Employee 1$50,000

Employee 2$90,000

Employee 3$100,000

$3,100.00

$5,580.00 $5,580.00 Social Security Tax

Medicare Tax

$50,000 X 6.2% = $3,100.00

$90,000 X 6.2% = $5,580.00

$90,000 X 6.2% = $5,580.00Earnings

Social Security Tax and Medicare Tax

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Social Security Tax

Medicare Tax

$50,000 X 1.45% = $725.00

$100,000 X 1.45% = $1,450.00

$90,000 X 1.45% = $1,305.00 $725.00

$1,305.00 $1,450.00

$3,100.00

$5,580.00 $5,580.00

Employee 1$50,000

Employee 2$90,000

Employee 3$100,000

Earnings

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Federal Income TaxFederal Income Tax

Employers are required to withhold an estimated amount

of federal income tax from the employee’s earnings.

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social security tax (6.2% up to an earnings base limit)

Employee Earnings

Medicare tax (1.45%)

federal income tax

Gross

Wages

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State and Local TaxesState and Local Taxes

Most states, and many local governments, may require employers to withhold income taxes from employees’ earnings to prepay the employees’ state and local income taxes.

The rules are generally almost identical to those governing federal income tax withholding.

10-18

Employer’s Payroll Taxes and Insurance Costs

Employer’s Payroll Taxes and Insurance Costs

Employers withhold social security and Medicare taxes from employees’ earnings.

In addition, employers pay social security and Medicare taxes on their employees’ earnings.

Employers are also required to pay:

Federal unemployment tax

State unemployment tax

Workers’ compensation insurance

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Employee Earnings


federal income tax

The employer matches the social security tax withheld from the employee’s earnings.

10-20


Employee Earningsfederal income tax

The employer matches the Medicare tax withheld from the employee’s earnings.


FICA Tax


Employer 6.2% X $90,000 = $5,580.00

Total 12.4 %

Let’s assume an employee earns $100,000 in the calendar year.

10-22

Federal unemployment taxes (FUTA) are taxes levied by the federal government against employers to benefit unemployed workers.

Federal Unemployment Tax

FUTA

10-23

State unemployment taxes (SUTA) are taxes levied by the state government against employers to benefit unemployed workers.

State Unemployment Tax

SUTA

10-24

Unemployment Rate Taxes

The FUTA and SUTA tax rates are applied to FUTA wages:

The federal tax rate is 6.2 percent. This can be reduced by the state tax rate (5.4 percent for many

states).

This text assumes that the taxable earnings base per employee is $7000 per year.

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FUTA tax rate 6.2%

(Less) SUTA tax rate (5.0)

Net FUTA tax rate 1.2

Total taxes 6.2%

6.2%

(4.8)

1.4

6.2%

SUTA tax rate 5.0% 4.8% 5.4%

6.2%

(5.4)

0.8

6.2%

The SUTA-FUTA Connection

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Employee Earningsfederal income tax


unemployment taxes (6.2% up to a taxable earnings base)

Gross

Wages

10-27

Workers’ compensation insurance is the insurance that protects employees against losses from job-related injuries or illnesses, or compensates their families if death occurs in the course of employment.

Workers’ Compensation Insurance

10-28

Employee Records Required by Law

Employee Records Required by Law

Federal laws require that certain payroll records be maintained. For each employee the employer must keep a record of:

Employee’s name, address, social security number, and date of birth Hours worked each day and week, and wages paid at the regular and overtime rates (certain exceptions exist for employees who earn salaries) Cumulative wages paid during the year Amount of income tax, social security tax, and Medicare tax withheld for each pay period Proof that the employee is a United States citizen or has a valid work permit

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Kent Furniture and Novelty Co. imports furniture and novelty items to sell over the Internet.

The firm is a sole proprietorship owned and managed by Sarah Kent.

Kent Furniture and Novelty Co. has five employees.

Payday is each Monday.

Meet Kent Furniture and Novelty Co.

10-30

The first step in preparing payroll is to compute the gross wages or salary for each employee. There are several ways to compute earnings.

The first step in preparing payroll is to compute the gross wages or salary for each employee. There are several ways to compute earnings.

Hourly rate basis Salary basis Commission basis Piece-rate basis

Computing Total Earnings of Employees

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Hourly rate basis is a method of paying employees according to a stated rate per hour.

Commission basis is a method of paying employees according to a percentage of net sales.

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Piece-rate basis is a method of paying employees according to the number of units produced.

Salary basis is a method of paying employees according to an agreed-upon amount for each week, month or other period.

10-33

Determining Pay for Hourly Employees

Two pieces of data are needed to compute gross pay for hourly rate basis employees:

number of hours worked during the payroll period rate of pay

10-34

Hours Worked

Many businesses use time clocks for hourly employees.

Each employee has a time card and inserts it in the time clock to record the times of arrival and departure.

The payroll clerk collects the cards at the end of the week.

10-35

Computing Gross Pay

Alicia Martinez 40 hours X $ 10.00 = $400.00

Jorge Rodriguez 40 hours X $ 9.50 = $380.00

George Dunlap 40 hours X $ 9.00 = $360.00

The gross pay for hourly employees for the week ended January 6 is determined as follows:

Total hours Rate of pay Gross pay

10-36

George Dunlap earns $9.00 per hour. He worked 45 hours. He is paid 40 hours regular rate of pay and 5 hours at time and a half.

Therefore, Dunlap’s gross pay adds up to:

Overtime

Regular earnings: 40 hours X $ 9.00 $360.00=

=Overtime earnings: 5 hours X $13.50 $ 67.50

Gross Pay $427.50

10-37

Withholdings for Hourly Employees Required by Law

FICA (social security) tax

Medicare tax

Federal income tax withholding

Recall that federal law requires employers to make three deductions from employees’ gross pay:

10-38

Earnings in excess of the base amount ($90,000 as of 2005) are not subject to FICA withholding.

If an employee works for more than one employer during the year, the FICA tax is deducted and matched by each employer.

When the employee files a federal income tax return, any excess FICA tax withheld from the employee’s earnings is refunded by the government or is applied to payment of the employee’s federal income taxes.

Tax-exempt Wages

10-39

To determine the amount of social security tax to withhold, multiply the taxable wages by the social security tax rate and round off to the nearest cent.

Social Security Tax

Cindy Taylor $400.00 X 6.2% = $24.80

Jorge Rodriguez 380.00 X 6.2% = 23.56

George Dunlap 427.50 X 6.2% = 26.51

Cecilia Wu 560.00 X 6.2% = 34.72

Employee Gross pay Tax rate Tax

Total social security tax $109.59

10-40

To compute the Medicare tax to withhold from the employee’s paycheck, multiply the wages by the Medicare tax rate, 1.45 percent.

Medicare Tax

Alicia Martinez $400.00 X 1.45% = $ 5.80

Jorge Rodriguez 380.00 X 1.45% = $ 5.51

George Dunlap 427.50 X 1.45% = $ 6.19

Cecilia Wu 560.00 X 1.45% = $ 8.12

Employee Gross pay Tax rate Tax

Total Medicare tax $25.62

10-41

The amount of federal income tax to withhold from an employee’s earnings depends on:

Earnings during the pay period

Length of the pay period

Employee’s instructions:

Marital status

Number of withholding allowances

10-42

The taxpayer A spouse who does not also claim an allowance Each dependent for whom the taxpayer provides more than

half the support during the year

Withholding Allowances

As the number of withholding allowances increases, the amount of federal income tax withheld decreases.

In the simplest circumstances, a taxpayer claims a withholding allowance for:

10-43

The Employee’s Withholding Allowance Certificate, Form W-4 is a form used to claim exemption (withholding) allowances.

The wage-bracket table method is a simple method to determine the amount of federal income tax to be withheld using tables provided by the government.

10-44

The wage-bracket table method is the most common way to compute the federal income tax withholding.

The wage-bracket tables are in Publication 15, Circular E or online on www.IRS.gov

Computing Federal Income Tax Withholding

10-45

Use the following steps to determine the amount to withhold:

Wage-Bracket Table Method

1. Choose the table for the pay period and the employee’s marital status.

2. Find the row in the table that matches the wages earned. Find the column that matches the number of withholding allowances claimed on Form W-4. The income tax to withhold is the intersection of the row and the column.

10-46

0 1 2 3 4 5 6 7 8 9 10 At least But less

thanThe amount of income tax to be withheld shall be--

520 530 42 33 22 19 10 4 0 0 0 0 0530 540 43 34 23 20 11 5 0 0 0 0 0540 550 45 36 24 21 12 6 0 0 0 0 0550 560 46 37 29 22 16 10 4 0 0 0 0560 570 48 39 30 23 17 11 5 0 0 0 0

And the number of withholding allowances claimed is--If the wages are---

MARRIED Persons—WEEKLY Payroll Period

2. Find the line covering wages between $560 and $570.

Cecilia Wu is married, claims two withholding allowances, and earned $560 for the week.

1. Go to the table for married persons paid weekly.

The tax to withhold is $30; this is where the row and column intersect.

Find the column for two withholding allowances.

10-47

Other Deductions Required by Law Most states and some local governments require

employers to withhold state and local income taxes from earnings.

In some states employers are also required to withhold unemployment tax or disability tax.

The procedures are similar to those for federal income tax withholding.

Apply the tax rate to the earnings, or use withholding tables.

10-48

Some examples are:

Group life insurance Group medical insurance Company retirement plans Bank or credit union savings plans or loan repayments United States savings bonds purchase plans Stocks and other investment purchase plans Employer loan repayments Union dues

There are many payroll deductions not required by law but made by agreement between the employee and the employer.

10-49

A salaried employee earns a specific sum of money for each payroll period.

Determining Pay for Salaried Employees

Exempt employees are salaried employees who hold supervisory or managerial positions who are not subject to the maximum hour and overtime pay provisions of the Wage and Hour Law.

10-50

The procedures for withholding taxes for salaried employees is the same as withholding for hourly employees.

Apply the tax rate to the earnings or use withholding tables.

Withholdings for Salaried Employees Required by Law

10-51

A payroll register is a record of payroll information for each employee for the pay period.

Recording Payroll Information for Employees

10-52

Completing the Payroll Register

Enter the employee’s name (Column A), number of withholding allowances and marital status (Column B), and rate of pay (Column E).

PAYROLL REGISTER WEEK BEGINNING January 1, 20--

NAME NO. OF MARITAL CUMULATIVE NO. OF RATE ALLOW. STATUS EARNINGS HRS.

Martinez, Alicia 1 M 40 10.00 Rodriguez, Jorge 1 S 40 9.50 Dunlap, George 3 S 45 9.00 Wu, Cecil 2 M 40 14.00 Booker, Cynthia 1 S 40 480.00

(A) (B) (C) (D) (E)

10-53





(A) (B) (C) (D) (E)The Cumulative Earnings column (Column C) shows the total earnings for the calendar year before the current pay period. Since this is the first payroll period for the year, there are no cumulative earnings prior to the current pay period.

10-54

Completing the Payroll RegisterPAYROLL REGISTER WEEK BEGINNING January 1, 20--



(A) (B) (C) (D) (E)In Column D enter the total number of hours worked in the current period. This data comes from the weekly time sheets.

Note that all employees were paid for eight hours on January 1, a holiday.

10-55


Using the hours worked and the pay rate, calculate regular pay (Column F), the overtime pay (Column G), and gross pay (Column H).


EARNINGS

NAME REGULAR OVERTIME GROSS CUMULATIVE AMOUNT EARNINGS Martinez, Alicia 400.00 400.00 400.00 Rodriguez, Jorge 380.00 380.00 380.00 Dunlap, George 360.00 67.50 427.50 427.50 Wu, Cecil 560.00 560.00 560.00 Booker, Cynthia 480.00 480.00 480.00 2,180.00 67.50 2,247.50 2,247.50

(A) (F) (G) (H) (I)

10-56


Calculate the cumulative earnings after this pay period (Column I).


EARNINGS

NAME REGULAR OVERTIME GROSS CUMULATIVE AMOUNT EARNINGS

Martinez, Alicia 400.00 400.00 400.00 Rodriguez, Jorge 380.00 380.00 380.00 Dunlap, George 360.00 67.50 427.50 427.50 Wu, Cecil 560.00 560.00 560.00 Booker, Cynthia 480.00 480.00 480.00 2,180.00 67.50 2,247.50 2,247.50

(A) (F) (G) (H) (I)

10-57


The Taxable Wages columns shows the earnings subject to taxes for social security (Column J), Medicare (Column K), and FUTA (Column L). Only the earnings at or under the earnings limit are included in these columns.

AND ENDING January 6, 20-- PAID January 8, 20--

TAXABLE WAGES DEDUCTIONS

NAME SOCIAL MEDICARE FUTA SOCIAL MEDICARE SECURITY SECURITY Martinez, Alicia 400.00 400.00 400.00 24.80 5.80Rodriguez, Jorge 380.00 380.00 380.00 23.56 5.51Dunlap, George 427.50 427.50 427.50 26.51 6.19Wu, Cecil 560.00 560.00 560.00 34.72 8.12Booker, Cynthia 480.00 480.00 480.00 29.76 6.96 2,247.50 2,247.50 2,247.50 139.35 32.58

(A) (J) (K) (L) (M) (N)

10-58


The Deductions columns show the withholding for social security tax (Column M), Medicare tax (Column N), federal income tax (Column O), and medical insurance (Column P).


DEDUCTIONS

NAME SOCIAL MEDICARE INCOME HEALTHSECURITY TAX INSURANCE

Martinez, Alicia 24.80 5.80 19.00Rodriguez, Jorge 23.56 5.50 34.00Dunlap, George 26.51 6.19 23.00 40.00Wu, Cecil 34.72 8.12 30.00 40.00 Booker, Cynthia 29.76 6.96 49.00

139.35 32.58 155.00 80.00

(A) (M) (N) (O) (P)

10-59


Subtract the deductions (Columns M, N, O, and P) from the gross earnings (Column H). Enter the results in the Net Amount column (Column Q). This is the amount paid to each employee.


DEDUCTIONS DISTRIBUTION NAME INCOME HEALTH NET CHECK OFFICE SHIPPING TAX INSURANCE AMOUNT NO. SALARIES WAGESMartinez, Alicia 19.00 350.40 1601 400.00Rodriguez, Jorge 34.00 316.93 1602 380.00Dunlap, George 23.00 40.00 331.80 1603 427.50Wu, Cecil 30.00 40.00 447.16 1604 560.00 Booker, Cynthia 49.00 394.28 1605 480.00 155.00 80.00 1,840.57 480.00 1,767.50

(A) (O) (P) (Q) (R) (S) (T)

10-60

Completing the Payroll RegisterAND ENDING January 6, 20-- PAID January 8, 20--


(A) (O) (P) (Q) (R) (S) (T)

Enter the check number in Column R.

10-61

Completing the Payroll RegisterAND ENDING January 6, 20-- PAID January 8, 20--


(A) (O) (P) (Q) (R) (S) (T)

The payroll register’s last two columns classify employee earnings as office salaries (Column S) or shipping wages (Column T).

10-62

The Payroll Register

When the payroll data for all employees has been entered in the payroll register, total the columns.

10-63

Recording Payroll

1. Record the payroll expense

2. Pay the employees

Recording payroll information involves two separate entries:

GENERAL JOURNAL PAGE 1

DATE DESCRIPTION POST. DEBIT CREDIT REF.

20--Jan. 8

Shipping Wages Expense 1,767.50

Social Security Tax Payable 139.35

Medicare Tax Payable 32.58

Payroll for week ending Jan. 6

Office Salaries Expense 480.00

Employee Income Tax Payable 155.00

Health Insurance Premiums Payable 80.00

Salaries and Wages Payable 1,840.57



(A) (O) (P) (Q) (R) (S) (T)

The information in the register is

used for recording the payroll expense.



20--Jan. 8









Each type of deduction is credited to a separate liability account.


DEDUCTIONS

NAME SOCIAL MEDICARE INCOME HEALTHSECURITY TAX INSURANCE

Martinez, Alicia 24.80 5.80 19.00Rodriguez, Jorge 23.56 5.50 34.00Dunlap, George 26.51 6.19 23.00 40.00Wu, Cecil 34.72 8.12 30.00 40.00 Booker, Cynthia 29.76 6.96 49.00

139.35 32.58 155.00 80.00

(A) (M) (N) (O) (P) A separate liability account is set up

for each deduction.



20--Jan. 8











(A) (O) (P) (Q) (R) (S) (T)

Net pay is credited to the liability account, Salaries and Wages Payable.

10-67

Paying Employees

Most businesses pay their employees by check or by direct deposit.

By using these methods, the business avoids the inconvenience and risk involved in dealing with currency.

10-68



Jan. 8 Salaries and Wages Payable 1,840.57

Cash 1,840.57

To record payment of salaries and wages for week ended Jan. 6

On January 8 Kent Furniture and Novelty Co. wrote five checks for payroll, Check numbers 1601-1605.

Wages Paid

General Journal Format

Documents

10-1 Skyline College Chapter 10. 10-2 An employee is a person who is hired by and works under the direction of the employer. Who Is an Employee? Works