Lesson 3-2: Recording a Payroll and Payroll Taxes
 
 
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Bank Accounts

Most businesses have two separate checking accounts: one for general payments and another for payroll. For security reasons, businesses want to keep only enough cash in the payroll account to cover payroll. When a payroll register is completed, the business knows how much must be transferred to the payroll account. Before checks are written, a transfer is made from one checking account to another. At the same time the transfer is made, the business will make a journal entry to record the payroll.

Totals from the payroll register are used to make the journal entry. Below are two parts of the payroll register (one above and the other below). We'll use this payroll register to show what totals will be journalized.

Journalizing Payroll (Transaction 1)

The cash payments journal will be used to record the payroll in. Why the cash payments journal? Since money must be transferred from the general checking account to the payroll account, we'll journalize payroll accounts while writing the check for the transfer. For the payroll register above, there are three salary accounts to be debited: Salary Expense Hardware, 7605.80; Salary Expense Paint, 5070.60; and Salary Expense Administrative 2862.00 (see Salary Expense entries below).

July 10. Paid July 3 payroll. Check No. 260

All deductions from the payroll register are listed as credits to liability accounts. The totals recorded are as follows:

  • Federal Income Tax deduction recorded to Emp. Fed. Income Tax Pay. 1305.00
  • State Income Tax deduction recorded to Emp. State Income Tax Pay. 776.92
  • Social Security Tax deduction recorded to Social Security Tax Payable 1010.00
  • Medicare Tax deduction recorded to Medicare Tax Payable 233.08
  • Health Insurance Premiums deduction recorded to Health Insurance Premium Pay. 588.00
  • Life Insurance deduction recorded to Life Insurance Prem. Pay. 102.40

The difference between Salary Expense and deductions if Net Pay. The total Pay is recorded in the cash column.

Journalizing Payroll (Transaction 2)

There are two journal entries for every payroll. The journal entry in the Cash Payments journal (above) includes the deductions for employee taxes. The chart below describes who pays what taxes. Notice employees pay four taxes and all four taxes are journalized in the Cash Payments journal.

Tax
Tax Base Tax?
Employee
Employer
Federal Income  
X
Social Security X
X
X
Medicare  
X
X
State Income  
X
Federal Unemployment (FUTA) X
X
State Unemployment (SUTA) X
X

There are four taxes the employer must also pay. The employer will match the employee for Social Security and Medicare taxes. Only the employer pays FUTA and SUTA tax. The second journal entry you will record will be to record the employer taxes. The entry will be recorded in the General Journal because the employer is recording that they owe the taxes at this time, but are not actually paying them yet.

July 10. Recorded employer's payroll taxes for the pay period ended July 3. Tax rates are as follows: .8% for FUTA, 5.4% for SUTA. Social Security and Medicare taxes are the same as for the employees. Memo No. 33

For Social Security and Medicare Tax, use the same amounts as used on the Cash Payments journal for the employee. Federal and State Unemployment must be calculated on Total Earnings. The tax percentages for these taxes are provided in your textbook.

Federal Unemployment Tax = Total Earnings X .8%
FUTA Tax = 15538.40 X .8% = 124.31

State Unemployment Tax = Total Earnings X 5.4%
SUTA Tax = 15538.40 X 5.4% = 839.07

The total of all four taxes is a debit to Payroll Taxes Expense.

Paying Taxes

Since all taxes are liabilities, they are credited when recorded that we owe them (see General Journal entry above). Taxes are paid at various times throughout the year as determined by the Internal Revenue Service (IRS). When the taxes are paid, the liability account is debited and cash is credited. If more than one tax is paid to the same place, one check can be written for many taxes.

July 15. Paid employees' federal income tax withholding, sosical security tax, and medicare tax liabilities for the pay period July 3. Note: Remember that both the employee and employer pay Social Security and Medicare. You must add both amounts together to figure how much to pay.

Social Security: Employee Share 1010.00 + Employer Share 1010.00 = 2020.00
Medicare: Employee Share 233.08 + Employer Share 233.08 = 466.16
Employee Federal Income Tax Payable (get amount from Cash Payments journal)

July 29. Paid Federal Unemployment tax, 745.84 and State Unemployment tax, 5034.44 for the quarter ended June 30. Check No. 270. NOTE: These should be separate entries and two separate checks.

Video Calculating Payroll Taxes
Click HERE or on camera to start video
Video Recording Payroll Entries in a Cash Payments & General Journal
Click HERE or on camera to start video
   
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