Liability 1. Payroll Accounting: Assume That The Following
Liability 1. Payroll accounting . Assume that the following tax rates and payroll information pertain to Brookhaven Publishing
Assume that the following tax rates and payroll information pertain to Brookhaven Publishing: Social Security taxes: 4% on the first $55,000 earned per employee. Medicare taxes: 1.5% on the first $130,000 earned per employee. Federal income taxes withheld from wages: $7,500. State income taxes: 4% of gross earnings. Insurance withholdings: 1% of gross earnings. State unemployment taxes: 5.4% on the first $7,000 earned per employee. Federal unemployment taxes: 0.8% on the first $7,000 earned per employee. The company incurred a salary expense of $50,000 during February. All employees had earned less than $5,000 by month-end and no wages have been paid during the month.
Paper For Above instruction
Understanding payroll accounting is vital for any organization to ensure compliance with tax laws and accurate financial reporting. In this scenario, Brookhaven Publishing’s payroll activities during February involve calculating gross wages, determining required deductions, and recording the associated liabilities. Additionally, the company must account for payroll tax expenses, encompassing both employee withholdings and employer contributions.
Calculating Gross Wages and Deductions
Given that Brookhaven incurred a salary expense of $50,000 and employees earned less than $5,000 each, it can be assumed that the payroll for the period involved total gross wages of $50,000. Since no wages have been paid yet, these are accrued wages payable.
Deductions include several taxes and withholdings:
- Social Security taxes: 4% on the first $55,000 of each employee’s earnings.
- Medicare taxes: 1.5% on the first $130,000.
- Federal income taxes: flat amount of $7,500.
- State income taxes: 4% of gross earnings.
- Insurance withholdings: 1% of gross earnings.
Assuming that all employees earned less than the thresholds, the total social security and Medicare taxes are straightforward calculations based on gross wages.
Calculation of Employee Deductions:
- Social Security: 4% × $50,000 = $2,000.
- Medicare: 1.5% × $50,000 = $750.
- Federal income taxes: $7,500 (withheld).
- State income taxes: 4% × $50,000 = $2,000.
- Insurance: 1% × $50,000 = $500.
Total deductions:
$2,000 + $750 + $7,500 + $2,000 + $500 = $12,750.
Net wages payable to employees:
$50,000 (gross wages) – $12,750 (total deductions) = $37,250.
Employer's Payroll Taxes:
The employer must match certain employee taxes and pay certain unemployment taxes.
- Social Security (employer): 4% of gross wages, same as employee contribution: $2,000.
- Medicare (employer): 1.5% of gross wages: $750.
- State unemployment taxes: 5.4% on the first $7,000 per employee.
- Federal unemployment taxes: 0.8% on the first $7,000 per employee.
Since all employees earned less than $5,000, the entire $50,000 counts toward unemployment tax calculations.
Calculations:
- State unemployment tax: 5.4% × $7,000 = $378.
- Federal unemployment tax: 0.8% × $7,000 = $56.
Entry to Record Payroll in February:
```plaintext
Dr. Salary Expense 50,000
Cr. Wages Payable 50,000
```
This records gross wages owed.
Deductions and liabilities:
- Employee taxes payable:
```plaintext
Dr. Wages Payable 12,750
Cr. Federal Income Taxes Payable 7,500
Cr. Social Security Taxes Payable 2,000
Cr. Medicare Taxes Payable 750
Cr. State Income Taxes Payable 2,000
Cr. Insurance Withholdings Payable 500
```
- Employer’s contribution:
```plaintext
Dr. Payroll Tax Expense 3,750
Cr. Social Security Taxes Payable 2,000
Cr. Medicare Taxes Payable 750
Cr. State Unemployment Taxes Payable 378
Cr. Federal Unemployment Taxes Payable 56
```
Total payroll tax expense includes employer-side taxes:
$2,000 + $750 + $378 + $56 = $3,184.
Summary:
The net wages payable to employees is $37,250, and liabilities for deductions amount to $12,750. The company also recognizes payroll tax expense of $3,184 for employer contributions.
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Conclusion:
Proper recording of payroll involves calculating gross wages, deducting payroll taxes, and determining employer tax expenses. These entries ensure that liabilities are recognized accurately, facilitating compliance and financial transparency. Accurate payroll accounting supports organizational budgeting, tax filings, and audits, emphasizing the importance of detailed and systematic record-keeping in payroll processes.
References
- Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2020). Managerial Accounting. McGraw-Hill Education.
- Williams, J. R., Haka, S. F., Bethel, L., & Carcello, J. (2021). Financial & Managerial Accounting. McGraw-Hill Education.
- IRS. (2023). Employment Taxes. Internal Revenue Service. https://www.irs.gov/businesses/small-businesses-self-employed/employment-taxes
- Hopkins, K. (2019). Payroll Accounting: A Practical Guide. Wiley.
- FASB. (2022). Financial Accounting Standards Board. Accounting Standards Updates.
- Department of Labor. (2023). Unemployment Insurance. https://www.dol.gov/general/topic/unemploymentinsurance
- American Payroll Association. (2022). Payroll Source. American Payroll Association.
- Brigham, E. F., & Houston, J. F. (2021). Fundamentals of Financial Management. Cengage Learning.
- Higgins, R. C. (2019). Analysis for Financial Management. McGraw-Hill Education.
- Ohlson, J. A. (2020). Contemporary Auditing. McGraw-Hill Education.