Chapter 11: Payroll Taxes, Deposits, and Reports

Chapter 11: Payroll Taxes, Deposits, and Reports Chapter Opener: Thinking Critically Payroll accountants are responsible for keeping accurate records of all employees so paychecks can be processed properly and so that wage and tax statements can be prepared. A lower staff turnover rate means fewer new employees to enter into the accounting system a time saver for payroll accountants. Fast Facts The first IKEA store opens in the USA in 1985. The IKEA group employs a total of 84,000 co-workers in 44 countries. The retail organization employs over 36,000 thousand co-workers. The IKEA Catalog is printed in 30 languages. 140 million copies are distributed to over 30 countries. Over 400 million customers visited IKEA stores in 2004. Computers in Accounting: Thinking Critically Answers will vary. Students may suggest the following. names of payees correct pay rates correct hours correct withholdings Computers in Accounting: Internet Application The American Payroll Assoc. Web site address is www.amerlcanpayroll.org. The organization offers a nationwide course on Payroll System Selection and Implementation. The outline of the course is available online. Managerial Implications: Thinking Critically The 941 is prepared from the Quarterly Summary of Earnings. Discussion Questions These questions are designed to check students understanding of the new terms, concepts, and procedures presented in the chapter. 1. B, C, D 2. Federal deposits are due on the 15th day of the following month. 3. Federal deposits are due on either Wednesdays or Fridays, depending on the employer s payday. 4. Electronic Federal Tax Payment System; use if the annual federal tax deposits are more than $200,000. 5. Used if the employer has been assigned a federal ID but has not yet received their supply of Forms 8109. 6. Unique ID number assigned by the federal government to employers. 7. SUTA, FUTA, social security, and Medicare 8. A four-quarter period ending June 30 of the preceding year. 9. Summarizes employees earnings and deductions for the year; sent with W-2 forms to Social Security Administration by last day of February following close of calendar year. 10. To each employee by January 31 following the close of the calendar year. 11. Employer is responsible and must pay any taxes due. 12. Form 8109 13. Circular E 14. Start of the year 15. Employer 16. Reports employee earnings subject to federal income, social security, and Medicare taxes. Filed quarterly. 17. Yes, if FUTA payable is $100 or more, deposit by last day of month following end of quarter. 18. 5.4 percent 19. Filed once a year, it reports net federal unemployment tax; indicates amount of additional tax due. 20. Intended to encourage states to adopt state unemployment tax programs. 21. To alleviate hardship on employees who lose their jobs. Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 11 263

Exercises Exercise 11.1 1. March 31,. No deposit is necessary at this time since tax due is less than $2,500. 2. March 31,. No deposit is necessary at this time since the tax due is less than $2,500. 3. March 31,. No deposit is necessary at this time since tax due is less than $2,500. 4. March 15,. A deposit is required by the 15th of the month following the period where $2,500 or more in tax is owed. In 1, 2, and 3, the taxes may be paid with Form 941 on or before April 30,. Exercise 11.2 GENERAL JOURNAL PAGE 24 July 16 Social Security Tax Payable...................... 20,160 Medicare Tax Payable.......................... 4,644 Employee Income Tax Payable................... 18,360 Cash...................................... 43,164 Deposit payroll taxes Exercise 11.3 TAX BASE RATE AMOUNT Social Security $71,200 6.2% $4,414.40 Medicare 71,200 1.45% 1,032.40 FUTA 39,000 0.8% 312.00 SUTA 39,000 5.4% 2,106.00 Total $7,864.80 Exercise 11.4 GENERAL JOURNAL PAGE 24 Apr. 30 Federal Unemployment Tax Payable............... 1,152 Cash...................................... 1,152 Deposit of FUTA Exercise 11.5 SUTA = $1,600.80 ($100,050 x 0.016) Exercise 11.6 GENERAL JOURNAL PAGE 30 July 31 State Unemployment Tax Payable................. 2,736 Cash...................................... 2,736 Pay SUTA 264 Chapter 11 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

Exercise 11.7 Gross tax (0.008 x $128,400) = $1,027.20 Less Deposit = 1,000.00 Net tax payable = $27.20 Exercise 11.8 WORK ESTIMATED ESTIMATED CLASSIFICATION EARNINGS RATE PREMIUM Office $180,000 $.40/$100 $ 720 Factory 960,000 $8.00/$100 76,800 Total $77,520 Problems Problem 11.1A TAX BASE RATE AMOUNT Social Security $2,800 6.2% $173.60 Medicare 2,800 1.45% 40.60 FUTA 2,800 0.8% 22.40 SUTA 2,800 5.4% 151.20 Total $387.80 GENERAL JOURNAL PAGE 28 June 14 Payroll Taxes Expense.......................... 387.80 Social Security Tax Payable.................... 173.60 Medicare Tax Payable........................ 40.60 Federal Unemployment Tax Payable............. 22.40 State Unemployment Tax Payable............... 151.20 Record employer s payroll taxes............... Analyze: Social Security and Medicare are paid by the employee and matched by the employer. Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 11 265

Problem 11.2A GENERAL JOURNAL PAGE April 8 Payroll Taxes Expense.......................... 322.98 Social Security Tax Payable.................... 144.58 Medicare Tax Payable........................ 33.81 Federal Unemployment Tax Payable............. 18.66 State Unemployment Tax Payable............... 125.93 Payroll tax expense May 15 Social Security Tax Payable...................... 1,173.04 Medicare Tax Payable.......................... 274.34 Employee Income Tax Payable................... 935.00 Cash...................................... 2,382.38 Deposit payroll taxes for April June 17 Social Security Tax Payable...................... 1,156.67 Medicare Tax Payable.......................... 270.51 Employee Income Tax Payable................... 924.00 Cash...................................... 2,351.18 Deposit payroll taxes for May Analyze: The amount of income tax withheld was determined based on tables for the filing status and withholding allowances claimed by each employee. Problem 11.3A GENERAL JOURNAL PAGE July 15 Social Security Tax Payable...................... 1,456.75 Medicare Tax Payable.......................... 340.69 Employee Income Tax Payable................... 1,162.00 Cash...................................... 2,959.44 Deposit payroll taxes for June Analyze: The balance of the Employee Income Tax Payable account is 0. Form 941 Page 1 75-4444444 Marvel Turner Turner Broadcasting Company 3750 Belt Line Parkway Dallas, TX 76539-6205 Quarter 2 Line 2: 30,536.00 Line 3: 3,021.00 Line 5a: 30,536.00; 3,786.46 Line 5c: 30,536.00; 885.54 Line 5d: 4,672.00 Line 6: 7,693.00 Line 8: 7,693.00 Line 10: 7,693.00 Line 11: 7,693.00 Line 12: 0 Page 2 Marvel Turner; 75-4444444 Line 14: TX Line 15: Check second box; Month 1: 2,382.38; Month 2: 2,351.18; Month 3: 2,959.44; Total: 7,693.00 Part 5 Marvel Turner, Owner 07/31/07; (972) 709-3654 266 Chapter 11 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

Problem 11.4A State unemployment insurance = 0.017 x $27,553.00 = $468.40 GENERAL JOURNAL PAGE April 30 State Unemployment Tax Payable................. 468.40 Cash...................................... 468.40 Payment of quarterly SUTA Analyze: An employer s experience rating determines the amount of state unemployment taxes paid. Generally, a more favorable rating will result in a lower state unemployment tax rate for the business. Problem 11.5A GENERAL JOURNAL PAGE 2008 Jan. 28 Federal Unemployment Tax Payable............... 19.52 Cash...................................... 19.52 Pay balance of tax due Analyze: The total debits made to liability accounts were $487.92. Form 940-EZ Mary Amos The Style Shop Trendsetter Lane 75-9462315 Dallas, TX 75268-0967 A: 1,090.77 B1: TX B2: 37-9462315 Line 1: 117,698.00 Line 3: 53,535.00 Line 4: 53,535.00 Line 5: 64,163.00 Line 6: 513.00 Line 7: 493.78 Line 8: 19.52 Quarter: First: 220.42; Second: 198.72; Third: 74.64; Fourth: 19.52; Total 513.30 Form 940-V(EZ) Line 1: 75-9462315 Line 2: 19.52 Line 3: Mary Amos, Trendsetter Lane, Dallas, TX 75268-0967 Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 11 267

Problem 11.6A WORK ESTIMATED INSURANCE ESTIMATED CLASSIFICATION EARNINGS RATE PREMIUMS Office work $ 68,000 $0.40/$100 $ 272 Shop work $315,000 $5.00/$100 15,750 Total $16,022 WORK ACTUAL INSURANCE ACTUAL CLASSIFICATION EARNINGS RATE PREMIUMS Office work $ 72,000 $0.40/$100 $ 288 Shop work $319,000 $5.00/$100 15,950 Total $16,238 Estimated premiums paid 16,022 Additional premium due $ 216 GENERAL JOURNAL PAGE 8 Jan. 15 Workers Compensation Insurance Expense......... 16,022 Cash...................................... 16,022 Estimated workers compensation for year Dec. 31 Workers Compensation Insurance Expense......... 216 Workers Compensation Insurance Payable....... 216 Adjust workers compensation insurance expense Analyze: The premium estimate would have been $19,150. Problem 11.1B TAX BASE RATE AMOUNT Social Security $2,890 6.2% $179.18 Medicare $2,890 1.45% 41.91 FUTA $2,890 0.8% 23.12 SUTA $2,890 2.2% 63.58 Total $307.79 GENERAL JOURNAL PAGE 28 April 8 Payroll Taxes Expense.......................... 307.79 Social Security Tax Payable.................... 179.18 Medicare Tax Payable........................ 41.91 Federal Unemployment Tax Payable............. 23.12 State Unemployment Tax Payable............... 63.58 Record taxes on payroll Analyze: The total employer payroll taxes would be $319.35. 268 Chapter 11 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

Problem 11.2B GENERAL JOURNAL PAGE 31 July 7 Payroll Taxes Expense.......................... 210.87 Social Security Tax Payable.................... 122.76 Medicare Tax Payable........................ 28.71 Federal Unemployment Tax Payable............. 15.84 State Unemployment Tax Payable............... 43.56 Payroll taxes for week ended July 6 Aug. 15 Employee Income Tax Payable................... 803.00 Social Security Tax Payable...................... 1,023.00 Medicare Tax Payable.......................... 239.26 Cash...................................... 2,065.26 Deposit of payroll taxes for July Sept. 15 Employee Income Tax Payable................... 1,067.00 Social Security Tax Payable...................... 1,350.36 Medicare Tax Payable.......................... 315.84 Cash...................................... 2,733.20 Deposit of payroll taxes for August Analyze: A SUTA rate of.015 would reduce the amount of tax by $13.86. Problem 11.3B GENERAL JOURNAL PAGE 31 Oct. 15 Employee Income Tax Payable................... 1,061.50 Social Security Tax Payable...................... 1,350.36 Medicare Tax Payable.......................... 315.84 Cash...................................... 2,727.70 Deposit of payroll taxes for September Analyze: The total taxes deposited with the IRS for the quarter ended September 30 was $7,526.16. Form 941 Page 1 75-5555555 Carolyn Wells The Fashion Shop 2008 Trendsetter Lane Dallas, TX 75268-0967 Quarter 3 Line 2: 30,030.00 Line 3: 2,931.50 Line 5a: 30,030.00; 3,723.72 Line 5c: 30,030.00; 870.87 Line 5d: 4,594.59 Line 6: 7,526.09 Line 8: 7,526.09 Line 10: 7,526.09 Line 11: 7,526.16 Line 12: 0 Line 13:.07; check Apply to next return Page 2 Carolyn Wells; 75-5555555 Line 14: TX Line 15: Check second box; Month 1: 2,065.26; Month 2: 2,733.20; Month 3: 2,727.70; Total: 7,526.16 Part 5 Carolyn Wells, Owner 10/31/07; (972) 709-3102 Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 11 269

Problem 11.4B State unemployment insurance = 0.023 x $20,335.00 = $467.71 GENERAL JOURNAL PAGE 21 April 30 State Unemployment Tax Payable................. 467.71 Cash...................................... 467.71 Paid state unemployment tax Analyze: If all employees made the same amount for the quarter ended June 30,, $18,715 would be subject to the federal unemployment tax. Problem 11.5B GENERAL JOURNAL PAGE 2008 Jan. 27 Federal Unemployment Tax Payable............... 36.40 Cash...................................... 36.40 Pay balance of tax due Analyze: The balance of the Federal Unemployment Tax Payable account is $0. Form 940-EZ Helen Franz The Hobby Shop 4560 LBJ Freeway 75-9999999 Dallas, TX 75232-6002 A: 1,354.36 B1: TX B2: 37-6789015 Line 1: 88,435.00 Line 3: 29,550.00 Line 4: 29,550.00 Line 5: 58,885.00 Line 6: 471.08 Line 7: 434.68 Line 8: 36.40 Quarter: First: 162.68; Second: 170.00; Third: 102.00; Fourth: 36.40; Total: 471.08 Form 940-V(EZ) Line 1: 75-9999999 Line 2: 36.40 Line 3: Helen Franz, 4560 LBJ Freeway, Dallas, TX 75232-6002 270 Chapter 11 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

Problem 11.6B WORK ESTIMATED INSURANCE ESTIMATED CLASSIFICATION EARNINGS RATE PREMIUMS Office work $ 96,000 $0.39/$100 $ 374.40 Factory work $290,000 $7.50/$100 21,750.00 Total $22,124.40 WORK ACTUAL INSURANCE ACTUAL CLASSIFICATION EARNINGS RATE PREMIUMS Office work $ 99,080 $0.39/$100 $ 386.41 Factory work $310,050 $7.50/$100 23,253.75 Total actual premiums $23,640.16 Estimated premiums paid 22,124.40 Additional Premium Due $ 1,515.76 GENERAL JOURNAL PAGE 28 Jan. 17 Workers Compensation Insurance Expense......... 22,124.40 Cash...................................... 22,124.40 Estimated workers compensation for year Dec. 31 Workers Compensation Insurance Expense......... 1,515.76 Workers Compensation Insurance Payable....... 1,515.76 Adjust workers compensation insurance expense Analyze: The balance of the Workers Compensation Insurance Expense account is $23,640.16. Challenge Problem 1. Leora is not an employee. The employer does not provide a work place or tools. No one directly supervises her activities. She has the freedom to decide when the work is to be done and how it is to be done. 2. Ken is an employee, paid on an hourly basis by Dr. Kent, who provides all facilities, tools, and equipment. He is not hired by the patients for professional services. 3. Jones is not an employee. A self-employed person cannot be his or her own employee. 4. Guy is probably not an employee. He has the right to refuse jobs, which is not characteristic of an employee s rights. 5. Peoples is definitely a part-time employee. The titles of president, secretary, and treasurer make her officially an employee. Analyze: Both employees are hired and work under the control and direction of the employer. The employer determines how the employee completes the job. Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 11 271

Critical Thinking Problem 1. Payroll information needed: the hourly rate paid the truck drivers; the rates for social security, medicare, and federal and state unemployment taxes; and the employer s obligations for workers compensation insurance and fringe benefits such as health insurance, pension contributions, and group life insurance. YEARLY COST CURRENT SYSTEM 2. Truck Drivers: Wages (110 x $48,000) $5,280,000 Social Security Tax ($5,280,000 x.062) 327,360 Medicare Tax ($5,280,000 x.0145) 76,560 State Unemployment Tax (110 x $7,000 x.05) 38,500 Federal Unemployment Tax (110 x $7,000 x.008) 6,160 Workers Compensation Insurance ($5,280,000 x $.70 100) 36,960 Health Insurance (110 x $310 x 12) 409,200 Pensions (110 x $250 x 12) 330,000 Total Payroll Costs $6,504,740 Teenage Carriers: Payment per paper (90,000 x $0.04 x 5 days x 52 weeks) 936,000 Liability Insurance 110,000 Total Cost $7,550,740 YEARLY COST PROPOSED SYSTEM Truck Drivers: Wages (30 x $48,000) $1,440,000 Social Security Tax ($1,440,000 x 0.0620) 89,280 Medicare Tax ($1,440,000 x.0145) 20,880 State Unemployment Tax (30 x $7,000 x 0.05) 10,500 Federal Unemployment Tax (30 x $7,000 x.008) 1,680 Workers Compensation Insurance ($1,440.000 x $.70 100) 10,080 Health Insurance (30 x $310 x 12) 111,600 Pensions (30 x $250 x 12) 90,000 Total Payroll Costs $1,774,020 Independent Contractor Payments (90,000 x $.20 x 5 days x 52 weeks) 4,680,000 Total Cost $6,454,020 Davis would save $1,096,720 if the proposed system were adopted ($7,550,740 $6,454,020). NOTE: Federal income tax withholding is not a factor in this analysis since it is the employee s obligation, not the employer s. 3. In addition to analyzing payroll costs, Davis should consider costs of operating the fleet of delivery trucks. What is the current cost to operate the trucks? How much would be saved by reducing the fleet? She should also consider the effect on employee morale of terminating 75 truck drivers and the commitments the paper has to union contracts. She should also assess the dependability and stability of the independent contractors; it may be worthwhile to spend more in order to have control of the paper s distribution system through its own employees and trucks. Business Connections Managerial Focus 1. Only authorized persons able to add new employees to payroll; review of payroll by different employee; distribution of paychecks by yet another person. 2. Premiums for workers compensation insurance are based on the amount earned by classes of employees. 3. Penalties and fines for the employer. 4. Experience rating is a potential source of tax savings. 272 Chapter 11 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

Ethical Dilemma Johan is paying $1,720 more per month for wages. The extra expense represents an additional employee that he did not hire. He should consult his accountant to find the approval for an additional sales associate. To prevent this from happening in the future, he should pass out the paychecks personally to match the paycheck to the person. Streetwise 1. Current liability category: Accrued Salaries and Related Expenses. 2. Advantages: Current employees will be familiar with processes and culture of the business. Disadvantage: Restricts the infusion of new ideas and talents. Financial Statement Analysis 1. 52.8% 2. $53,906,272 3. 6.9% increase 02 03; 16.0% increase 03 04. Analyze Online: Answers will vary depending on the year. Extending the Thought Answers will vary. Students may agree that businesses must collectively contribute to national and state funds for unemployment regardless of the layoff record of the business. Some may contend that if a business has not fired workers, they should not be taxed. Business Communication Students memos will vary, but should include the forms and journals covered in the chapter. Team Work Hire temporary employees for jobs that occur seasonally. Only pay 98% of deposit required. The IRS states that 98% is considered in compliance. Stop any unnecessary overtime by requiring management approval for all overtime. Internet Connection The 940 and 941 form is available to download and use. However, the W-2, W-3, W-4 and W-5 must be original forms. Practice Test Answer Key Part A 1. F 2. T 3. F 4. F 5. F 6. F 7. T 8. F 9. F 10. T 11. T 12. F 13. F 14. F 15. F 16. T 17. F 18. T True-False Part B 1. j 2. i 3. h 4. a 5. g 6. b 7. d 8. c 9. e 10. f Matching Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 11 273