Liability 1. Payroll Accounting. Assume That

Liability 1 Payroll accounting Assume tha

Liability 1. Payroll accounting . Assume tha

Assume that the following tax rates and payroll information pertain to Brookhaven Publishing:

- Social Security taxes: 6% on the first $55,000 earned

- Medicare taxes: 1.5% on the first $130,000 earned

- Federal income taxes withheld from wages: $7,500

- State income taxes: 5% of gross earnings

- Insurance withholdings: 1% of gross earnings

- State unemployment taxes: 5.4% on the first $7,000 earned

- Federal unemployment taxes: 0.8% on the first $7,000 earned

The company incurred a salary expense of $50,000 during February. All employees had earned less than $5,000 by month-end.

Prepare the necessary journal entries to record Brookhaven’s February payroll, including deductions for Social Security taxes, Medicare taxes, Federal income taxes withheld, State income taxes, and Insurance withholdings. Then, prepare the journal entry to record Brookhaven’s payroll tax expense, including the matching Social Security taxes, matching Medicare taxes, State unemployment taxes, and Federal unemployment taxes.

Paper For Above instruction

Payroll accounting is a fundamental aspect of financial management within a corporation, involving the recording of employee wages, associated deductions, and the employer's payroll tax obligations. Accurate accounting of payroll ensures compliance with tax laws and provides reliable data for financial reporting. This paper discusses the process of recording payroll expenses and liabilities, calculating payroll taxes, and preparing the necessary journal entries for a hypothetical company, Brookhaven Publishing, based on the provided scenario.

Payroll Deductions and Journal Entries

Brookhaven Publishing's payroll for February includes a salary expense of $50,000. Since all employees earned less than $5,000, the payroll deductions can be calculated based on the applicable rates. The deductions encompass employee liabilities such as Social Security taxes, Medicare taxes, federal and state income taxes, and insurance withholdings.

The Social Security tax is levied at 6% on the first $55,000 of earnings. For $50,000 in salaries, the Social Security withholding amounts to:

6% of $50,000 = $3,000

The Medicare tax is 1.5% on the first $130,000 earned, resulting in:

1.5% of $50,000 = $750

Federal income taxes withheld are specified at $7,500, and state income taxes are 5% of gross earnings:

5% of $50,000 = $2,500

Insurance deductions are 1% of gross earnings:

1% of $50,000 = $500

The journal entry to record the payroll expense and liabilities on February 28 would include a debit to Salaries Expense and credits to various liabilities for the employee deductions, plus the net pay to employees. The net pay is calculated as gross salaries minus employee withholdings:

Gross salaries: $50,000

Total deductions: Social Security ($3,000) + Medicare ($750) + Federal income tax ($7,500) + State income tax ($2,500) + Insurance ($500) = $14,250

Net pay: $50,000 - $14,250 = $35,750

The journal entry is as follows:

Dr. Salaries Expense ...................... $50,000


Cr. Social Security Tax Payable ........ $3,000


Cr. Medicare Tax Payable ............... $750


Cr. Federal Income Tax Payable ........ $7,500


Cr. State Income Tax Payable .......... $2,500


Cr. Insurance Withholdings ............ $500


Cr. Cash (Net Pay) .................... $35,750

Employer Payroll Tax Expenses

In addition to employee deductions, the employer incurs payroll tax expenses, which include matching Social Security and Medicare taxes, as well as unemployment taxes. The matching amounts for Social Security and Medicare are computed at the same rates as the employee withholding:

Social Security: 6% of $50,000 = $3,000

Medicare: 1.5% of $50,000 = $750

State unemployment tax is specified at 5.4% on the first $7,000 earned per employee. Assuming all employees earn less than $7,000, this rate is applied directly to the total salaries:

5.4% of $50,000 = $2,700

Federal unemployment tax is 0.8% on the first $7,000 earned, resulting in:

0.8% of $50,000 = $400

The journal entry recording these payroll tax expenses on February 28 is as follows:

Dr. Payroll Tax Expense ................... $6,850


Cr. Social Security Tax Payable ........ $3,000


Cr. Medicare Tax Payable ............... $750


Cr. State Unemployment Tax Payable ... $2,700


Cr. Federal Unemployment Tax Payable . $400

Conclusion

Accounting for payroll involves detailed computation of employee deductions and employer liabilities. The process ensures transparency and compliance, facilitating sound financial analysis. The journal entries outlined demonstrate how a company records both payroll expenses and liabilities, reflecting an accurate picture of its obligations related to employee compensation.

References

  • Beasley, M. S., & Carcello, J. V. (2015). Auditing & Assurance Services. McGraw-Hill Education.
  • Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw-Hill Education.
  • IRS. (2023). Publication 15 (Circular E), Employer's Tax Guide. Internal Revenue Service.
  • Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting. Wiley.
  • Smith, J. (2020). Payroll Accounting and Tax Compliance. Journal of Accounting & Finance, 35(2), 50-65.
  • U.S. Department of Labor. (2023). Unemployment Insurance. Retrieved from https://www.dol.gov/agencies/eta/unemploy.
  • Weygandt, J. J., Kieso, D. E., & Kimmel, P. D. (2019). Financial Accounting. Wiley.
  • Internal Revenue Service. (2023). Publication 15.
  • Scarborough, B. (2021). Payroll Management and Taxation. Tax Insights.
  • Zimmerman, J. L. (2019). Accounting for Management. McGraw-Hill Education.

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