Page 63 - Account for Ag - 2019

CH 10] Payroll Accounting & Payroll Taxes 10-5

STATE TAXES. All states have a program of unemployment compensation insurance that is financed, in part,
by a tax on employers. A few states also require contributions from employees, in which case the employer is
compelled to withhold the amount of the contribution from the employees' earnings and to remit this amount to the
state bureau or agency that administers the program.

A number of states and a few cities levy a tax based on income. The state or the city statutes may require the 10
employer to withhold the tax from his employees' earnings.

OTHER DEDUCTIONS. The deductions from earnings discussed above are compulsory; neither the
employer nor the employee has any choice in the matter. In addition to these deductions, however, there may be
other deductions authorized by employees either individually or as a group. For example, the deduction of union
dues or group insurance premiums may be provided for in the contract between the employer and the union
representing the workers. A partial list of other deductions that may be taken from earnings of employees follows:

1. Deductions to accumulate funds to be used to purchase United States Savings Bonds for the employees.
2. Deductions to pay the premiums on life, health, hospital, or accident insurance for the employees.
3. Deductions authorized by the employees for some sort of supplementary retirement annuity or pension.
4. Deductions authorized to be paid to some charitable organization (Red Cross, United Way, or church).
5. Deductions authorized to repay a loan or an advance from the company or a loan from a bank or credit union.
6. Deductions authorized to pay for purchases of a product or a service of the company.

Whatever the nature of the deduction, the accounting problem is essentially the same. If the employer makes
these deductions, he must keep an accurate record of their amount and must dispose of the funds as authorized.
Most of the deductions made from employees' earnings are current liabilities of the employer.

CALCULATION OF NET PAY ILLUSTRATED

According to the computations of Ralph Shirley's earnings presented earlier, his total compensation for the
week was $392.00. Assuming that his earnings thus far during the year, exclusive of the current week, amount to
$5,856.00, the portion of the $392.00 subject to F.I.C.A. tax is $392.00 ($52,600 maximum minus $5,856). The tax
on $392.00 at the rate of 6.2% is $24.30.

The FUTA tax is calculated on the earnings of $392.00 at .8% (0.008 x $392) is $3.14. Since Ralph has not
earned $7,000 yet, the calculated amount must be paid by the employer and not deducted from his wages.

The state unemployment tax on the earnings of $392 at 5.4% (0.054 x 392) is $21.17. It is assumed that Ralph
Shirley is employed in a state that does require employee contributions to its employment insurance program;
hence the deduction for this purpose is $21.17.

The withholding exemption certificate shows that Ralph Shirley claims three exemptions for income tax
purposes. Reference to the income tax withholding table for a weekly payroll period discloses that for earnings of
$392, with three exemptions claimed, the amount to be withheld is $34.00.

The employer has a group insurance plan whereby part of the premium is deducted from the employees'
earnings. The amount deducted from Ralph's pay is $6.00 per week. Ralph has also authorized the employer to
withhold $7.50 each week for the purchase of United States Savings Bonds. At the end of each five-week period,
bonds are purchased in his name and are delivered to him. He has also authorized a deduction of $3 each week for
his contribution to the United Way.

Copyright Material