Accounting Chapter 7 - Payroll Process

Study Notes

Payroll Definitions and Concepts

Payroll Period: Duration for calculating employee earnings; can be daily, weekly, biweekly, semimonthly, monthly, quarterly, or annual.
Gross Earnings: Total pay received before any deductions, reflecting the amount earned by the employee.
Fair Labor Standards Act: Federal law regulating minimum wage and overtime pay; mandates time-and-a-half for hours worked beyond a set threshold.
Interstate Commerce: Legal concept determining if Fair Labor Standards Act applies based on business operations across state lines.
Work Week: Defined as a seven-day period for calculating overtime; flexible start day but concludes after seven days.

Forms and Allowances

Form W-4: Certificate used by employees to indicate allowances and marital status, guiding federal income tax withholding from paychecks; relevant for interstate businesses.
Allowances: Dependents claimed by the employee, reducing taxable income and overall tax liability.
Federal Income Tax Withholding: Amount deducted from employee's gross pay based on earnings, allowances, pay period, and marital status from W-4.
Allowances (Exemptions): Specific amounts of income considered non-taxable for withholding purposes.

Taxation and Financial Reporting

Circular E: IRS publication featuring tax tables for income tax calculations.
Wage Bracket Table: Charts in Circular E aiding deduction calculations based on earnings and W-4 data.
State Income Tax Withholding: Similar to federal withholding but based on state regulations and may vary from the W-4 guidelines.

Contributions and Earnings

FICA: Federal taxes imposed on employer and employee for Social Security (OASDI, capped) and Medicare (no cap) since the 1935 Act.
Calendar Year: One-year period from January 1 to December 31 used for payroll purposes despite employer fiscal year.
Taxable Earnings: Portion of earnings subject to taxation; specifics often detailed in individual situations.
Medical Insurance: Healthcare coverage with premiums deducted from employee pay, treated as a non-tax exemption.

Net Earnings

Net Pay: The take-home pay after all deductions from gross earnings, representing actual amounts employees receive.
Payroll Register: Multi-column form to document payroll data systematically.
Individual Employee Earnings Record: Document summarizing wages and deductions for the year, assisting in financial reporting.

Unemployment Tax

FUTA: Federal Unemployment Tax Act tax paid by employers with an earnings cap.
SUTA: State Unemployment Tax Act tax, also employer-paid, with its own earnings cap.

Payment Responsibilities

Employee's Pay Components: Includes federal and state income tax, FICA (OASDI and Medicare), and state disability payments.
Employer's Pay Components: Includes FICA contributions, FUTA, and SUTA obligations.
Timeliness of Payroll: Critical for satisfying both employee and government tax obligations.
Payroll Record Summary: Captures gross earnings, withholdings, net pay, and cumulative earnings data.
Withholding: Deductions from gross earnings that affect net pay, representing the difference between total earnings and take-home amounts.

Description

Test your knowledge on the payroll process with this flashcard quiz based on Accounting Chapter 7. You'll learn important terms like pay periods, gross earnings, and the Fair Labor Standards Act. Perfect for students looking to reinforce their understanding of payroll concepts.