3-3: Journalizing and Paying Payroll and Payroll Taxes

Most businesses use a separate checking account to write employee payroll checks from. Why? So that payroll checks will not be mixed up with other checks and so that only enough money to cover payroll will be in that account. This way, if a payroll checks gets altered, the business would most likely know right away because the account would overdraft. Using this method requires that enough money to cover payroll checks be transferred from the regular checking account to the payroll account each pay period.

When money is transferred from one account to the next for payroll, at the same time, the payroll register is journalized in the cash payments journal. Below is the the portion of the payroll register from WT 3-2 which will be needed to complete WT 3-3.

Payroll Register

A journal entry is made in the cash payments journal to transfer money between checking accounts and to record the payroll for the pay period.

Cash Payments

Using the totals from the payroll register, journalize the payroll in a cash payments journal:

  1. Debit a salary expense account for each department for the total earnings in that department. From WT 3-2 payroll register, Salary Expense Hardware = $7,605.80; Salary Expense Paint = $5,070.60; Salary Expense Administrative = $2,862.00.
  2. When a deduction is taken from an employee's earnings, the company does not keep that money. The employer owes that money to a tax agency, a health plan provider, an insurance carrier, etc. Since the employer must pay the deduction to someone else, all deductions are liabilities. Each deduction must have its own liability account. From WT 3-2 payroll register, each liability account will be credited to show the employer owes that amount: Employee Income Tax Payable-Federal (federal withholding) $1,305.00; Employee Income Tax Payable-State (state withholding) $776.92; Social Security Tax Payable $1,010.00; Medicare Tax Payable $233.08; Health Insurance Premimums Payable $588.00; Life Insurance Premiums Payable $102.40.
  3. The difference between salary expense and deductions is net pay. That is the amount to be transferred from one checking account to the next. Credit cash for the total net pay of $11,523.00.

The entry above records the payroll register in the cash payments journal, but there are additional taxes the employer must pay on top of what is deducted from the employee checks. The four taxes the employer pays are:

  • Social security tax (both employee and employer pay this)
  • Medicare tax (both employee and employer pay this)
  • Federal unemployment tax (only employer pays this)
  • State unemployment tax (only employer pays this)

Each pay period, employer payroll taxes are recorded or journalized. However, taxes are not always paid each pay period. For example, federal unemployment taxes are paid once per quarter. A journal entry will be made to show that taxes are owed; taxes will be paid when due. An entry will be made in a general journal to record the employer taxes owed:

General Journal

Record the employer taxes as follows:

  1. Payroll taxes expense will be debited for all taxes owed. Wait until all taxes are calculated and recorded; then, calculate this amount.
  2. Social security tax is paid by both the employee and employer. Because of this, the employer will pay the exact amount the employee pays. Take the amount of total social security from the payroll register in WT 3-2, or take total earnings X the 6.5% social security rate. Example: Total earnings $15,538.40 x 6.5% social security tax rate = $1,010.00. Credit Social Security Tax Payable for the employer's portion.
  3. Medicare tax is paid by both the employee and employer. Because of this, the employer will pay the exact amount the employee pays. Take the amount of total medicare from the payroll register in WT 3-2, or take total earnings X the 1.5% medicare rate. Example: Total earnings $15,538.40 x 1.5% medicare tax rate = $233.08. Credit Medicare Tax Payable for the employer's portion.
  4. Federal unemployment tax is based on employee earnings and is paid only by the employer. Unemployment is also a tax-based tax. This means, the employer pays this tax on an employee until the employee earns a set amount of money, referred to as the tax base. Once the employee's earnings hits the tax base, unemployment tax is no longer paid. The tax base for Federal unemployment is $7,000 and the tax rate is listed in our textbook as .8%. Since the textbook does not say any of our employees are over the tax base, we will assume all employees are taxable. Formula: Total earnings $15,538.40 X .8% FUTA tax rate = $124.31 FUTA tax owed. Credit Unemployment Tax Payable-Federal (or FUTA Tax Payable) for $124.31.
  5. State unemployment tax is an employer only tax and is also a tax-based tax. Since our textbook does not tell us the tax-base, assume all employees are taxable. Formula: Total earnings $15,538.40 X 5.4% SUTA tax rate = $839.07 SUTA tax owed. Credit Unemployment Tax Payable-State (of SUTA Tax Payable) for $839.07.
  6. Now determine the total payroll taxes expense. Add all employer taxes together and debit payroll taxes expense.

The steps above records employer taxes owed. At some point, the taxes will be paid to the respective government agencies or businesses.

When taxes are due, checks are written to pay for the taxes. The following taxes are all paid to the federal government: federal withholding, social security, and medicare. Therefore, one check is written to pay all taxes. On July 15 in WT 3-3, the instruction says to pay these taxes. The amounts are not provided. You will be required to look at your two journal entries to calculate what is owed:

Tax Amount From Journal
Federal withholding
$1,305.00
Cash payments
Social security (employee part)
1,010.00
Cash payments
Medicare (employee part)
233.08
Cash payments
Social security (employer part)
1,010.00
General journal
Medicare (employer part)
233.08
General journal
TOTAL TAXES
$3,791.16
 

Refer to the cash payments journal above for an example of how to journalize this entry: debit Employee Income Tax Payable-Federal $1,305.00; debit Social Security Tax Payable $2,020.00 (for both employee and employer portions); debit Medicare Tax Payable $466.16 (for both employee and employer portions); credit cash for the total $3,791.16.

Although not realistic, the textbook suggests that one check is written for unemployment taxes. In reality, a separate check would be written to the federal government for federal unemployment and another check written to the state government for state unemployment.

In WT 3-3, write one check for both unemployment taxes. On July 29, journalize the following entry in the cash payments journal to pay unemployment taxes: debit Unemployment Tax Payable-Federal $745.84; debit Unemployment Tax Payable-State $5,034.44; credit cash for total of both taxes $5,780.28.

ASSIGNMENTS

  1. WT 3-3 (self-check)
  2. OYO 3-3 (self-check)
  3. Application 3-6
  4. Application 3-7
  5. Mastery 3-8
  6. Study Guide 3

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