Liabilities related to payroll
In most businesses, payroll costs are a major category of expenses, and there are many liabilities related to employee earnings. When employees earn wages and salaries, those amounts are subject to taxes and other deductions that the employer must withhold. The taxes and other deductions that the employer withholds become
liabilities
The employer is also required by law to pay employer taxes on employee earnings. Since these amounts must be paid to government agencies, they are
liabilities
Most employers must pay FUTA, FICA and SUTA taxes. Employer FICA taxes are levied on employers at the
same rates
same earnings bases
employers
employees’
unemployment benefits
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Review the defined terms in this section. Because of the matching principle, the company will recognize the employer payroll taxes expense and related liabilities at the same time as employee wages and salaries expenses.
APPLY THE CONCEPTS: Record payroll entries
The payroll clerk at Diego, Inc., has used a spreadsheet program to produce a printout of the salaries for April 15.
Employees’ total earnings | $50,000 | |
Deductions from earnings: | ||
Federal income tax | $8,000 | |
State income tax | 2,000 | |
Social Security tax | 3,100 | |
Medicare tax | 725 | |
Health insurance premiums | 1,000 | |
Total deductions | 14,825 | |
Net pay | $35,175 |
Use the data in the spreadsheet for the following entries. If an amount box does not require an entry, leave it blank or enter “0”. | |
1. | Prepare the journal entry for the payment of the weekly salaries. The salaries will not be paid until April 20. |
2. | Prepare the journal entry to record the employer’s payroll taxes. In addition to the data for Social Security and Medicare in the table, which the employer must also pay, assume a 6.0% federal unemployment tax rate and a 5.4% state unemployment tax rate. Also assume that all wages are subject to these two taxes. |
Not sure about the account title? |
AssetsCash |
LiabilitiesAccounts Payable |
Owner’s EquityIncome Summary |
Revenues/GainsSales |
Expenses/LossesCost of Merchandise Sold |
DATE | DESCRIPTION | DOC. NO. |
POST. REF. |
DEBIT | CREDIT | ||
---|---|---|---|---|---|---|---|
1 | 1. | Salaries Expense |
1 | ||||
2 | Employee Fed. Inc. Tax Payable |
2 | |||||
3 | State Income Tax Payable |
3 | |||||
4 | Social Security Tax Payable |
4 | |||||
5 | Medicare Tax Payable |
5 | |||||
6 | Health Insurance Premiums Payable |
6 | |||||
7 | Net Pay |
7 | |||||
8 | 8 | ||||||
9 | 2. | Payroll Taxes Expense |
9 | ||||
10 | Social Security Tax Payable |
10 | |||||
11 | Medicare Tax Payable |
11 | |||||
12 | FUTA Tax Payable |
12 | |||||
13 | SUTA Tax Payable |
13 |
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Because of the matching principle, the company will recognize the employer payroll taxes expense and related liabilities at the same time as employee wages and salaries expenses.
Note that both the employer and the employee normally pay equal amounts for Social Security and Medicare.
Indicate the effect of the journal entries above on the accounting equation. Each row in the table corresponds to the row in the journal.
Accounting Equation | |||||
Row | Assets | = | Liabilities | + | Owner’s Equity |
1. |
no effect |
no effect |
– |
||
2. |
no effect |
+ |
no effect |
||
3. |
no effect |
+ |
no effect |
||
4. |
no effect |
+ |
no effect |
||
5. |
no effect |
+ |
no effect |
||
6. |
no effect |
+ |
no effect |
||
7. |
no effect |
+ |
no effect |
||
9. |
no effect |
no effect |
– |
||
10. |
no effect |
+ |
no effect |
||
11. |
no effect |
+ |
no effect |
||
12. |
no effect |
+ |
no effect |
||
13. |
no effect |
+ |
no effect |
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Review the chart of accounts in the previous step to determine the effect of each line in the journal entry.
The total payroll cost of the employees for Diego, Inc., for this period is $
In the future, as each of the payroll liabilities is paid, the liability will be
debited
credited
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Add up both the total direct employee cost and the taxes paid by the company.
Recall that the entries above recognize payroll tax expenses before the cash is actually paid. When the cash finally is paid (at different points in the future for each deduction), what happens to the liabilities created in the entries above?
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Correct