Study Guide for Advanced Accounting Entries
1
IV. Payroll
In accounting, the term payroll refers to the amount paid to employees for the services
they provide during a period. The total earnings of an employee for a payroll period,
including bonuses and overtime pay, are called gross pay. From this amount is
subtracted one or more deductions to arrive at the net pay. Net pay is the amount the
employer must pay the employee.
Common deductions for an employee include federal taxes, state or local income taxes,
and FICA tax. Employers are required by the Federal Insurance Contributions Act
(FICA) to withhold a portion of the earnings of each employee. The amount of FICA tax
withheld is the employees’ contribution to two federal programs. The first program, call
social security, is for old age, survivors, and disability insurance (OASDI). The second
program, called Medicare, is health insurance for senior citizens. Tables from
accountants or the Internal Revenue Service are available to determine the amount of tax
that should be withheld. Neither the employer nor the employee has any choice in
deducting taxes from gross earnings. However, an employee may authorize deductions
for retirement plan, insurance premiums, etc.
Employers are required to contribute to the Social Security and Medicare programs for
each employee. Some accounting software packages use the term, employer’s matching
contribution, for the name of this expense account. Additional payroll liabilities for the
employer may include Federal Unemployment Tax Act (FUTA) and State
Unemployment Tax Act (SUTA). FUTA provides temporary payments to employees
who become unemployed as a result of layoffs due to economic causes beyond their
control. SUTA also provides payments to unemployed workers. Contact your
accountant to see if you as an employer are subject to these taxes.
In general, payroll includes transactions which effect accounts for payroll expenses and
payroll liabilities. Payroll expenses occur on your company’s income statement or profit
and loss. Payroll liabilities are found on the balance sheet under current liabilities. Some
common payroll expenses include gross pay, matching contribution by the company of
payroll taxes, and company benefits. Examples of payroll liabilities are Federal
withholdings, State withholdings, and Social Security and Medicare tax. The amount of
gross pay determines which expense and liability accounts are effected. Your company’s
benefit policy also comes into play. In general when a paycheck is written the following
transactions take place:
1. Gross wage is expensed
2. Company’s match or share of withholdings is expensed
3. Checking is reduced by the amount of the net wage
4. The employee’s withholdings and the company matching funds
increase liabilities.
Payroll Example:
A producer paid his employee a weekly check of $423.35. The employee’s
withholdings were federal $26.00, state $12.40, and FICA $38.25.
Account Name/Number Account type Increase Decrease Debit Credit
Employee gross Wage Expense 500.00 500.00
