chapter 12 accounting for payroll: employer taxes and reports 1© paradigm publishing, inc

Chapter 12

Accounting for Payroll:Employer Taxes and Reports

1© Paradigm Publishing, Inc.

1. Describe and calculate payroll taxes imposed on the employer.

2. Record the employer’s payroll taxes.

3. Record the deposit of employee’s federal income taxes and FICA taxes and report these taxes to the government (Forms 8109 and 941).

© Paradigm Publishing, Inc. 2

Learning Objectives

4. Record and report payment of the employer’s federal and state unemployment taxes (Form 940).

5. Report employee earnings and tax deductions to the federal government at the end of the year (Forms W-2 and W-3).

6. Describe and account for workers’ compensation insurance.


Learning Objectives

Describe and calculate payroll taxes imposed on the employer


Learning Objective 1

All employers are required to pay certain taxes to All employers are required to pay certain taxes to federal and state authorities on behalf of employees.federal and state authorities on behalf of employees.

The three basic payroll taxes paid by most employers The three basic payroll taxes paid by most employers are:are:

FICA (both OASDI and HI)FICA (both OASDI and HI)

Federal unemployment taxesFederal unemployment taxes

State unemployment taxesState unemployment taxes


Since payroll taxes are a necessary part of operating a Since payroll taxes are a necessary part of operating a business, they are recorded in the Payroll Tax Expense business, they are recorded in the Payroll Tax Expense account, an operating expense account.account, an operating expense account.


Expense accountsare increased on

the debit side.

Payroll Tax ExpensePayroll Tax Expense

Debit Debit ++

CreditCredit--

Employer’s matchingEmployer’s matchingportion of FICA taxesportion of FICA taxes

Federal Federal unemploymentunemploymenttaxestaxes

State unemploymentState unemploymenttaxestaxes

Balance of the accountBalance of the accountclosed to Incomeclosed to IncomeSummary at the end Summary at the end ofofthe accounting period.the accounting period.

A matching tax paid equally by the employer and the A matching tax paid equally by the employer and the employeeemployee

The OASDI tax rate: 6.2% on the first $102,000 of The OASDI tax rate: 6.2% on the first $102,000 of annual earningsannual earnings

The HI tax rate: 1.45% on unlimited annual earningsThe HI tax rate: 1.45% on unlimited annual earnings


Example

Assume an employee earns $3,500 during the current pay period. What would the OASDI and HI taxes be?


OASDI $3,500 × 0.062 = OASDI $3,500 × 0.062 = $217.00$217.00

HI $3,500 × 0.0145 = HI $3,500 × 0.0145 = 50.7550.75

Total FICA tax Total FICA tax $267.75$267.75

Requires the payment of taxes to provide benefits for Requires the payment of taxes to provide benefits for workers during periods of temporary unemploymentworkers during periods of temporary unemployment

Unlike FICA, paid only by the employer; cannot be Unlike FICA, paid only by the employer; cannot be withheld from the pay of employeeswithheld from the pay of employees


FUTA tax rate: 6.2% on the first $7,000 of wages paid FUTA tax rate: 6.2% on the first $7,000 of wages paid to each employee during the calendar yearto each employee during the calendar year

The employer may take a credit of up to 5.4% The employer may take a credit of up to 5.4% for for timely contributions to state unemployment timely contributions to state unemployment fundsfunds

This leaves an effective FUTA rate of only 0.8% This leaves an effective FUTA rate of only 0.8% (6.2% – 5.4%)(6.2% – 5.4%)


The The State Unemployment Tax ActState Unemployment Tax Act (SUTA) law (SUTA) law requires employers to pay unemployment taxes (for requires employers to pay unemployment taxes (for the benefit of employees) to the states in which they the benefit of employees) to the states in which they conduct business.conduct business.

The taxable base for SUTA taxes varies from state to The taxable base for SUTA taxes varies from state to state.state.

Most states have a Most states have a merit-rating systemmerit-rating system that that provides a lower rate as an incentive for employers provides a lower rate as an incentive for employers to stabilize employment.to stabilize employment.



FUTA taxes: $340 × .008 = $2.72SUTA taxes: $340 × .027 = $9.18

OASDI taxes: $2,249 × .062 = $139.44 HI taxes: $3,464 × .0145 = $50.23

Amount of earnings this pay period subject to FUTA and SUTA taxes

Review Quiz 12-1

Assuming the current FICA rates, a FUTA rate of Assuming the current FICA rates, a FUTA rate of 0.8%, and a SUTA rate of 2.7%, calculate the 0.8%, and a SUTA rate of 2.7%, calculate the employer’s payroll taxes for the following payroll.employer’s payroll taxes for the following payroll.


EmployeeEmployee

EarningsEarnings FICA

FUTA SUTAYear-Year-

to-Dateto-DateThis This

PeriodPeriod OASDI HI

KingKing $14,500$14,500 $396.00$396.00

MarisMaris 6,7506,750 318.00318.00

MimmsMimms 33,00033,000 675.00675.00

ToddTodd 5,4005,400 215.50215.50

WadeWade 6,9006,900 200.00200.00

TotalsTotals

$24.55$24.55 $5.74$5.74 00 00

19.7219.72 4.614.61 $2.00$2.00 $6.75$6.75

41.8541.85 9.799.79 00 00

13.3613.36 13.1213.12 1.721.72 5.825.82

12.4012.40 2.902.90 .80.80 2.702.70

$111.88$111.88 $26.16$26.16 $4.52$4.52 $15.27$15.27 $157.83$157.83

Record the employer’s payroll taxes




The employer’s payroll taxes are debited to an The employer’s payroll taxes are debited to an expense account entitle Payroll Tax Expense.expense account entitle Payroll Tax Expense.

The journal entry for payroll taxes should be prepared The journal entry for payroll taxes should be prepared separately from the journal entry for salaries expense.separately from the journal entry for salaries expense.

+ liability+ liability+ liability+ liability+ liability+ liability+ liability+ liability

+ expense+ expense


The employer must match the OASDI taxes paid by The employer must match the OASDI taxes paid by the employees. the employees.

The same account is used to record both the The same account is used to record both the employees’ and the employer’s share.employees’ and the employer’s share.

Credited to record OASDI taxes imposed on the Credited to record OASDI taxes imposed on the employeremployer

Debited when the taxes are sent inDebited when the taxes are sent in


HI taxes are shared HI taxes are shared equally by the employees equally by the employees and employer.and employer.

Credited to record HI taxes Credited to record HI taxes imposed on the employer imposed on the employer

Debited when the taxes Debited when the taxes are sent inare sent in


A current liability account used to record the employer’s A current liability account used to record the employer’s obligation for federal unemployment taxesobligation for federal unemployment taxes

Credited when taxes are imposed on the employer Credited when taxes are imposed on the employer



A current liability account used to record the A current liability account used to record the employer’s obligation for state unemployment taxesemployer’s obligation for state unemployment taxes

Credited when taxes are imposed on the employer Credited when taxes are imposed on the employer


Quick Check


Mary Watts earns $525 per week and is the sole employee Mary Watts earns $525 per week and is the sole employee at the Gilbert Company. Her cumulative year-to-date at the Gilbert Company. Her cumulative year-to-date earnings immediately before this pay period amount to earnings immediately before this pay period amount to $6,300. The FUTA tax rate is 0.8% and the SUTA tax rate is $6,300. The FUTA tax rate is 0.8% and the SUTA tax rate is 5.4%. Gilbert’s FUTA taxes for the current week amount to:5.4%. Gilbert’s FUTA taxes for the current week amount to:

a.a. $32.55$32.55

b.b. $4.20$4.20

c.c. $28.35$28.35

d.d. $42.00$42.00

e.e. $2.84$2.84

Quick Check


Mary Watts earns $525 per week and is the sole employee Mary Watts earns $525 per week and is the sole employee at the Gilbert Company. Her cumulative year-to-date at the Gilbert Company. Her cumulative year-to-date earnings immediately before this pay period amount to earnings immediately before this pay period amount to $6,800. The FUTA tax rate is 0.8% and the SUTA tax rate is $6,800. The FUTA tax rate is 0.8% and the SUTA tax rate is 5.4%. Gilbert’s SUTA taxes for the current week amount to:5.4%. Gilbert’s SUTA taxes for the current week amount to:

a.a. $1.60$1.60

b.b. $28.35$28.35

c.c. $4.20$4.20

d.d. $10.80$10.80

e.e. $17.55$17.55

Review Quiz 12-2

Using the payroll information in Review Quiz 12.1, Using the payroll information in Review Quiz 12.1, make the general journal entry needed to record the make the general journal entry needed to record the employer’s payroll taxes (Nov. 18).employer’s payroll taxes (Nov. 18).


FICA

FUTA SUTA TotalOASDI HI

Totals $111.88 $26.16 $4.52 $15.27 $157.83

Record the deposit of employees federal income taxes and FICA taxes and report these

taxes to the government (Forms 8109 and 941)




Employers must complete on a timely basisEmployers must complete on a timely basis

To file tax reports, employers must have an Employer To file tax reports, employers must have an Employer Identification Number (EIN)Identification Number (EIN)

A nine-digit number issued by the IRSA nine-digit number issued by the IRS

To a business what a Social Security Number To a business what a Social Security Number (SSN) is to an individual(SSN) is to an individual


Three areas:Three areas:

FICA taxes and federal income taxesFICA taxes and federal income taxes

Federal unemployment taxesFederal unemployment taxes

State unemployment taxesState unemployment taxes


Form 941, Employer’s Quarterly Federal Tax ReturnForm 941, Employer’s Quarterly Federal Tax Return

A quarterly reportA quarterly report

Summarizes FICA taxes (employer and employee Summarizes FICA taxes (employer and employee shares) and federal income taxes withheld during shares) and federal income taxes withheld during the quarterthe quarter

If employer’s total tax liability is less than $2,500, If employer’s total tax liability is less than $2,500, payment may be sent with Form 941payment may be sent with Form 941


If employer’s total taxes exceed $2,500If employer’s total taxes exceed $2,500

Not permitted to send payment directly to the Not permitted to send payment directly to the IRS at the end of the quarterIRS at the end of the quarter

Taxes must be deposited by electronic funds Taxes must be deposited by electronic funds transfer or in a Federal Reserve banktransfer or in a Federal Reserve bank


Employers can electronically deposit FICA taxes and Employers can electronically deposit FICA taxes and federal income taxes withheld from employees by federal income taxes withheld from employees by

Using the Electronic Federal Tax Payment System Using the Electronic Federal Tax Payment System (EFTPS) (EFTPS)

Mailing or delivering a check to a Federal Mailing or delivering a check to a Federal Reserve bankReserve bank


There are two deposit schedules — monthly or There are two deposit schedules — monthly or semiweekly — for determining when taxes must be semiweekly — for determining when taxes must be deposited.deposited.

Determining which schedule to use is based on the Determining which schedule to use is based on the employer’s total tax liability reported during a 12-employer’s total tax liability reported during a 12-month lookback period.month lookback period.

The lookback period for any year is the 12-month The lookback period for any year is the 12-month period beginning on July 1 period beginning on July 1 two years two years prior to the prior to the current year, and ending on June 30, one year prior current year, and ending on June 30, one year prior to the current year.to the current year.


An employer is a monthly depositor for the current An employer is a monthly depositor for the current year if the total taxes (FICA and withheld federal year if the total taxes (FICA and withheld federal income taxes) for the lookback period were $50,000 income taxes) for the lookback period were $50,000 or less.or less.

Under the monthly deposit schedule, taxes must be Under the monthly deposit schedule, taxes must be deposited by the 15th day of the following month.deposited by the 15th day of the following month.


If an employer’s total taxes during the lookback period If an employer’s total taxes during the lookback period were more than $50,000, the semiweekly deposit were more than $50,000, the semiweekly deposit schedule is required.schedule is required.

Under the semiweekly deposit schedule, taxes on Under the semiweekly deposit schedule, taxes on payroll payments made on Wednesday, Thursday or payroll payments made on Wednesday, Thursday or Friday must be deposited by the following Wednesday.Friday must be deposited by the following Wednesday.

Taxes on payroll payments made on Saturday, Sunday, Taxes on payroll payments made on Saturday, Sunday, Monday or Tuesday must be deposited by the following Monday or Tuesday must be deposited by the following Friday.Friday.


If the payday falls on:If the payday falls on: Then deposit taxes by the Then deposit taxes by the

following:following:Wednesday, Thursday or FridayWednesday, Thursday or Friday WednesdayWednesday

Saturday, Sunday, Monday or Saturday, Sunday, Monday or

TuesdayTuesdayFridayFriday


If an employer accumulates a tax liability of $100,000 If an employer accumulates a tax liability of $100,000 or more on any day during a deposit period, the taxes or more on any day during a deposit period, the taxes must be deposited the next business day.must be deposited the next business day.

The monthly and semiweekly deposit schedules don’t The monthly and semiweekly deposit schedules don’t applyapply

Must deposit the taxes the next business dayMust deposit the taxes the next business day


When any deposit of taxes is made, the employer When any deposit of taxes is made, the employer should complete and submit to the bank a Form should complete and submit to the bank a Form 8109, Federal Tax Deposit Coupon.8109, Federal Tax Deposit Coupon.


- asset- asset

- liability- liability- liability- liability- liability- liability

Record and report payment of the employer’s federal and state

unemployment taxes (Form 940)




When the FUTA tax liability exceeds $500, a When the FUTA tax liability exceeds $500, a deposit must be made by the last day of the deposit must be made by the last day of the month following the end of the quarter.month following the end of the quarter.

If the FUTA tax liability is $500 or less at the end of If the FUTA tax liability is $500 or less at the end of a quarter, the balance may be rolled over to the a quarter, the balance may be rolled over to the next quarter and subsequent quarters until the next quarter and subsequent quarters until the liability exceeds $500 — or until January 31 of the liability exceeds $500 — or until January 31 of the following year, whichever comes first.following year, whichever comes first.


If the FUTA liability is $500 or less at the end of the If the FUTA liability is $500 or less at the end of the fourth quarter, the employer must pay the tax when fourth quarter, the employer must pay the tax when Form 940 is filed.Form 940 is filed.

Every employer that incurs a FUTA tax liability must Every employer that incurs a FUTA tax liability must file Form 940 with the IRS.file Form 940 with the IRS.


Employer’s Annual Federal Unemployment Tax Employer’s Annual Federal Unemployment Tax ReturnReturn

Must be filed by the employer on January 31, Must be filed by the employer on January 31, following the end of the yearfollowing the end of the year

Summarizes the quarterly FUTA deposits made Summarizes the quarterly FUTA deposits made during the preceding yearduring the preceding year


Each state provides its own special forms and Each state provides its own special forms and specifies how state unemployment taxes are paid.specifies how state unemployment taxes are paid.

Generally, the amount of state unemployment taxes Generally, the amount of state unemployment taxes imposed on employers must be remitted to the imposed on employers must be remitted to the proper state office by the end of the month following proper state office by the end of the month following the close of the calendar quarter in which wages and the close of the calendar quarter in which wages and salaries were earned by employees.salaries were earned by employees.

Report employee earnings and tax deductions to the federal government at the end of the year (Forms W-2 and W-3)




By January 31 of each year, employers are required By January 31 of each year, employers are required to furnish copies of to furnish copies of Form W-2Form W-2 to each person who to each person who was employed in any part of the previous year.was employed in any part of the previous year.

The employer is also required to send a copy of each The employer is also required to send a copy of each employee’s Form W-2 directly to the Social Security employee’s Form W-2 directly to the Social Security Administration.Administration.


Employers must file Employers must file Form W-3Form W-3 with the Social with the Social Security Administration by the last day of February Security Administration by the last day of February following each year.following each year.

Summarizes the earnings and tax deductions of all Summarizes the earnings and tax deductions of all employees of the firm for the previous year.employees of the firm for the previous year.

Review Quiz 12-3

Assuming the following payroll taxes are owed on Assuming the following payroll taxes are owed on May 31, 20XXMay 31, 20XX


FICA

FUTA SUTAOASDI HI$568 $132 $57 $189

a)a) Record the deposit of the OASDI and HI taxes, Record the deposit of the OASDI and HI taxes, assuming they were deposited on June 15.assuming they were deposited on June 15.

Review Quiz 12-3



FICA


b)b) Record the deposit of FUTA tax, assuming a June Record the deposit of FUTA tax, assuming a June 30 deposit.30 deposit.

Review Quiz 12-3



FICA


c)c) Record the June 30 payment of the SUTA tax.Record the June 30 payment of the SUTA tax.

1.1. Record payroll in the payroll registerRecord payroll in the payroll register

2.2. Use the payroll register to inform earnings and Use the payroll register to inform earnings and deductionsdeductions

3.3. Calculate employer’s payroll taxesCalculate employer’s payroll taxes

4.4. Record when an amount is withheld or paidRecord when an amount is withheld or paid


Describe and account for workers’ compensation insurance




To provide protection for employees who suffer a job-To provide protection for employees who suffer a job-related illness or injuryrelated illness or injury

Required by most statesRequired by most states

The entire cost usually paid by the employerThe entire cost usually paid by the employer

The cost depends on The cost depends on

The number of employees a company hasThe number of employees a company has

The company’s accident historyThe company’s accident history

Risk factors associated with the jobRisk factors associated with the job


Assume Gilbert Company estimates its total payroll Assume Gilbert Company estimates its total payroll for the year to be $500,000.for the year to be $500,000.

Gilbert’s premium rate for workers’ compensation Gilbert’s premium rate for workers’ compensation insurance is 0.2%.insurance is 0.2%.


The following entry is prepared at the beginning of The following entry is prepared at the beginning of the year based on estimated total payroll and the the year based on estimated total payroll and the premium rate assigned to the company.premium rate assigned to the company.

Jan. 1 Workers’ Comp. Insurance Expense 1,000

Cash 1,000


At year-end, Gilbert’s actual payroll for the year was At year-end, Gilbert’s actual payroll for the year was $525,000.$525,000.

The following adjusting entry would be prepared on The following adjusting entry would be prepared on December 31.December 31.

Dec. 31 Workers’ Comp. Insurance Expense 50

Workers’ Comp. Insurance Payable 50

Review Quiz 12-4

At the beginning of the year, the estimated total At the beginning of the year, the estimated total payroll was $425,000. The actual amount was payroll was $425,000. The actual amount was $442,000. Assuming a worker’s compensation $442,000. Assuming a worker’s compensation premium rate of 1.5%,premium rate of 1.5%,


a)a) Record the January 2 payment of the estimated Record the January 2 payment of the estimated premium.premium.

Review Quiz 12-4

At the beginning of the year, the estimated total At the beginning of the year, the estimated total payroll was $425,000. The actual amount was payroll was $425,000. The actual amount was $442,000. Assuming a worker’s compensation $442,000. Assuming a worker’s compensation premium rate of 1.5%,premium rate of 1.5%,


b)b) Record the December 31 adjusting entry showing Record the December 31 adjusting entry showing the additional premium due.the additional premium due.


What internal controls can prevent the owner of a company from engaging in a scheme such as this?

Focus on Ethics

Refer to the Focus on Ethics box on page 561 in your Refer to the Focus on Ethics box on page 561 in your text.text.


Deposit Rules Deposit Rules

for Federal for Federal

Taxes Withheld Taxes Withheld

and FICA Taxesand FICA Taxes

Joining the Pieces

Start Here

No

No

No

No

Yes

Yes

Yes

Yes

chapter 12 accounting for payroll: employer taxes and reports 1© paradigm publishing, inc

Documents

employer paradigm publishing

employer taxes

oasdi taxes

futa taxes

hi taxes

employers payroll taxes

suta taxes

payment of taxes