Page 67 - Account for Ag - 2019

CH 10] Payroll Accounting & Payroll Taxes 10-15

At the end of each month, reference to previous records or notations will provide the information for the
calculation of the earnings of each person. Similar sources will provide all necessary data for the determination of
the amount of income tax to be withheld in each case. It is a certainty that some form of earnings record be kept for
each employee, as even the small business needs such a record to provide the information necessary for the
preparation of the various tax returns and statements. Reference to this record will indicate when the earnings of
each employee reaches the $ 57,600 level. Other notations will provide information about any other deductions.

A payroll check on the regular check form is given to each employee on the last day of the semimonthly 10
period, accompanied by a memorandum showing the date, the earnings, the deductions, and the net amount paid.
Each check is recorded individually as shown in the cash payments journal below. The amount of the salaries is
recorded in the Salary Expense Dr. column; the liabilities for income tax and F.I.C.A. tax withholdings are
recorded in the credit columns provided for this purpose; and the amount of each check is recorded in the Bank Cr.
column.

As indicated early, the employer's payroll tax may be recorded on each payday or may be deferred until the
end of the month. In this illustration it will be assumed that the salaries for the second half of June are the same as
for the first half and that the payroll taxes are recorded on a monthly basis. Since the employer has fewer than four
employees, he is not subject to the federal unemployment tax.

The laws vary as to the number of employees required to subject the employer to the state unemployment tax.
One should refer to their own state requirements. Assuming that the employer is not subject to the state
unemployment tax, the entry to record the F.I.C.A. tax for the entire month of June is:

June 30 Payroll Tax Expense ........................................... 717 371.58
FICA Taxes Payable ...................................... 215 136.26
State FUTA Taxes Payable .......................... 215.2 117.72
Federal Income Taxes Payable .................... 215.6 117.60
Payroll taxes accrued for June.

Inasmuch as the salaries are paid on the last day of each semimonthly pay period, there is no salary accrual to
record. When tax returns are prepared and checks are drawn in payment of the taxes, a record of each payment is
made in the cash payments journal as a debit to the appropriate tax liability account.

This simplified procedure can be used in many situations that may be a little more complicated than the one
illustrated. For example, weekly payrolls can be similarly handled, though this may give rise to an end-of-fiscal-
period general journal entry to record salary accruals. Such entries would be reversed as of the first of the next
period. sometimes formal payrolls are prepared, but only for the purpose of facilitating the preparation of the
paychecks themselves. The first journal record is made in the cash payments journal as illustrated above.

QUESTIONS
1. What federal taxes are most employers required to withhold from employees' wages?

2. What two accounts are credited for the federal taxes withheld from wages of employees?

3. Name the various payroll taxes levied against employers.

4. What record provided the amounts $1542.70 appearing in illustration 10-8 that were used in determining the employer's
tax expense?

5. The Peerless Pump Co. pays its employees weekly by checks drawn on a payroll bank account. (a) At what times should
deposits be made in the account? (b) How is the amount of the deposit determined? (c) Is it necessary to have an account
entitled "Payroll Bank" in the ledger? Explain. (d) The bank statement for the payroll bank account for the month ended
October 31 indicates a credit balance of $392.47 Assuming that the bank has made no errors, how do you explain this
fact?

Copyright Material