Accounting: The Language of Business (Part 69)

Once the dollar begins to collapse beneath the weight of all this new deficit spending, accumulation of contingency liabilities and the socialization of our economy, commodity prices and interest rates will head skyward.

Peter Schiff

 Current Liabilities (Part D)

by

Charles Lamson

Accounting Systems for Payroll and Payroll Taxes

In designing payroll systems, the requirements of various federal, state, and local agencies for payroll data are considered. Payroll data must also be maintained accurately for each payroll period and for each employee. Periodic reports using payroll data must be submitted to government agencies. The payroll data itself must be retained for possible inspection by the various agencies.

Payroll systems must be designed to pay employees on a timely basis. Payroll systems should also be designed to provide useful data for management decision-making needs. Such needs might include settling employee grievances and negotiating retirement or other benefits with employees.

Although payroll systems differ among businesses, the major elements common to most payroll systems are the payroll register, employee's earnings record, and payroll checks. We discuss and illustrate each of these elements next. The illustrations are kept relatively simple, and they may be modified in practice to meet the needs of each individual business.

Payroll Register

The payroll register is a multi-column report used for summarizing the data for each payroll period. Its design varies according to the number and classes of employees and the extent to which computers are used. Exhibit 5 shows a report suitable for a small number of employees.

The nature of the data appearing in the payroll register is evident from the column headings. The number of hours worked and the earnings and deduction data are inserted in their proper columns. The sum of the deductions for each employee is then subtracted from the total earnings to yield the amount to be paid. The check numbers are recorded in the payroll register as evidence of payment.

The last 2 columns of the payroll register are used to accumulate the total wages or salaries to be debited to the various expense accounts. This process is usually called payroll distribution.

Recording Employees Earnings

The column totals of the payroll register support the journal entry for payroll. The entry based on the payroll register in Exhibit 5 follows.

Recording and Paying Payroll Taxes

The employer's payroll taxes become liabilities when the related payroll is paid to employees. In addition, employers are required to compute and report payroll taxes on a calendar-year basis, even if a different fiscal year is used for financial reporting and income tax purposes.

To illustrate, assume that Everson Company's fiscal year ends on April 31. Also, assume that Everson company owes its employees $26,000 of wages on December 31. The following portions of the $26,000 of wages are subject to payroll taxes on December 31:

If the payroll is paid on December 31, the payroll taxes will be based on the preceding amounts. If the payroll is paid on January 2, however, the entire $26,000 will be subject to all payroll taxes. This is because the maximum earnings limitation for determining Social Security and unemployment taxes will not be exceeded at the beginning of the calendar year.

The payroll register for McDermott Supply Co. in Exhibit 5 indicates that the amount of social security tax withheld is $643.07 and Medicare tax withheld is $208.53. Since the employer must match the employees FICA contributions, the employer's social security payroll tax will also be $643.07, and the Medicare tax will be $208.53. Further, assume that the earnings subject to state and federal unemployment compensation taxes are $2,710. Multiplying this amount by the state (5.4%) and federal (0.8 %) rates yields the unemployment compensation taxes shown in the following payroll tax computation:

The entry to journalize the payroll tax expense for the week and the liability for the taxes accrued is shown below. 

*WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 446-448*

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