Accounting Chapter 7 - Payroll Process

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.