Accounting Chap 8 Flashcards
a) Works under the control and direction of an employer.
b) Employers must deduct certain taxes, maintain payroll records, and file numerous reports for all employees.
Examples:
Funeral Director
Secretaries
Embalmer
Employees
a) Perform services for a fee.
b) Do not work under the control and direction of the company paying for the service.
c) Only one form (Form 1099) must be filed for independent contractors.
Examples:
Embalming Service
Pre-Need Agents
Lawyers
Independent contractors
Three steps in determining an employee’s pay
- Calculate total earnings.
- Determine the amounts of deductions.
- Subtract deductions from total earnings to compute net pay.
a) Is compensation for managerial or administrative services.
b) Normally is paid in biweekly, monthly, or annual terms.
Salaries
a) Is compensation for skilled or unskilled labor.
b) Paid in terms of hours, weeks, or units produced.
Wages
Fair Labor Standards Act (FLSA)
a) Established the 40-hour work week.
b) Requires employers to pay overtime at 1½ times the regular rate to any hourly employee who works over 40 hours in a week.
c) Some companies pay a higher rate for hours worked on Saturday or Sunday, but this is not required by the FLSA.
d) Some salaried employees are exempt from the FLSA rules and are not paid overtime.
EMPLOYEES vs. INDEPENDENT CONTRACTORS
Employees involve:
More laws and regulations
Taxes that must be deducted
Payroll records to maintain
Numerous reports to file
Only one form must be filed for independent contractors
Form 1099Computing Total Earnings
- Usually is based upon the time worked in a payroll period, sales, or units of output during the period.
- Time cards are kept to compute employee wages.
- Computation of total earnings for an hourly worker
- Salaries are usually the same from one payment period to another.
An employee’s total earnings are called
gross pay
Various deductions are made from gross pay to yield take-home or
net pay
Various deductions are
a) Federal (and possibly state and city) income tax withholding
b) Employee FICA tax withholding
c) Voluntary deductions
INCOME TAX WITHHOLDING
Required by federal law
Applied toward the payment of the
employee’s federal income tax
Amount withheld determined by:
Total earnings
Marital status
Number of withholding allowances
claimed (W-4)
Length of the pay periodA ___ exempts a specific dollar amount of
an employee’s gross pay from federal income tax withholding
withholding allowance
Wage-bracket tables are provided by the IRS in Circular E— Employer’s Tax Guide
(1) Find the row where wages fall between “at least” and “less than.”
(2) Find the column where the number of allowances is stated.
(3) Where the row and column cross is the amount to be withheld.
For state or city income taxes, withholding generally is handled in one of two ways:
(1) Form and tables similar to those provided by the IRS are used.
(2) An amount equal to a percentage of the federal withholding amount is withheld.
Employee FICA Tax Withholding
Required by the Federal Insurance Contribution Act (FICA)
___ taxes provide pension and disability benefits.
(1) The current rate is ___ on maximum earnings of $___.
___ taxes provide health insurance.
(1) The current rate is ___ on all earnings; there is ___ maximum.
Social Security
6.2%
106,800
Medicare
1.45%
no
Voluntary deductions can be withheld from the employee’s pay at the discretion of the employee.
a) U.S. savings bond purchases
b) Health insurance premiums
c) Credit union deposits
d) Pension plan payments
e) Charitable contributions
To compute an employee’s ___ for the period, subtract all tax
withholdings and voluntary deductions from the gross pay.
net pay
Payroll records should provide the following information for each employee
- Name, address, occupation, social security number, marital status, and number of withholding allowances
- Gross amount of earnings, date of payment, and period covered by each payroll
- Gross amount of earnings accumulated for the year
- Amount of taxes and other items withheld
3 Types Payroll Records
- The payroll register
- The payroll check with earning statement attached
- The employee earnings record
- Is a form used to compute the data required at the end of each payroll period.
- Detailed information on earnings, cumulative or year-to-date total earnings, taxable earnings, deductions, and net pay is provided for each employee.
Payroll Register
Payroll Register (cont)
- Column headings for deductions may vary, depending on which deductions are commonly used by a particular business.
- Information is taken from time cards and pay rates.
- After the data for each employee have been entered, the amount columns in the payroll register should be totaled and the totals verified.
PAYROLL CHECK
Employees may be paid in cash or by
check
The employer furnishes an earnings
statement to each employee along with
his or her paycheck
In many cases, payment is made by
direct deposit or electronic funds
transfer (EFT) by the employer to the
employee’s bank
Payment by check or direct deposit
provides better internal accounting
control than payment by cashEmployee Earnings Record
- Separate records are kept for each employee.
2. Information is obtained from the payroll register.
Journalizing Payroll Transactions
1. Totals from the ___ provide the data for journalizing the employee’s payroll information.
2. ___ is debited for the gross pay.
3. Deductions from wages (which are liabilities) are credited along with
cash (which is net pay).
4. A separate account is kept for each earnings deduction.
payroll register
Wages and Salaries Expense
- Wages and Salaries Expense is ___ for the gross pay of all employees for each pay period.
- Separate expense accounts may be kept for the employees of different departments.
debited
- Employee Income Tax Payable is ___ for the total federal income tax withheld from employees’ earnings
- Employee Income Tax Payable is ___ for amounts paid to the IRS
- A state or city income tax payable account is used in a similar manner
credited
debited
- Social Security and Medicare Taxes Payable are ___ for the Social Security and Medicare
taxes withheld from employees’ earnings and the Social Security and
Medicare taxes imposed on the employer. - Social Security and Medicare Taxes Payable are ___ for amounts paid to the IRS
credited
debited
- Voluntary deductions are ___ when deducted from the employee’s pay.
- When Voluntary deductions amounts are paid, accounts are ___.
- Health Insurance Premiums Payable and United Way Contributions
Payable are two common ___.
credited
debited
deductions
Payroll Record-Keeping Methods
A. Manual System
B. Payroll processing center
C. Electronic system
- All records are prepared by hand.
- Information is recorded in several places.
a) Payroll register
b) Paycheck and stub
c) Employees earnings record - If an employer has many employees, this system can be inefficient
and costly.
Manual System
- Is a business that sells payroll record-keeping services.
- The employer provides the center with all basic employee data and each period’s report of hours worked.
- The processing center maintains all payroll records and prepares each period’s payroll checks.
- Fees are cost efficient.
Payroll processing center
- Is a computer system based on a software package that performs all
payroll record keeping and prepares payroll checks. - Only the employee number and hours worked need to be entered into
the computer each pay period. - The computer uses the employee number and hours worked to
determine the gross pay, deductions, and net pay. - Outputs:
a) Payroll register
b) Checks
c) Employees earnings record
Electronic system
