1 Chapter 9 LISEGAGNE/ISTOCKPHOTO.COM Payroll Accounting: Employer Taxes and Reports As competition has become more global, many challenges to businesses have developed. Learning how to function in many different languages and cultures is one of these challenges. Lingualinx is a fullservice translation company that offers help with language issues. Founded in 2002, Lingualinx has offices in the United States, the United Kingdom, France, and China. It hires qualified professional linguists with skills tailored to provide services in more than 100 languages. Some examples of its capabilities include simple text translation, simultaneous interpretation, sign language, copywriting, and even Braille production. It can also provide on-site language instruction classes. Lingualinx faces the same kinds of payroll issues as Intechra, the company described in the introduction to Chapter 8. But Lingualinx would face the added challenge of employees in multiple countries, so it would need to know the regulations in each location. In addition, you will learn in this chapter that employers must account for not just employee wages and taxes but also employer taxes. The complexity of payroll accounting is a major reason why many businesses hire an outside company to manage their payroll. You will also learn about two of these payroll service companies in this chapter s A Broader View. LEARNING OBJECTIVES Careful study of this chapter should enable you to: LO1 Describe and calculate employer payroll taxes. LO2 Account for employer payroll taxes expense. LO3 Describe employer reporting and payment responsibilities. LO4 Describe and account for workers compensation insurance.
2 The taxes we discussed in Chapter 8 had one thing in common they all were levied on the employee. The employer withheld them from employees earnings and paid them to the government. They did not add anything to the employer s payroll expenses. In this chapter, we will examine several taxes that are imposed directly on the employer. All of these taxes represent additional payroll expenses. You will see that the total cost of employees includes not only wages but also payroll taxes and benefits such as vacation and sick pay. EMPLOYER PAYROLL TAXES LO1 Describe and calculate employer payroll taxes. Most employers must pay FICA, FUTA (Federal Unemployment Tax Act), and SUTA (state unemployment tax) taxes. EMPLOYER FICA TAXES Employer FICA taxes are levied on employers at the same rates and on the same earnings bases as the employee FICA taxes. As explained in Chapter 8, we are assuming the Social Security component is 6.2% on maximum earnings of $106,800 for each employee. Since there is no maximum on the Medicare component, this tax is 1.45% on all earnings. The payroll register we saw in Chapter 8 is a key source of information for computing employer payroll taxes. That payroll register is reproduced in Figure 9-1. The Taxable Earnings Social Security column shows that $4,835 of employee earnings were subject to Social Security tax for the pay period. The employer s Social Security tax on these earnings is computed as follows: FIGURE 9-1 Payroll Register (left side) NAME ALLOWANCES MARITAL STATUS EARNINGS REGULAR OVERTIME TOTAL CUMULATIVE TOTAL UNEMPLOYMENT COMPENSATION TAXABLE EARNINGS SOCIAL SECURITY PAYROLL 1 Cadrain, Sarah 4 M Gruder, James 1 S Istone, Ken 4 M Kuzmik, Helen 2 M Lee, Hoseoup 3 M Swaney, Linda 2 S Tucci, Paul 3 M Wiles, Harry 1 S Time cards, pay rates Prior period total + current period earnings Current below $7,000 cumul. total Current below $106,800 cumul. total 316 PART 2 Accounting for Cash and Payroll
3 Chapter 9 Payroll Accounting: Employer Taxes and Reports 317 LEARNING KEY Use the information in the payroll register to compute employer payroll taxes. Social Security Taxable Earnings Tax Rate = Tax $4, $ The Medicare tax applies to the total earnings of $5,835. The employer s Medicare tax on these earnings is computed as follows: Total Earnings Tax Rate = Tax $5, $84.61 These amounts plus the employees Social Security and Medicare taxes withheld must be paid by the employer to the Internal Revenue Service (IRS). The self-employment tax rate is double the employee and employer Social Security and Medicare rates because the self-employed person is considered both the employer and employee. SELF-EMPLOYMENT TAX Individuals who own and run their own business are considered self-employed. These individuals can be viewed as both employer and employee. They do not receive salary or wages from the business, but they do have earnings in the form of the business net income. Self-employment income is the net income of a trade or business run by an individual. Currently, persons earning net self-employment income of $400 or more must pay a self-employment tax. Self-employment tax is a contribution to the FICA program. The tax rates are double the Social Security and Medicare rates (12.4% + 2.9% = 15.3% total). They are applied to the same income bases as those used for the Social Security and Medicare taxes. Publication 334, Tax Guide for Small Business, contains helpful information for self-employed persons. EMPLOYER FUTA TAX The FUTA (Federal Unemployment Tax Act) tax is levied only on employers. It is not deducted from employees earnings. The purpose of this tax is to raise funds to administer the combined federal/state unemployment compensation program. The maximum FIGURE 9-1 Payroll Register (right side) REGISTER WEEK ENDED 12/19/-- FEDERAL INCOME TAX SOCIAL SECURITY TAX MEDICARE TAX HEALTH INSURANCE DEDUCTIONS UNITED WAY OTHER TOTAL NET PAY CHECK NO. Withholding Tax Table 6.2% Social Security taxable earnings 1.45% total earnings Specific employer employee agreements Total earnings total deductions
4 318 PART 2 Accounting for Cash and Payroll amount of earnings subject to the FUTA tax and the tax rate can be changed by Congress. The current rate is 6.2% applied to maximum earnings of $7,000 for each employee, but employers are allowed a credit of up to 5.4% for participation in state unemployment programs. Thus, the effective federal rate is commonly 0.8%. Gross FUTA rate 6.2% Credit for state unemployment taxes 5.4% Net FUTA rate 0.8% To illustrate the computation of the FUTA tax, refer to Figure 9-1. The Taxable Earnings Unemployment Compensation column shows that only $300 of employee earnings were subject to the FUTA tax. This amount is low because the payroll period is late in the calendar year (December 19, 20--). It is common for most employees to exceed the $7,000 earnings limit by this time. The FUTA tax is computed as shown in Figure 9-2. FIGURE 9-2 Computation of FUTA Tax UNEMPLOYMENT UNEMPLOYMENT COMPENSATION COMPENSATION FUTA Taxable Earnings Tax Rate = Tax $ $2.40 State unemployment tax rates and maximum earnings amounts vary greatly. Current rates range from 5.4% to 11%. Maximum earnings amounts are $7,000 to $35,700. EMPLOYER SUTA TAX The SUTA (state unemployment tax) tax is also levied only on employers in most states. The purpose of this tax is to raise funds to pay unemployment benefits. Tax rates and unemployment benefits vary among the states. A common rate is 5.4% applied to maximum earnings of $7,000 for each employee. Most states have an experience-rating system to encourage employers to provide regular employment to workers. If an employer has very few former employees receiving unemployment compensation, the employer qualifies for a lower state unemployment tax rate. If an employer qualifies for a lower state rate, the full credit of 5.4% would still be allowed in computing the federal unemployment tax due. Refer to the payroll register in Figure 9-1. As we saw with the FUTA tax, only $300 of employee earnings for this pay period are subject to the state unemployment tax. The tax is computed as shown in Figure 9-3. FIGURE 9-3 Computation of SUTA Tax UNEMPLOYMENT UNEMPLOYMENT COMPENSATION COMPENSATION State Unemployment Taxable Earnings Tax Rate = Tax $ $16.20
5 Chapter 9 Payroll Accounting: Employer Taxes and Reports 319 U REVU Complete U REVU-1 on page 339 to test your basic understanding of LO1. ACCOUNTING FOR EMPLOYER PAYROLL TAXES LO2 Account for employer payroll taxes expense. Now that we have computed the employer payroll taxes, we need to journalize them. It is common to debit all employer payroll taxes to a single account Payroll Taxes Expense. However, we usually credit separate liability accounts for Social Security, Medicare, FUTA, and SUTA taxes payable. JOURNALIZING EMPLOYER PAYROLL TAXES The employer payroll taxes computed in the previous section can be summarized as follows: Employer s Social Security tax $ Employer s Medicare tax FUTA tax 2.40 SUTA tax Total employer payroll taxes $ These amounts provide the basis for the following journal entry: 5 Dec. 19 Payroll Taxes Expense Social Security Tax Payable Medicare Tax Payable FUTA Tax Payable SUTA Tax Payable Employer payroll taxes for week ended Dec The steps needed to prepare this journal entry for employer payroll taxes are: STEP 1 Obtain the total earnings and taxable earnings amounts from the Earnings Total and Taxable Earnings columns of the payroll register. In this case, total earnings were $5,835; Social Security taxable earnings were $4,835; and Unemployment Compensation taxable earnings were $300. STEP 2 Compute the amount of employer Social Security tax by multiplying the Social Security taxable earnings by 6.2%. STEP 3 Compute the amount of employer Medicare tax by multiplying total earnings by 1.45%. STEP 4 Compute the amount of FUTA tax by multiplying the Unemployment Taxable earnings by 0.8%. STEP 5 Compute the amount of SUTA tax by multiplying the Unemployment Taxable earnings by 5.4%. STEP 6 Prepare the appropriate journal entry using the amounts computed in steps 2 5.
6 320 PART 2 Accounting for Cash and Payroll To understand the journal entry for employer payroll taxes, let s use the accounting equation to examine the accounts involved. The five accounts affected by the payroll taxes entry above are shown in the accounting equation in Figure 9-4. FIGURE 9-4 Accounting for Payroll Taxes Assets = Liabilities + Owner s Equity Debit Credit Debit Credit Debit Credit Social Security Tax Payable Drawing Expenses Revenues Debit Credit Debit Credit Debit Credit Payroll Taxes Expense Medicare Tax Payable FUTA Tax Payable 2.40 SUTA Tax Payable PAYROLL TAXES EXPENSE The Social Security, Medicare, FUTA, and SUTA taxes imposed on the employer are expenses of doing business. Each of the employer taxes is debited to Payroll Taxes Expense. Payroll Taxes Expense Debit Credit Social Security, Medicare, FUTA, and SUTA taxes imposed on the employer SOCIAL SECURITY AND MEDICARE TAXES PAYABLE These are the same liability accounts used in Chapter 8 to record the Social Security and Medicare taxes withheld from employees earnings. The accounts are credited to enter the Social Security and Medicare taxes imposed on the employer. They are debited when the taxes are paid to the IRS. When all of the Social Security and Medicare taxes have been paid, the accounts will have zero balances.
7 Chapter 9 Payroll Accounting: Employer Taxes and Reports 321 LEARNING KEY Employer and employee Social Security and Medicare taxes are credited to the same liability accounts because both of these taxes are due and will be paid to the IRS. Debit Payment of Social Security tax Debit Payment of Medicare tax Social Security Tax Payable Medicare Tax Payable Credit Social Security taxes (1) withheld from employees earnings and (2) imposed on the employer Credit Medicare taxes (1) withheld from employees earnings and (2) imposed on the employer FUTA TAX PAYABLE A separate liability account entitled FUTA Tax Payable is kept for the employer s FUTA tax. This account is credited for the tax imposed on employers under the Federal Unemployment Tax Act. The account is debited when this tax is paid. When all of the FUTA taxes have been paid, the account will have a zero balance. FUTA Tax Payable Debit Payment of FUTA tax Credit FUTA tax imposed on the employer SUTA TAX PAYABLE A separate liability account entitled SUTA Tax Payable is kept for the state unemployment tax. This account is credited for the tax imposed on employers under the state unemployment compensation laws. The account is debited when this tax is paid. When all of the state unemployment taxes have been paid, the account will have a zero balance. SUTA Tax Payable Debit Payment of SUTA tax Credit SUTA tax imposed on the employer TOTAL PAYROLL COST OF AN EMPLOYEE It is interesting to note what it really costs to employ a person. The employer must, of course, pay the gross wages of an employee. In addition, the employer must pay payroll taxes on employee earnings up to certain dollar limits.
8 322 PART 2 Accounting for Cash and Payroll To illustrate, assume that an employee earns $26,000 a year. The total cost of this employee to the employer is calculated as follows: Gross wages $26,000 Employer Social Security tax, 6.2% of $26,000 1,612 Employer Medicare tax, 1.45% of $26, State unemployment tax, 5.4% of $7, FUTA tax, 0.8% of $7, $28,423 Thus, the total payroll cost of employing a person whose stated compensation is $26,000 is $28,423. Employer payroll taxes clearly are a significant cost of doing business. Employer-paid medical insurance and pension plans can further increase total payroll costs. U REVU Complete U REVU-2 on page 339 to test your basic understanding of LO2. REPORTING AND PAYMENT RESPONSIBILITIES LO3 Describe employer reporting and payment responsibilities. Employer payroll reporting and payment responsibilities fall into six areas: 1. Federal income tax withholding and Social Security and Medicare taxes 2. FUTA taxes 3. SUTA taxes 4. Employee Wage and Tax Statement (Form W-2) 5. Summary of employee wages and taxes (Form W-3) 6. Employment eligibility verification (Form I-9) FEDERAL INCOME TAX WITHHOLDING AND SOCIAL SECURITY AND MEDICARE TAXES Three important aspects of employer reporting and payment responsibilities for federal income tax withholding and Social Security and Medicare taxes are: 1. Determining when payments are due 2. Use of Form 8109, Federal Tax Deposit Coupon 3. Use of Form 941, Employer s Quarterly Federal Tax Return When Payments Are Due The date by which federal income tax withholding and Social Security and Medicare taxes must be paid depends on the amount of these taxes. Figure 9-5 summarizes the deposit rules stated in Circular E Employer s Tax Guide. In general, the larger the amount that needs to be deposited, the more frequently payments must be made. For simplicity, we will assume that deposits must be made 15 days after the end of each month.
9 Chapter 9 Payroll Accounting: Employer Taxes and Reports 323 FIGURE 9-5 Summary of Deposit Rules ACCUMULATED TAX LIABILITY DEPOSIT DUE 1. Less than $2,500 at the end of the current 1. Pay with Form 941 at end of the month quarter following end of the quarter 2. $2,500 or more at the end of the current 2. Deposit 15 days after end of the month quarter and $50,000 or less in total during the lookback period* 3. $2,500 or more at the end of the current quarter 3. Deposit every other Wednesday or Friday, and more than $50,000 in total during the depending on day of the week payroll lookback period* payments are made 4. $100,000 or more on any day during the 4. Deposit by the end of the next banking day current quarter *Lookback period is the four quarters beginning July 1, two years ago, and ending June 30, one year ago. Taxpayers who are not required to make electronic deposits may voluntarily participate in EFTPS. Form 8109 Deposits may be made using either the Electronic Federal Tax Payment System (EFTPS) or Form The EFTPS is an electronic funds transfer system for making federal tax deposits. Any taxpayer whose deposits in the prior year exceeded $200,000 is required to use this system. Deposits other than EFTPS are made at an authorized commercial bank using Form 8109, Federal Tax Deposit Coupon (Figure 9-6). The Employer Identification Number (EIN) shown on this form is obtained by the employer from the IRS. This number identifies the employer and must be shown on all payroll forms and reports filed with the IRS. FIGURE 9-6 Federal Tax Deposit Coupon (Form 8109) AMOUNT OF DEPOSIT (Do NOT type, please print.) DOLLARS CENTS Darken only one TYPE OF TAX a n d Darken only one TAX PERIOD MONTH TAX YEAR ENDS 1 5,, st Quarter 2nd Quarter EMPLOYER IDENTIFICATION NUMBER BANK NAME/ DATE STAMP Name Address Westly, Inc Natural Bridge IRS USE ONLY CT T 990-PF 944 3rd Quarter 4th Quarter City State St. Louis MO ZIP Telephone number ( ) FOR BANK USE IN MICR ENCODING Federal Tax Deposit Coupon Form 8109-B (Rev )
10 324 PART 2 Accounting for Cash and Payroll The $5, deposit shown in Figure 9-6 for Westly, Inc., was for the following taxes on wages paid in January: Employees income tax withheld from wages $2, Social Security tax: Withheld from employees wages $1, Imposed on employer 1, , Medicare tax: Withheld from employees wages $ Imposed on employer Amount of check $5, The journal entry for this deposit would be as follows: 5 Feb. 15 Employee Income Tax Payable Social Security Tax Payable Medicare Tax Payable Cash Deposit of employee federal income tax and 9 10 Social Security and Medicare taxes 10 Form 941 Form 941, Employer s Quarterly Federal Tax Return, must be filed with the IRS at the end of the month following each calendar quarter. This form reports the following taxes for the quarter: 1. Employee federal income tax withheld 2. Employee Social Security and Medicare taxes withheld 3. Employer Social Security and Medicare taxes A completed form for Westly, Inc., for the first quarter of the calendar year is shown in Figure 9-7. Instructions for completing the form are provided with the form and in Circular E. FUTA TAXES Federal unemployment taxes must be calculated on a quarterly basis. If the accumulated liability exceeds $500, the total must be paid to an authorized commercial bank. The total is due by the end of the month following the close of the quarter. If the liability is $500 or less, no deposit is necessary. The amount is simply added to the amount to be deposited for the next quarter. FUTA taxes are deposited using either EFTPS or Form 8109 (Figure 9-6). Assume that an employer s accumulated FUTA tax liability for the first quarter of the calendar year is $508. The employer would use Form 8109 to deposit this amount on April 30. The journal entry for this transaction would be as follows: 15 Apr. 30 FUTA Tax Payable Cash Deposit of federal unemployment tax 17
11 Chapter 9 Payroll Accounting: Employer Taxes and Reports 325 FIGURE 9-7 Employer s Quarterly Federal Tax Return (Form 941) 941 for 20--: Form (Rev. January 20--) Department of the Treasury Internal Revenue Service OMB No (EIN) Employer identification number Name (not your trade name) Trade name ( if any) Address Westly, Inc Natural Bridge Employer s QUARTERLY Federal Tax Return Number Street Suite or room number St. Louis MO City State ZIP code Read the separate instructions before you complete Form 941. Type or print within the boxes. Part 1: Answer these questions for this quarter Report for this Quarter of 20-- (Check one.) 1: January, February, March 2: April, May, June 3: July, August, September 4: October, November, December Number of employees who received wages, tips, or other compensation for the pay period including: Mar. 12 (Quarter 1), June 12 (Quarter 2), Sept. 12 (Quarter 3), Dec. 12 (Quarter 4) 1 8 Wages, tips, and other compensation 2 65, Employee Income tax withheld from wages, tips, and other compensation 3 7, federal income tax withheld If no wages, tips, and other compensation are subject to social security or Medicare tax Check and go to line 6. Taxable social security and Medicare wages and tips: Column 1 Column 2 5a Taxable social security wages 65, = 8, Employee and employer Social Security taxes 5b Taxable social security tips.124 = 5c Taxable Medicare wages & tips 65, = 1, Employee and employer Medicare taxes 6 7 5d Total social security and Medicare taxes (Column 2, lines 5a + 5b + 5c = line 5d) Total taxes before adjustments (lines 3 + 5d = line 6) CURRENT QUARTER S ADJUSTMENTS, for example, a fractions of cents adjustment. See the instructions. 5d 6 9, , a Current quarter s fractions of cents 7b Current quarter s sick pay 7c Current quarter s adjustments for tips and group-term life insurance d TOTAL ADJUSTMENTS. Combine all amounts on lines 7a through 7c Total taxes after adjustments. Combine lines 6 and 7d Advance earned income credit (EIC) payments made to employees Total taxes after adjustment for advance EIC (line 8 line 9 = line 10) Total deposits for this quarter, including overpayment applied from a prior quarter and overpayment applied from Form 941-X or Form 944-X 12a COBRA premium assistance payments (see instructions) 12b Number of individuals provided COBRA premium assistance reported on line 12a 13 Add lines 11 and 12a 13 Balance due. If line 10 is more than line 13, write the difference here For information on how to pay, see the instructions. Overpayment. If line 13 is more than line 10, write the difference here You MUST complete both pages of Form 941 and SIGN it... 7d , Check one 0 17, , , Apply to next return. Send a refund. Next For Privacy Act and Paperwork Reduction Act Notice, see the back of the Payment Voucher. Cat. No Z Form 941 (Rev )
12 326 PART 2 Accounting for Cash and Payroll FIGURE 9-7 Employer s Quarterly Federal Tax Return (Form 941) (concluded) Name (not your trade name) Employer identification number (EIN) Part 2: Tell us about your deposit schedule and tax liability for this quarter. If you are unsure about whether you are a monthly schedule depositor or a semiweekly schedule depositor, see Pub. 15 (Circular E), section M O Write the state abbreviation for the state where you made your deposits OR write MU if you made your deposits in multiple states. 17 Check one: Line 10 is less than $2,500. Go to Part 3. You were a monthly schedule depositor for the entire quarter. Enter your tax liability for each month. Then go to Part 3. Tax liability: Month 1 Month 2 Month 3 5, , , , Total liability for quarter Total must equal line 10. You were a semiweekly schedule depositor for any part of this quarter. Complete Schedule B (Form 941): Report of Tax Liability for Semiweekly Schedule Depositors, and attach it to Form 941. Part 3: Tell us about your business. If a question does NOT apply to your business, leave it blank. 18 If your business has closed or you stopped paying wages enter the final date you paid wages / /. Check here, and 19 If you are a seasonal employer and you do not have to file a return for every quarter of the year Part 4: May we speak with your third-party designee? Check here. Do you want to allow an employee, a paid tax preparer, or another person to discuss this return with the IRS? See the instructions for details. Yes. Designee s name and phone number ( ) No. Select a 5-digit Personal Identification Number (PIN) to use when talking to the IRS. Part 5: Sign here. You MUST complete both pages of Form 941 and SIGN it. Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. Sign your name here Print your name here Print your title here Date / / Best daytime phone ( ) Paid preparer s use only Preparer s name Preparer s signature Firm s name (or yours if self-employed) Address Check if you are self-employed Preparer s SSN/PTIN Date / / EIN Phone ( ) City Page 2 State ZIP code Form 941 (Rev )
13 Chapter 9 Payroll Accounting: Employer Taxes and Reports 327 Form 940 In addition to making quarterly deposits, employers are required to file an annual report of federal unemployment tax using Form 940 (Figure 9-8). This form must be FIGURE 9-8 Employer s Annual Federal Unemployment (FUTA) Tax Return (Form 940) Form 940 for 20--: Employer s Annual Federal Unemployment (FUTA) Tax Return Department of the Treasury Internal Revenue Service OMB No (EIN) Employer identification number Type of Return (Check all that apply.) Name (not your trade name) Trade name (if any) Address Number Street Suite or room number City State ZIP code Read the separate instructions before you fill out this form. Please type or print within the boxes. Part 1: Tell us about your return. If any line does NOT apply, leave it blank. 1 If you were required to pay your state unemployment tax in FUTA tax before adjustments (line = line 8) Part 3: Determine your adjustments. If any line does NOT apply, leave it blank a. Amended b. Successor employer c. No payments to employees in 20-- d. Final: Business closed or stopped paying wages 1a One state only, write the state abbreviation 1a - OR - 1b More than one state (You are a multi-state employer) 1b Check here. Fill out Schedule A. 2 Skip line 2 for 20-- and go to line 3. If you paid wages in a state that is subject to CREDIT REDUCTION 2 Check here. Fill out Schedule A (Form 940), Part 2. Part 2: Determine your FUTA tax before adjustments for If any line does NOT apply, leave it blank. Skip line 11 for 20-- and go to line If credit reduction applies, enter the amount from line 3 of Schedule A (Form 940) 11 Part 4: Determine your FUTA tax and balance due or overpayment for If any line does NOT apply, leave it blank Westly, Inc Natural Bridge St. Louis Total payments to all employees Payments exempt from FUTA tax Check all that apply: 4a Fringe benefits 4c Retirement/Pension 4e Other 4b Group-term life insurance 4d Dependent care Total of payments made to each employee in excess of $7, , Subtotal (line 4 + line 5 = line 6) Total taxable FUTA wages (line 3 line 6 = line 7) If ALL of the taxable FUTA wages you paid were excluded from state unemployment tax, multiply line 7 by.054 (line = line 9). Then go to line 12 If SOME of the taxable FUTA wages you paid were excluded from state unemployment tax, OR you paid ANY state unemployment tax late (after the due date for filing Form 940), fill out the worksheet in the instructions. Enter the amount from line 7 of the worksheet onto line 10 Total FUTA tax after adjustments (lines = line 12) FUTA tax deposited for the year, including any payment applied from a prior year 13 Balance due (If line 12 is more than line 13, enter the difference on line 14.) If line 14 is more than $500, you must deposit your tax. If line 14 is $500 or less, you may pay with this return. For more information on how to pay, see the separate instructions 14 You MUST fill out both pages of this form and SIGN it. MO Overpayment (If line 13 is more than line 12, enter the difference on line 15 and check a box below.) Check one:. Apply to next return. Send a refund. Next For Privacy Act and Paperwork Reduction Act Notice, see the back of Form 940-V, Payment Voucher. Cat. No O Form 940 (20--) M O. 258, , , FUTA taxable wages FUTA tax FUTA tax paid FUTA tax due
14 328 PART 2 Accounting for Cash and Payroll FIGURE 9-8 Employer s Annual Federal Unemployment (FUTA) Tax Return (Form 940) (concluded ) Name (not your trade name) Employer identification number (EIN) Part 5: Report your FUTA tax liability by quarter only if line 12 is more than $500. If not, go to Part Report the amount of your FUTA tax liability for each quarter; do NOT enter the amount you deposited. If you had no liability for a quarter, leave the line blank. 16a 1st quarter (January 1 March 31) 16a 16b 16c 16d 2nd quarter (April 1 June 30) 3rd quarter (July 1 September 30) 4th quarter (October 1 December 31) 16b 16c 16d 17 Total tax liability for the year (lines 16a + 16b + 16c + 16d = line 17) 17 Total must equal line 12. Part 6: May we speak with your third-party designee? Do you want to allow an employee, a paid tax preparer, or another person to discuss this return with the IRS? See the instructions for details. Yes. Designee s name and phone number ( ) Select a 5-digit Personal Identification Number (PIN) to use when talking to IRS No. Part 7: Sign here. You MUST fill out both pages of this form and SIGN it. Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete, and that no part of any payment made to a state unemployment fund claimed as a credit was, or is to be, deducted from the payments made to employees. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge. Sign your name here Print your name here WILLIAM P. JONES Print your title here TREASURER Date / / Best daytime phone ( ) Paid preparer s use only Check if you are self-employed Preparer s name Preparer s signature Preparer s SSN/PTIN Date / / Firm s name (or yours if self-employed) EIN Address Phone ( ) City State ZIP code Page 2 Form 940 (20--)
15 Chapter 9 Payroll Accounting: Employer Taxes and Reports 329 filed with the IRS by the beginning of the second week of February. Figure 9-8 shows a completed Form 940 for Westly, Inc. If a balance is due, it may be paid using EFTPS or Form 940-V. Figure 9-9 shows a completed Form 940-V for Westly. FIGURE 9-9 Payment Voucher (Form 940-V) OMB No Payment Voucher 940-V Department of the Treasury Do not staple or attach this voucher to your payment. Internal Revenue Service Enter your employer identification number 2 Dollars Cents (EIN). Form Enter the amount of your payment. 3 Enter your business name (individual name if sole proprietor). Westly, Inc. Enter your address Natural Bridge Enter your city, state, and ZIP code. St. Louis, MO SUTA TAXES Deposit rules and forms for state unemployment taxes vary among the states. Deposits usually are required on a quarterly basis. Assume that Westly s accumulated state unemployment liability for the first quarter of the calendar year is $2,754. The journal entry for the deposit of this amount with the state on April 30 would be as follows: 19 Apr. 30 SUTA Tax Payable Cash Deposit of state unemployment tax 21 EMPLOYEE WAGE AND TAX STATEMENT By January 31 of each year, employers must furnish each employee with a Wage and Tax Statement, Form W-2 (Figure 9-10). This form shows the total amount of wages paid to the employee and the amounts of taxes withheld during the preceding taxable year. The employee earnings record contains the information needed to complete this form. Multiple copies of Form W-2 are needed for the following purposes: Copy A Employer sends to Social Security Administration Copy B Employee attaches to federal income tax return Copy C Employee retains for his or her own records Copy D Employer retains for business records Copy 1 Employer sends to state or local tax department Copy 2 Employee attaches to state, city, or local income tax return
16 330 PART 2 Accounting for Cash and Payroll FIGURE 9-10 Wage and Tax Statement (Form W-2) Total wages paid Federal income tax withheld Void b Employer identification number (EIN) c Employer s name, address, and ZIP code Westly, Inc Natural Bridge St. Louis, MO a Employee s social security number For Official Use Only OMB No Wages, tips, other compensation 2 Federal income tax withheld 27, Social security wages 4 Social security tax withheld 27, , Medicare wages and tips 6 Medicare tax withheld 27, Medicare tax withheld 7 Social security tips 8 Allocated tips Social security tax withheld d Control number 9 Advance EIC payment 10 Dependent care benefits e Employee s first name and initial Ken M Swallow Dr. St. Louis, MO f Employee s address and ZIP code Last name Istone Suff. 11 Nonqualified plans 13 Statutory employee 14 Other Retirement plan Third-party sick pay 12a See instructions for box 12 C o d e 15 State Employer s state ID number 16 State wages, tips, etc. 17 State income tax 18 Local wages, tips, etc. 19 Local income tax 20 Locality name 12b C o d e 12c C o d e 12d C o d e Wage and Tax Form W-2 Statement 2 Copy A For Social Security Administration Send this entire page with Form W-3 to the Social Security Administration; photocopies are not acceptable. 0-- Department of the Treasury Internal Revenue Service For Privacy Act and Paperwork Reduction Act Notice, see back of Copy D. Cat. No D Do Not Cut, Fold, or Staple Forms on This Page DoNot Cut, Fold, or Staple Forms on This Page SUMMARY OF EMPLOYEE WAGES AND TAXES Employers send Form W-3, Transmittal of Wage and Tax Statements (Figure 9-11), with Copy A of Forms W-2 to the Social Security Administration. Form W-3 must be filed by February 28 following the end of each taxable year. This form summarizes the employee earnings and tax information presented on Forms W-2 for the year. Information needed to complete Form W-3 is contained in the employee earnings records. EMPLOYMENT ELIGIBILITY VERIFICATION Every employee hired after November 6, 1986, must complete Form I-9, Employment Eligibility Verification. The purpose of this form is to document that each employee is authorized to work in the United States. The employee completes Section 1 of the form and provides the employer with evidence of the employee s identity and authorization to work. The employer completes Section 2 of the form indicating what evidence the employer examined. Form I-9 is not filed with any government agency. Instead, it must be retained by the employer and made available for inspection if requested by the Department of Homeland Security or the Department of Labor. SUMMARY OF TAXES, REPORTS, AND PAYMENTS Keeping track of the many payroll taxes can be a challenge for an employer. Figure 9-12 summarizes the various employee and employer taxes we have discussed in Chapters 8 and 9. Figure 9-13 shows a calendar that highlights the due dates for the various reports and deposits. The calendar assumes the following for an employer: 1. Undeposited FIT (federal income tax) and Social Security and Medicare taxes of $2,500 at the end of each quarter and less than $50,000 during the lookback period. 2. Undeposited FUTA taxes of more than $500 at the end of each quarter. 3. SUTA taxes deposited quarterly.
17 Chapter 9 Payroll Accounting: Employer Taxes and Reports 331 FIGURE 9-11 Transmittal of Wage and Tax Statements (Form W-3) The combination of payroll taxes, reports, deposit rules, and due dates can make payroll accounting rather complex. In fact, this is a major reason why small businesses often hire an accountant or an outside company to handle payroll a Control number For Official Use Only OMB No b 941 Military Wages, tips, other compensation Kind 276, of Hshld. Medicare Third-party emp. govt. emp. Payer CT-1 sick pay 3 Social security wages 274, c Total number of Forms W-2 d Establishment number 5 Medicare wages and tips 8 276, e Employer identification number (EIN) f Employer s name Westly, Inc Natural Bridge St. Louis, MO DO NOT STAPLE Social security tips Advance EIC payments Nonqualified plans For third-party sick pay use only Federal income tax withheld 30, Social security tax withheld 17, Medicare tax withheld 4, Allocated tips Dependent care benefits Deferred compensation 14 Income tax withheld by payer of third-party sick pay g h Employer s address and ZIP code Other EIN used this year 15 State Employer s state ID number MO State wages, tips, etc. 276, Local wages, tips, etc State income tax Local income tax Contact person address Telephone number ( ) Fax number ( ) For Official Use Only Under penalties of perjury, I declare that I have examined this return and accompanying documents, and, to the best of my knowledge and belief, they are true, correct, and complete. Signature Title Form W-3 Transmittal of Wage and Tax Statements 20-- Date Department of the Treasury Internal Revenue Service FIGURE 9-12 Summary of Employee and Employer Taxes TAX Federal income tax State income tax TAX APPLIES TO EMPLOYEE EMPLOYER X X Social Security X X Medicare X X FUTA SUTA X X * * Also applies to employees in some states.
18 332 PART 2 Accounting for Cash and Payroll FIGURE 9-13 Payroll Calendar File Forms 940, 941, state unemployment tax report, and send W-2 to employees. File Form 940 File form W-3 with CopyA ofw-2s. File Form 941 and make FUTA and SUTA tax deposits. Deposit FIT and Social Security and Medicare taxes from previous month. January S M T W T F S April S M T W T F S July S M T W T F S October S M T W T F S February S M T W T F S May S M T W T F S August S M T W T F S November S M T W T F S March S M T W T F S June S M T W T F S September S M T W T F S December S M T W T F S A BROADER VIEW Dealing with Payroll Complexity Let Someone Else Do It A common way for both small and large businesses to deal with the complexity of payroll reports, deposit rules, and due dates is to hire an outside company to handle the payroll. Payroll processing companies have combined payroll expertise with the power of computers to create a major business enterprise based on the efficient and effective provision of payroll services. The extent to which businesses use outside companies to handle payroll can be seen in the two largest payroll processing companies: Automatic Data Processing, Inc. (ADP) and ADP, INC. Paychex, Inc. ADP has operations in 26 countries, provides payroll services to 585,000 clients (500,000 in the United States), and has revenues of $9 billion. Paychex has 100 locations nationwide, provides services to 572,000 clients, and has revenues of $2 billion. These companies prepare employee paychecks, journals, and summary reports; collect and remit funds for federal, state, and local payroll taxes; and file all required forms with government taxing authorities. U REVU Complete U REVU-3 on page 339 to test your basic understanding of LO3.
19 Chapter 9 Payroll Accounting: Employer Taxes and Reports 333 WORKERS COMPENSATION INSURANCE LO4 Describe and account for workers compensation insurance. Most states require employers to carry workers compensation insurance. Workers compensation insurance provides insurance for employees who suffer a job-related illness or injury. The employer usually pays the entire cost of workers compensation insurance. The cost of the insurance depends on the number of employees, riskiness of the job, and the company s accident history. For example, the insurance premium for workers in a chemical plant could be higher than for office workers. Employers generally obtain the insurance either from the state in which they operate or from a private insurance company. The employer usually pays the premium at the beginning of the year, based on the estimated payroll for the year. At the end of the year, after the actual amount of payroll is known, an adjustment is made. If the employer has overpaid, a credit is received from the state or insurance company. If the employer has underpaid, an additional premium is paid. To illustrate the accounting for workers compensation insurance, assume that Lockwood Co. expects its payroll for the year to be $210,000. If Lockwood s insurance premium rate is 0.2%, its payment for workers compensation insurance at the beginning of the year would be $420. Estimated Payroll Rate = Estimated Insurance Premium $210, $ The journal entry for the payment of this $420 premium would be as follows: 7 Jan. 2 Workers Compensation Insurance Expense Cash Paid insurance premium 9 If Lockwood s actual payroll for the year is $220,000, Lockwood would owe an additional premium of $20 at year-end. Actual Payroll Rate = Insurance Premium $220, $ Less premium paid Additional premium due $ The adjusting entry at year-end for this additional expense would be as follows: 11 Dec. 31 Workers Compensation Insurance Expense Workers Compensation Insurance Payable Adjustment for insurance premium 13
20 334 PART 2 Accounting for Cash and Payroll In T account form, the total Workers Compensation Insurance Expense of $ would look like this. Workers Compensation Insurance Expense Debit Credit If Lockwood s actual payroll for the year is only $205,000, Lockwood would be due a refund of $10: Payroll Rate = Insurance Premium $205, $ Less premium paid Refund due $(10.00) The adjusting entry at year-end for this refund due would be as follows: 16 Dec. 31 Insurance Refund Receivable Workers Compensation Insurance Expense Adjustment for insurance premium 18 In T account form, the total Workers Compensation Insurance Expense of $410 would look like this. Workers Compensation Insurance Expense Debit Credit U REVU Complete U REVU-4 on page 339 to test your basic understanding of LO4. Profiles in Accounting Michael Burdish Payroll Compliance Auditor Michael Burdish graduated with an associate degree in accounting with honors from The College of Westchester. Michael excelled in his studies in accounting and knew this was the field for him. After graduation, Michael was hired as a payroll compliance auditor for an accounting firm. He is part of the team that audits companies and contractors that hire union members. The focus of the audits is to ensure that the correct amounts of benefits are paid. According to Michael he really enjoys his work. He especially likes meeting many new people and having new experiences. Michael intends to further his education and complete his baccalaureate degree in accounting.
21 SELF-STUDY LEARNING OBJECTIVES LO1 Describe and calculate employer payroll taxes. LO2 Account for employer payroll taxes expense. Key Points to Remember Employer payroll taxes include FICA, FUTA, and SUTA taxes. These taxes represent additional payroll expenses of the employer. The journal entry for payroll taxes is as follows: 8 Payroll Taxes Expense x x x xx 8 9 Social Security Tax Payable x x x xx 9 10 Medicare Tax Payable x x x xx FUTA Tax Payable x x x xx SUTA Tax Payable x x x xx 12 The steps to be followed in preparing this journal entry are as follows: 1. Obtain the total earnings and taxable earnings amounts from the Earnings Total and Taxable Earnings columns of the payroll register. 2. Compute the amount of employer Social Security tax by multiplying the Social Security taxable earnings by 6.2%. 3. Compute the amount of employer Medicare tax by multiplying total earnings by 1.45%. 4. Compute the amount of FUTA tax by multiplying the Unemployment Taxable earnings by 0.8%. 5. Compute the amount of SUTA tax by multiplying the Unemployment Taxable earnings by 5.4%. 6. Prepare the appropriate journal entry using the amounts computed in steps 2 5. LO3 Describe employer reporting and payment responsibilities. Employer payroll reporting and payment responsibilities fall into six areas. 1. Federal income tax withholding and Social Security and Medicare taxes 2. FUTA taxes 3. SUTA taxes 4. Employee Wage and Tax Statement (Form W-2) 5. Summary of employee wages and taxes (Form W-3) 6. Employment eligibility verification (Form I-9) Key forms needed in reporting and paying employer payroll taxes are as follows: 1. Form 8109, Federal Tax Deposit Coupon 2. Form 941, Employer s Quarterly Federal Tax Return 3. Form 940, Employer s Annual Federal Unemployment Tax Return By January 31 of each year, employers must provide each employee with a Wage and Tax Statement, Form W-2. By February 28 of each year, employers must file Form W-3 and Copy A of Form W-2 with the Social Security Administration. Chapter 9 Self-Study 335
22 336 PART 2 Accounting for Cash and Payroll LEARNING OBJECTIVES Key Points to Remember LO4 Describe and account for Workers compensation insurance provides insurance for workers compensation insurance. employees who suffer a job-related illness or injury. Employers generally are required to carry and pay the entire cost of this insurance. DEMONSTRATION PROBLEM The Totals line from Hart Company s payroll register for the week ended December 31, 20--, is as follows: (left side) NAME EMPLOYEE NUMBER ALLOWANCES MARITAL STATUS EARNINGS REGULAR OVERTIME TOTAL CUMULATIVE TOTAL UNEMPLOYMENT COMPENSATION TAXABLE EARNINGS 21 Totals SOCIAL SECURITY PAYROLL REGISTER PERIOD ENDED December 31, 20-- (right side) FEDERAL INCOME TAX SOCIAL SECURITY TAX MEDICARE TAX HEALTH INSURANCE DEDUCTIONS UNITED WAY OTHER TOTAL NET PAY CHECK NO. Payroll taxes are imposed as follows: Social Security, 6.2%; Medicare, 1.45%; FUTA, 0.8%; and SUTA, 5.4%. REQUIRED 1. a. Prepare the journal entry for payment of this payroll on December 31, b. Prepare the journal entry for the employer s payroll taxes for the period ended December 31, Hart Company had the following balances in its general ledger after the entries for requirement (1) were made: Employee Income Tax Payable $1, Social Security Tax Payable 1, Medicare Tax Payable FUTA Tax Payable SUTA Tax Payable a. Prepare the journal entry for payment of the liabilities for employee federal income taxes and Social Security and Medicare taxes on January 15, b. Prepare the journal entry for payment of the liability for FUTA tax on January 31, 20--.
23 Chapter 9 Self-Study 337 c. Prepare the journal entry for payment of the liability for SUTA tax on January 31, Hart Company paid a premium of $280 for workers compensation insurance based on estimated payroll as of the beginning of the year. Based on actual payroll as of the end of the year, the premium is $298. Prepare the adjusting entry to reflect the underpayment of the insurance premium. Solution 1. GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. REF. DEBIT CREDIT Dec. 31 Wages and Salaries Expense Employee Income Tax Payable Social Security Tax Payable Medicare Tax Payable Health Insurance Premiums Payable United Way Contributions Payable Cash To record Dec. 31 payroll Payroll Taxes Expense Social Security Tax Payable Medicare Tax Payable FUTA Tax Payable SUTA Tax Payable Employer payroll taxes for week ended Dec and Jan. 15 Employee Income Tax Payable Social Security Tax Payable Medicare Tax Payable Cash Deposit of employee federal income tax and Social Security and Medicare taxes FUTA Tax Payable Cash Paid FUTA tax SUTA Tax Payable Cash Paid SUTA tax Dec. 31 Workers Compensation Insurance Expense Workers Compensation Insurance Payable Adjustment for insurance premium 35
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