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© 2011, Educational Institute

Chapter 2

Accounting for Payroll

Financial Management for Spas

(367TXT or 367CIN)

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© 2011, Educational Institute 1

Competencies for

Accounting for Payroll

1. Discuss the importance of containing payroll costs, and describe

the elements of a spa¶s compensation plan.

2. Discuss the issue of independent contractors in spas.

3. Summarize payroll controls used by spas, identify payroll

records, and discuss issues surrounding overtime pay.

4. Outline factors involved in preparing payroll checks manually,and describe two major journal entries involving payroll.

5. Describe issues involved in the reporting of employee tips, and

explain how unpaid wages are accrued using adjusting entries.

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Elements of a Spa¶s Compensation

Plan

Base pay/salary

Variable/incentive pay

Commissions (percentage, fee-for-service)

Service charges/gratuities/tips

R etail commissions

Incentive pay

Merit pay

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Independent Contractors Independent contractors help spas deal with labor gaps,

special projects, and spikes in business.

IR S defines independent contractor status (20-Factor Test)

Independent contractors are in business for themselves;

employers do not have to withhold or pay taxes on

payments to independent contractors.

Spas can only control the result of the work done by an

independent contractor, not the means or methods the

contractor uses.

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© 2011, Educational Institute 5

Independent Contractors

Spas must report payments to independent contractors to

the IR S by filing Form 1099-MISC, Miscellaneous Income.

Three tests for worker status:

± Behavioral control

± Financial control

± R

elationship of the parties Spa may rent booth or chair to individual business owner;

spa records the amount of the rent as ³Other Income´ on

income statement.

(continued)

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Payroll Controls:

Segregated Payroll Functions

Authorization of employment and

establishment of wage rates for employees

R eporting of hours worked by employees

Actual preparation of the payroll

Signing of the payroll checks

Distribution of checks to employees

R econciliation of payroll bank accounts

by an independent party

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Other Payroll Controls

Pay employees by check or direct deposit, not with cash.

Imprest payroll account: a bank account in which only the

exact amount of the payroll for a given payroll period is

deposited

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Payroll Records Time sheets/cards

Master payroll file information includes:

IR S Form W-4

U.S. Department of Homeland Security Eligibility

Verification Form I-9 IR S Form W-2

Payroll journal

Employee¶s earnings record

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- Employees¶ full names - Addresses with zip codes - Dates of birth (if less than 19 years old)

- Gender - Occupation - Time and day when their workweek starts

- R ate of pay - R egular earnings - Hours worked each day and week

- Overtime earnings - Pay date - Additions to and deductions from pay

- Total wages paid - Pay period

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Overtime Pay

In the United States, overtime pay of 1.5 times the

employee¶s regular hourly rate must be given for any hours

worked in excess of 40 hours in a week.

Special holiday rates may apply in other countries.

In hotel/resort spas, when an employee works more than 40

hours in a week working in the spa and also in another hotel

department, and is paid with two different rates, the overtime

rate is calculated using a weighted average of the two rates.

Some states have a ³seven-day rule´; employees are paid 1.5

their regular hourly rate on the seventh consecutive day of

work.

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Payroll Considerations When

Preparing Checks Manually

Must take into account hours worked, commissions, marital

status, exemptions, and enrollment in the spa¶s cafeteria

benefit plan and retirement plan.

Must make appropriate payroll journal entries.

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Two Major Journal Entries

Involving Payroll

Entry to record payroll

Entry to record payroll taxes

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The Entry to Record Payroll

Gross pay

Federal income tax

FICA taxes State income tax

Miscellaneous deductions; these could include

local income tax, employer contributions to

health care plan, union dues, 401(k)contributions, and charitable deductions.

The amount of the employee¶s net pay

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The Entry to Record Payroll Taxes

Payroll taxes are taxes paid by the employer based on

employee wages. Three major elements of payroll taxes:

± FICA taxes

± FUTA taxes

± SUTA taxes

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Reporting Employee Tips

Most spa employees receive tips from their clients.

Tips are voluntary contributions by clients to a spa¶s

employees.

There are federal and state regulations concerning tip

reporting.

The spa must pay the employee¶s and the spa¶s share of FICA tax on tips and service charges.

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Accruing Unpaid Wages

Since pay periods seldom end on the last day of an

accounting period, wages must be accrued using adjusting

entries in ³Wages Expense´ and

³Wages Payable.´

Because payroll is such an important portion of spa

expenses, failure to make proper accrual entries can

have a large and misleading effect on reported financial

performance for a reporting period.

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