In addition to salaries and wages, the employer will incur some or all of the following payroll-related expenses: Show
1. Employer portion of Social Security taxIn addition to the amount withheld from its employees for Social Security taxes, the employer must contribute/remit an additional amount, which is an expense for the employer. In the year 2022, the employer's portion of the Social Security tax is 6.2% of the first $147,000 of an employee's annual wages and salary. Hence, the employer's amount is referred to as the matching amount. For example, if an employee earns $40,000 of wages, the entire $40,000 is subject to the Social Security tax. This means that in addition to the withholding of $2,480, the employer must also pay $2,480. The combined amount to be remitted to the federal government for this one employee is $4,960 ($2,480 of withholding plus the employer's portion of $2,480). For an employee with an annual salary of $200,000 in the year 2022, only the first $147,000 is subject to the Social Security tax. This means that in addition to the withholding of $9,114.00, the employer must also pay $9,114.00. The combined amount to be remitted to the federal government for this one employee is $18,228.00 ($9,114.00 + $9,114.00). The employer's share of Social Security taxes is recorded as an expense and as an additional current liability until the amounts are remitted. 2. Employer portion of Medicare taxIn addition to the employee's Medicare tax there is also an employer's Medicare tax. The employer's Medicare tax is considered to be an expense for the employer. For the year 2022, the employer's portion of the Medicare tax is the same rate as the employee's withholding—1.45% of every dollar of each employee's annual wages and salary. Unlike the Social Security tax, the Medicare tax has no cap (ceiling or limit). For example, if an employee earns a salary of $200,000, the employer must pay a Medicare tax of $2,900 ($200,000 x 1.45%) in addition to the $2,900 that was withheld from the employee. The combined amount to be remitted to the federal government for this one employee is $5,800. The employer's share of Medicare taxes is recorded as an expense and as an additional current liability until the amounts are remitted. There is a Medicare surtax known as the Additional Medicare Tax which is withheld from employee's earnings in excess of $200,000. However, the employer does not match the Additional Medicare Tax. 3. State unemployment taxState governments administer unemployment services (determine eligibility, remit payments to unemployed workers, etc.) and determine the state unemployment tax rate for each employer. Generally, states require that the employers pay the entire unemployment tax rate. (Only a few states require employees to make a minimal contribution.) The state unemployment tax rate is applied to each employee's wages up to the state unemployment wage base, which could be $7,000 per year in one state and $30,000 in another state. If a state has an unemployment tax rate of 4% and an unemployment wage base of $14,000, it means that the employer's maximum payment for each employee will be $560 per year. To illustrate, let's assume that a company has three employees. In the year 2022, Employee #1 earns $19,000, Employee #2 earns $40,000, and Employee #3 earns $4,000. If the 2022 state unemployment tax rate is 4%, the employer will pay a tax of $1,280 to the state government:  The contact information for each state's unemployment office is available at the following U.S. Department of Labor website: https://oui.doleta.gov/unemploy/agencies.asp 4. Federal unemployment taxThe federal government oversees the state unemployment programs and requires employers to pay a federal unemployment tax of 6.0% minus a credit if the employer has paid into a state unemployment fund and the state has met certain conditions. If an employer is allowed the maximum credit of 5.4%, then the federal unemployment tax rate will be 0.6%. This reduced rate is applied to each employee's first $7,000 of annual salaries and wages. Using the example of three employees with annual 2022 earnings of $19,000, $40,000, and $4,000; with a federal unemployment tax rate of 0.6%, the employer will pay a tax of $108 to the federal government: Even though the federal unemployment tax is based on employee salaries and wages, the entire tax is paid by the employer. There is no withholding from an employee's salary or wages for the federal unemployment tax. The Federal Unemployment Tax Act (FUTA) requires employers to pay this tax. The employer is also required to file IRS Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. Additional information on FUTA can be found in IRS Publication 15, Employer's Tax Guide. 5. Worker compensation insuranceWorker compensation insurance (or workers' compensation insurance, or workers' comp) provides coverage for employees who are injured on the job. State law usually requires that employers carry this insurance. The cost of worker compensation insurance is a function of at least three variables: (1) the type of business or industry, (2) the type of job being performed, and (3) the employer's history of claims. For example, statistics show that a production worker in a meat packing plant has a greater-than-average chance of suffering job-related cuts or back injuries. Because of this, worker compensation insurance rates for these employees can be as high as 15% of wages. On the other hand, the office staff of the meat packing plant—provided that they do not spend time in the production area—may have a rate that is less than 1% of salaries and wages. The worker compensation insurance rates are applied to the wages and salaries of the employees to arrive at the worker compensation insurance premiums or costs. Although the insurance premiums are based on employee salaries and wages, generally the entire amount is paid by the employer and is considered an expense for the employer. (Contact your state's worker compensation office for the specifics in your state.) If the employer pays the insurance premium in advance, a current asset such as Prepaid Insurance is used. The account balance will be reduced and Worker Compensation Insurance Expense will increase as the employees work. If the employer does not pay the premiums in advance, the company must accrue the expense with an adjusting entry that increases Worker Compensation Insurance Expense along with increases in a current liability such as Worker Compensation Insurance Liability. In this situation the current liability will be reduced when the employer pays the worker compensation insurance premiums. In some industries, worker compensation insurance is a significant expense for the employer and therefore we consider it an important part of payroll accounting. 6. Employer portion of insurance (health, dental, vision, life, disability)In the past, many companies included group health, dental, vision, disability, and life insurance in the benefit package provided to employees. Over the past few decades, however, the costs for these group policies have risen significantly. Today the insurance premium for family coverage can be more than $10,000 per year per employee. As a result of these escalating costs, most companies now require employees to pay a portion of the premium cost; this amount is usually collected by means of employee-directed payroll withholding. The employers' net cost (or expense) is simply the total amount of premiums paid to the insurance company minus the portion of the cost the employer collects from its employees. 7. Employer paid holidays, vacations, and sick daysMany companies pay their permanent employees for holidays such as New Year's Day, Memorial Day, July 4th, Labor Day, Thanksgiving, and Christmas. It is not unusual for employees to be paid for 10 holidays per year. It is also common for employees to earn one week of vacation after one year of service. Many employers give their employees two weeks of vacation after three years of service, with more weeks given after 10 years of service. Paid sick days are also a common benefit given to employees. If an employee is absent from work due to such things as illness or surgery, the company will pay the employee for the time missed. Employers generally set policies as to how sick days are to be used, and as to whether or not an employee is permitted to carry over unused sick days into subsequent years. The matching principle requires that the cost of compensated (or paid) absences (holidays, vacations, and sick days) be recognized as an expense during the time the employee is present and working. In other words, the cost is expensed when the benefit is being earned by the employee, not when the benefit is being used by the employee. (However, the Financial Accounting Standards Board generally allows for sick days and holidays not to be accrued.) To illustrate, assume that an employee works full-time for the entire year 2021 and as a result earns one week of vacation to be taken anytime during the year 2022. In the weeks/months of the year 2021 (when the employee is working), the employer debits Vacation Expense and credits Vacation Liability. In 2022, when the employee takes the vacation earned in the previous year, the employer records the gross amount of the vacation check with a debit to Vacation Liability (instead of Vacation Expense or Wages Expense). 8. Employer contributions toward 401(k), savings plans, and profit-sharing plansIf an employer is required to contribute company money into an employee's savings program or profit-sharing plan, the contribution should appear as an expense in the period when the employee earned the company contribution. It is also likely that the company will have the expense and the liability before the company actually pays the amount. This situation requires the company to record an adjusting entry in order to match the expense to the proper accounting period. 9. Employer contributions to pension plansSome companies provide pensions for their employees. This means their employees will receive ongoing monthly payments after they retire from the company. The matching principle requires that the cost of the benefit should be recognized during the years that the employees are working (earning the benefit), and not when the employee is retired. Note: In effect, pensions (and other benefits) are part of the compensation package given to employees working at a company. While some parts of the compensation package are paid out during the time the employee is working, other benefits are deferred until the employee is retired. The cost of the entire compensation package, however, must be expensed or assigned to products manufactured when the employee is working, so that the cost of the employee's work is matched with the revenue resulting from the employee's work. The concept is that in the years that the employee works, the company will charge Pension Expense and will credit either Pension Payable or Cash. For more specifics on pensions, you are referred to an Intermediate Accounting text or to the Financial Accounting Standards Board's website www.fasb.org. 10. Post-retirement health insuranceSome companies continue to provide health insurance coverage to employees after they have retired. This retiree benefit is considered to be part of the compensation package earned by employees while they are working. Again, accrual accounting and the matching principle require that the cost of this future insurance coverage be expensed (or assigned to manufactured products) during the years the employees are working by debiting an expense and crediting a liability. During the employees' retirement years, the company's payment for insurance will reduce the company's liability and will reduce its cash. To learn more on the accounting for post-retirement benefits, such as health insurance coverage, you are referred to an Intermediate Accounting text and/or to the Financial Accounting Standards Board's website www.fasb.org. Page 2The Wage and Hour Division (WHD) of the U.S. Department of Labor is charged with administering the Fair Labor Standards Act (FLSA), which requires that employees be paid: Some companies and some employees may be exempt from the FLSA rules due to the company's size or other criteria. However, an employer must also review its state's regulations and is required to follow the state regulation if it is more beneficial for the employee than the federal regulation. For example, some states require a minimum wage that is much larger than the federal minimum wage. There are also a few states that require overtime be paid for any hours worked in excess of 8 on any workday. The U.S. Department of Labor, Wage and Hour Division, has Fact Sheet #17A which summarizes the federal exemptions. It is available at https://www.dol.gov/agencies/whd/fact-sheets/17a-overtime. At the end of the fact sheet is a link to the official federal regulations. Minimum WageThe federal minimum wage and each state's minimum wage can be found through: https://www.dol.gov/general/topic/wages/minimumwage Overtime PayOvertime refers to time worked in excess of 40 hours per workweek. Whether or not employees are paid for overtime depends on each employee's job responsibilities and rate of pay not the employee's job title. As a result some employees are exempt from overtime pay and some are not. For example, highly-paid executives are considered to be "exempt"; and therefore their employers are not required to pay them for their overtime hours because (1) their compensation is high, and (2) they can control their work hours. Highly-paid executives do not need state or federal wage and hour laws to protect them from employer abuse. On the other hand, office clerks earning an annual salary of $18,000 per year are probably not in control of their work hours. If the clerks work for an executive who decides to work 60 hours per week, the clerks need to be protected from having to work 60 hours per week for no more pay than they would receive for 40 hours of work. These employees are considered to be "nonexempt" from the overtime rules and therefore must be paid overtime compensation. Some companies have been known to classify "hourly wage" employees as "salaried" in hopes of making them exempt from overtime pay. Federal and state laws exist to prevent such unfair treatment of employees. When processing payroll, don't assume that it's only the hourly-paid employees who receive overtime pay—state and federal laws require overtime payments to lower-paid salaried employees. It is also possible that some generous employers will give overtime pay to employees who are not required by law to receive it. Effective January 1, 2020 the minimum amount that a salaried employee must earn in order to be considered exempt from being paid overtime is $684 per week ($35,568 per year for a full-year worker). For information on overtime pay for salaried employees see https://www.dol.gov/agencies/whd/overtime/2019/overtime_FAQ#5. Overtime PremiumAn overtime premium refers to the "half" portion of "time-and-a-half" or "time-and-one-half" overtime pay. For example, assume an employee in the production department is expected to work 40 hours per week at $10 per hour. If the employer requires the employee to work 42 hours in a given workweek, the extra two hours are paid at time-and-a-half and the employee will earn gross wages of $430 for the week (40 hours x $10 per hour, plus 2 overtime hours x $15 per hour). The gross wages can also be computed as 42 hours at the straight-time rate of $10 per hour plus 2 hours times the overtime premium of $5 per hour. Calculating Overtime Pay for a Salaried PersonLet's assume that an office clerk receives an annual salary of $18,000 per year and is expected to work 40 hours per week. However, during a recent workweek the clerk was required to work an additional 4 hours. This person's salary and responsibilities require the employer to pay overtime at the rate of time-and-a-half for the additional 4 hours. The overtime pay calculation is as follows:
Assuming the clerk is paid semimonthly, the clerk's next paycheck will consist of the following:
Federal Insurance Contributions Act (FICA)An important part of U.S. payroll accounting involves the Federal Insurance Contributions Act (FICA), which consists of two federal programs:
The Social Security taxes and the Medicare taxes come from the following:
Summary of FICA's effect on a company's payroll processing: Examples using the above table:
Page 3This section of payroll accounting focuses on the amounts withheld from employees' gross pay. (Later we will discuss the payroll taxes that are not withheld from employees' gross pay.) The U. S. income tax system and many state income tax systems require employers to withhold payroll taxes from their employees' gross salaries, wages, bonuses, etc. The withholding of taxes and other deductions from employees' paychecks affects the employer in several ways:
Failure to remit the payroll taxes by their due dates can result in severe penalties. The withholdings from an employee's gross pay include:
1. Employee portion of Social Security taxA key component of payroll accounting is the Social Security tax which along with the Medicare tax make up what is referred to as FICA. Social Security tax is withheld from an employee's salary or wages and the employer is also required to pay a Social Security tax. In other words, the employer is responsible for remitting to the federal government both the employee and the employer portions of the Social Security tax. In 2022, the amount of Social Security tax that an employer must withhold from an employee is 6.2% of the first $147,000 of the employee's annual wages and salary; any amount above $147,000 is not subject to Social Security tax withholdings. The $147,000 is referred to as the Social Security wage base, wage limit, ceiling or maximum taxable earnings. For example:
The amount withheld—and the employer's portion—are reported as a current liability until the amounts are remitted to the government by the employer. NOTE: The employee's tax rate for Social Security and the amount subject to the tax can be found in the IRS Publication 15, Employer's Tax Guide. 2. Employee portion of Medicare taxMedicare tax is also withheld from an employee's salary or wages and the employer is also required to pay a Medicare tax. In other words, similar to the Social Security tax the employer is responsible for remitting to the federal government both the employee and the employer portions of the Medicare tax. (The Medicare program helps pay for hospital care, nursing care, and doctor's fees for people age 65 and older as well as for some individuals receiving Social Security disability benefits.) (The combination of the Social Security tax and the Medicare tax is referred to as FICA tax, or the Federal Insurance Contribution Act tax.) An employer must withhold 1.45% of each employee's annual wages and salary for the Medicare tax. Unlike the Social Security tax, this percentage is applied on every employee's total wages or salary no matter how large the amount might be—an employee's salary of $200,000 will require Medicare tax withholdings of $2,900 (the entire $200,000 times 1.45%). Also, there is a Medicare surtax of 0.9% (which is also known as the Additional Medicare Tax) that is withheld from the employee on wages and salaries that are in excess of $200,000 in a calendar year. However, this Additional Medicare Tax is not matched by the employer. See IRS Publication 15, Employer's Tax Guide for more information on this additional tax. The employee's Medicare tax and Additional Medicare Tax withholdings plus the employer's Medicare tax are reported as a current liability until the amounts are remitted to the government by the employer. 3. Federal income taxThe amount withheld for federal income tax is based on the employee's salary or wages as well as personal information (including whether to be taxed at the Single or Married income tax rates) that the employee is required to provide the employer on IRS Form W–4, Employees Withholding Allowance Certificate. In cases where an employee is paid low wages, it may not be necessary for the employer to withhold any federal income tax. Unlike FICA, there is no employer contribution for federal income tax. Amounts withheld from employees for federal income taxes are reported on the employer's balance sheet as a current liability. When the employer remits the amounts to the federal government, the current liability is reduced. Federal income tax withholding methods and tables are included in IRS Publication 15 and Publication 15-A. 4. State income taxIn most states payroll accounting will involve a state income tax. In those states an employer is required to withhold the state income tax that an employee is expected to owe based on salaries or wages. Like its federal counterpart, the amount withheld is rarely the exact amount of income tax that the employee will owe to the state government. (Some states do not have a personal income tax.) The amount withheld for state income tax is based on the employee's salary or wages as well as personal information that the employee is required to provide the employer on a state version of Form W–4. In cases where an employee is paid low wages and/or has a large number of personal exemptions, it may not be necessary for the employer to withhold any state income tax. Amounts withheld from employees for state income taxes are also reported on the employer's balance sheet as a current liability. When the employer remits the amounts to the state government, the current liability is reduced. 5. Court-ordered withholdingsPayroll accounting also involves withholdings for items other than payroll taxes. For example, courts of law may order employers to garnish (withhold money from) an employee's salary or wages for purposes such as paying child support or repaying debts. The amounts withheld from employees for court-ordered withholdings are reported on the employer's balance sheet as a current liability. When the employer remits the amounts to the designated parties, the liability is reduced. Some court orders may include a small fee to be withheld from the employee in order to reimburse the employer for administrative expenses. For example, the court order might direct the employer to withhold $101 from the employee and to remit $100 to a designated agency. The $1 difference will be a credit to the company's administrative expenses or to a miscellaneous revenue account. 6. Other withholdingsIn addition to the mandatory withholdings that an employer makes for taxes and court orders, payroll accounting often includes amounts that employers may be willing to withhold at the direction of its employees. These voluntary withholdings can include such things as:
If the voluntary withholdings are to be remitted to places outside of the company (a local charity, for example), the amounts withheld are reported on the employer's balance sheet as a current liability. When the employer remits the withholdings, the current liability is reduced. If the withholdings are for amounts that are due the company (such as employees' share of insurance premiums or amounts owed by employees for company merchandise), no remittance is required. Rather, the journal entry reflects a credit that reduces the company's insurance expense or reduces the company's receivables from employees. Sample journal entries are provided later in this topic. NOTE #1: Some payroll deductions/withholdings will reduce the employee's taxable gross wages thereby reducing the amount of taxes withheld from the employee's paycheck. These are referred to as pre-tax deductions. Other payroll deductions/withholdings do not reduce the employee's taxable wages and therefore will not reduce the amount of taxes withheld from the employee's paycheck. These are referred to as post-tax deductions. You should consult with your tax advisor to learn more about pre-tax and post-tax deductions. NOTE #2: A few states require employees to contribute a minimal amount toward the state unemployment insurance. However, the employers typically contribute the entire amount. Net PayNet pay is the amount that remains after withholdings are deducted from an employee's gross pay. Net pay is also referred to as "take home pay" or the amount that an employee "clears." From the company side of the transaction, it is the cash amount that the company will pay directly to the employees on payday. (The cash amount may be in the form of a check, a direct deposit, or other.) Page 4The employer is required to deposit the federal payroll taxes (amounts withheld from employees and the employer's matching amount) to the U.S. Treasury by means of an electronic funds transfer (EFT). Generally, this is done using EFTPS which is a free service of the U.S. Treasury. The federal payroll taxes must be sent via an electronic funds transfer by the dates described in IRS Publication 15. The dates depend upon the current amount of the federal payroll taxes and also the employer's amount during a previous one-year period. Here is part of the criteria regarding the current amount of federal payroll taxes: If the amount is $100,000 on any day, the money must be transferred within one day. If the amount is more than $50,000 but less than $100,000, the money must be transferred semiweekly (twice a week). For example, if the payday is on Wednesday, Thursday, and/or Friday, the payroll taxes must be deposited by the following Wednesday. If the payday is on Saturday, Sunday, Monday, and/or Tuesday the payroll taxes must be deposited by the following Friday. If the amount is $50,000 or less, the money must be transferred monthly. However, if the amount is less than $2,500 for the quarter, under certain circumstances you may be able to pay with a timely filed quarterly Form 941. See IRS Publication 15 for more information. Failure to deposit the amount owed on the required date may result in severe penalties. IRS Form 941, Employer's Quarterly Federal Tax Return is filed quarterly by companies who have employees. On Form 941 the employer reports the amounts for the following items: Small employers could be granted permission to file the annual Form 944 but must have received notification from the IRS. Form 941 is due by the last day of the month following the calendar quarter. In other words, Form 941 covering the months of January, February, and March must be filed by April 30. The second quarter report must be filed by July 31, and so on. There are significant penalties for not filing these required quarterly reports by their due dates. The federal income taxes withheld from employees plus the employee's and employer's Social Security and Medicare taxes must be deposited electronically according to due dates discussed in the previous section entitled "Depositing Federal Payroll Taxes". The IRS has Form 941 with instructions (and all other IRS forms) in PDF format available on its website www.IRS.gov. Many companies choose to outsource the processing of payroll to large payroll processing firms (ADP, Paychex, and others), banks, accounting firms, etc. The services of payroll processors can vary and the company using the service may be able to select the features it will use. Some of the common features include: To learn more about outsourcing payroll processing including risks and responsibilities see "Third-Party Payer Arrangements" found in IRS Publication 15, Employer's Tax Guide. Page 5NOTE: In the following examples we assume that the employee's tax rate for Social Security is 6.2% and that the employer's tax rate is 6.2%. In this section of payroll accounting we will provide examples of the journal entries for recording the gross amount of wages, payroll withholdings, and employer costs related to payroll. Let's assume that a distributor has hourly-paid employees working in two departments: delivery and warehouse. The company's workweek is Sunday through Saturday and paychecks are dated and distributed on the Thursday following the workweek. For the workweek of December 18–24, the gross wages are $1,000 for hourly employees in the delivery department and $1,300 for employees in the warehouse. Tax withholdings are hypothetical amounts from federal and state tax withholding tables. Other withholdings are based on agreements with employees and court orders. Paychecks are dated and distributed on December 29. The journal entry to record the hourly payroll's wages and withholdings for the work period of December 18–24 is illustrated in Hourly Payroll Entry #1. In accordance with accrual accounting and the matching principle, the date used to record the hourly payroll is the last day of the work period. Hourly Payroll Entry #1: To record hourly-paid employees wages and withholdings for the workweek of December 18-24 that will be paid on December 29. In addition to the wages and withholdings in the above entry, the employer has incurred additional expenses that pertain to the above workweek. These are shown next in Hourly Payroll Entry #2, which is also dated the last day of the work period. The items included are the employer's share of FICA, the employer's estimated cost for unemployment tax, worker compensation insurance, compensated absences, and company contributions for the company's 401(k) plan. The company is recognizing these additional expenses and the related liability in the period in which the employees are working and earning them. Later, when the company pays for them, it will reduce the liability and reduce its cash. (Our journal entry assumes that this company does not provide post-retirement benefits such as pensions or health insurance for its employees.) Hourly Payroll Entry #2: To record the company's additional payroll-related expenses for hourly-paid employees for the workweek of December 18-24. On payday, December 29, the checks will be distributed to the hourly-paid employees. The following entry will record the issuance of those payroll checks. Hourly Payroll Entry #3: To record the distribution of the hourly-paid employees' payroll checks on Dec. 29. (These checks reflect the net pay for the wages earned during the workweek of Dec. 18-24). Some withholdings and the employer's portion of FICA were remitted on payday; others are not due until a later date. Some withholdings, such as health insurance, were recorded as reductions of the company's expenses in Hourly Payroll Entry #1. We will assume the amounts in the following Hourly Payroll Entry #4 were remitted on payday. Hourly Payroll Entry #4: To record the remittance of some of the payroll withholdings and company matching that pertain to the hourly-paid workweek of Dec. 18-24. End of Month and End of YearLet's continue with our example of the payroll for the hourly-paid employees. We'll assume that the distributor's accounting month and accounting year both end on Saturday, December 31. The matching principle requires the company to report all of its December expenses (not simply its cash payments) on its December financial statements. This means the company must report on its income statement the hourly wages and other payroll expenses that the company incurred (and the employees earned) through December 31. Recall that the paychecks issued on December 29 covered the work done by hourly employees only through December 24. On December 31, the company must record the cost of work done during the week of December 25–31. In addition, the employees' holiday and vacation days must be recorded. Let's assume that during the workweek of December 25-31, some of the hourly-paid employees in the Delivery Department were paid for a holiday and a few vacation days. Let's assume that this paid time off amounted to $300 and the pay for the hours worked during the workweek was $700. Recall that each workweek's payroll entries had been anticipating the paid time off with a $100 debit to Holiday, Vacation, Sick Days Expense: Delivery Dept., and a $100 credit to Holiday, Vacation, Sick Days Payable. Now that vacation time off is being taken, the current workweek's payroll entry will reduce the company's liability with a debit to Holiday, Vacation, Sick Days Payable for $300. The $700 of pay for the hours worked is debited to Wages Expense: Delivery Dept. Let's also assume that the Warehouse Department's hourly-paid employees had been paid for their time off for the holiday and some vacation time. Let's assume that the paid time off amounts to $250, and the amount associated with the hours worked was $1,050. Since the paid time off had been accrued each workweek, the current workweek's entry reduces the company's liability with a debit to Holiday, Vacation, Sick Days Payable for $250. The $1,050 of pay for the hours worked is debited to Wages Expense: Warehouse Dept. Hourly Payroll Entry #1: To record hourly-paid employees' wages and withholdings for the workweek of December 25-31 that will be paid on January 5. In addition to the wages and withholdings in Hourly Payroll Entry #1, the employer has incurred additional expenses that pertain to the above workweek. These are shown next in Hourly Payroll Entry #2, which is also dated the last day of the work period. The items included are the employer's share of FICA, the employer's estimated cost for unemployment tax, worker compensation insurance, compensated absences, and company contributions for the company's 401(k) plan. The company is recognizing these additional expenses and the related liability in the period in which the employees are working and earning them. Later, when the company pays for them, it will reduce the liability and reduce its cash. (Our journal entry assumes that this company does not provide post-retirement benefits such as pensions or health insurance to its employees.) Hourly Payroll Entry #2: To record the company's additional payroll-related expenses for hourly-paid employees for the workweek of December 25-31. On payday, January 5, the checks will be distributed to the hourly-paid employees. The following entry will record the issuance of those payroll checks. Hourly Payroll Entry #3: To record the distribution of the hourly-paid employees' payroll checks on Jan 5. (These checks reflect the hourly-paid employees' take home pay from their wages earned during the workweek of Dec. 25-31). Some withholdings and the employer's portion of FICA were remitted on payday; others are not due until a later date. Some withholdings, such as health insurance, were recorded as reductions of the company's expenses in Hourly Payroll Entry #1. We will assume the amounts in the following Payroll Entry #4 were remitted on payday. Hourly Payroll Entry #4: To record the remittance of some of the payroll withholdings and company matching that pertain to the hourly-paid workweek of Dec. 25-31. Additional Accrual of WagesIn our example above, the workweek ended on the same day as the calendar month and year: December 31. In other months and in some years, the last full workweek might end on the 28th of the month. In that case, the employer will need to estimate the payroll and payroll-related expenses for the 29th, 30th, and 31st days of the month. Those estimates will be used to record an accrual-type adjusting entry on the 31st. This is required so that all of the expenses actually occurring during the month are matched with the revenues of the month. Recording wages expense in the proper period is critical for accurate financial statements and therefore a very important part of payroll accounting. Page 6NOTE: In the following examples we assume that the employee's tax rate for Social Security is 6.2% and that the employer's tax rate is 6.2%. Let's assume our company also has salaried employees who are paid semimonthly on the 15th and the last day of each month. The pay period for these employees is the half-month that ends on payday. There is one salaried employee in the warehouse department with a gross salary of $48,000 per year, or $2,000 per pay period. There are four salaried employees in the Selling & Administrative Department with combined salaries of $9,000 per pay period. Because the salaried employees are paid on the last day of the month and their pay period ends on payday, there is no need to accrue for salaries at the end of December (or any other calendar month). The salaried payroll entry for the work period of December 16–31 will be dated December 31 and will look like this: Salaried Payroll Entry #1: To record the salaries and withholdings for the work period of December 16-31 that will be paid on December 31. In addition to the salaries recorded above, the company has incurred additional expenses pertaining to the salaried payroll for this semi-monthly period of December 16–31. These expenses must be included in the December financial statements, as shown in the next journal entry: Salaried Payroll Entry #2: To record additional payroll-related expenses for salaried employees for the work period of December 16-31. On payday, December 31, the checks will be distributed to the salaried employees. The following entry will record the issuance of those payroll checks. Salaried Payroll Entry #3: To record the distribution of the salaried employees' payroll checks on Dec. 31. (These checks reflect the take-home pay for the salaries earned during the work period of Dec. 16-31). Some withholdings and the employer portion of FICA were remitted on payday; others are not due until a later date. Some withholdings, such as health insurance, were recorded as reductions of the company's expenses in Salaried Payroll Entry #1. We will assume the amounts in the following Payroll Entry #4 were remitted on payday. Salaried Payroll Entry #4: To record the remittance of some of the payroll withholdings and company matching that pertain to the salaried employees during the work period of Dec. 15-31.
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Which of the following accounts is an expense account in which an employer records the FICA
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