5.2: Payroll
Employee salaries and wages are usually one of the highest expenses that an employer has. These notes will provide a simplified discussion of payroll and payroll taxes. There can be many variations, exceptions, and complexities. However, knowing the basic elements is a very good start to understanding payroll.
A salary is typically an amount an employee earns annually, such as $52,000 per year.
A wage is typically an amount an employee earns hourly, such as $10 per hour. The hourly rate is then multiplied by the number of hours in the pay period to determine total earnings for that period.
A pay period is the span of time that is included in each paycheck that an employee receives. Typical pay periods are weekly, bi-weekly, semi-monthly, and monthly.
Gross pay is the amount that an employee earns in a pay period before any payroll taxes or other deductions are subtracted. EXAMPLES: (1) The gross pay of an employee who is paid weekly and who earns $52,000 per year is $1,000 per week. (2) The gross pay of an employee who is paid weekly and who earns $10 per hour for a 40-hour work week is $400 per week.
Employees are required by law to have certain taxes withheld (taken out) of their gross pay as they earn it. Therefore, rather than receiving the entire amount of their gross pay in each paycheck, they receive less. Employers are required by law to withhold these taxes from an employee’s gross pay and then pay them to federal and state government agencies on the employee’s behalf.
Employees in the state of Georgia typically must pay the following taxes, which are withheld from their gross pay:
| How much? | What for? | |
| Federal income tax | Use IRS tax tables | Needs of the population in the United States |
| Social Security tax | 6.2% of gross pay | Monthly income when employee reaches retirement age |
| Medicare tax | 1.45% of gross pay | Health insurance benefits when employee reaches retirement age |
| Georgia State income tax | Use GA Dept. of Revenue tax tables | Needs of the population in the State of Georgia |
The federal and state governments provide tax tables so an employee’s withholding tax amount can simply be looked up. Four pieces of information about the employee are needed to use the tables.
- Gross pay amount
- Pay period
- Marital status (single or married)
- Number of allowances (employee fills out a Form W4 on the hire date and provides this information)
To use the tax tables, you need to locate the page with the employee’s correct pay period and marital status on the top. Next, look down the first two columns on the page and locate the row in which the employee’s gross pay amount would fall. Finally, look across the row and locate the amount that falls under the number of allowances that the employee has claimed.
Net pay is the amount of cash the employee receives in his/her paycheck. It is gross pay minus taxes withheld.
Gross pay - Federal income tax - Social Security tax - Medicare tax - State tax = Net pay
Excess Company has two employees, Marta Stoward and Ronald Tramp. Here are facts about their compensation:
| Compensation | Pay Period | Number of Allowances | Marital Status | |
| Marta | Salary: $48,000 per year | Monthly | 0 | Single |
| Ronald | Wage: $15 per hour 40-hour work week | Weekly | 2 |
Married
|
Here are the calculations to determine how much each is paid per paycheck:
| Marta Stoward (monthly) | Ronald Tramp (weekly) | ||||
| Gross pay | $4,000.00 | Gross pay | $600.00 | ||
| Federal tax | 620.00 | (page 59) | Federal tax | 30.00 | |
| S.S. tax | 248.00 | S.S. tax | 37.20 | ||
| Medicare tax | 58.00 | Medicare tax | 8.70 | ||
| State tax | 215.19 | (page 25) | State tax | 26.14 | |
| Net pay | 2,858.81 | Net pay | 497.96 |
Let’s assume for a moment Marta is the only employee.
| Gross pay | $4,000.00 | |
| Federal tax | 620.00 | (page 59) |
| S.S. tax | 248.00 | (6.2% x 4,000) |
| Medicare tax | 58.00 | (1.45% x 4,000) |
| State tax | 215.19 | (page 25) |
| Net pay | 2,858.81 |
Using Marta as an example, here is one of the journal entries that Excess Company would make when Marta is paid. The payment of the federal and state taxes is not due until the 15th of the following month.
| Date | Account | Debit | Credit | |
| 10/31 | Salary Expense | 4,000.00 | ▲ Salary Expense is an expense account that is increasing . | |
| Federal Income Tax Payable | 620.00 | ▲ Fed. Income Tax Payable is a liability account that is increasing . | ||
| Social Security Tax Payable | 248.00 | ▲ Soc. Sec. Tax Payable is a liability account that is increasing . | ||
| Medicare Tax Payable | 58.00 | ▲ Medicare Tax Payable is a liability account that is increasing . | ||
| State Income Tax Payable | 215.19 | ▲ State Income Tax Payable is a liability account that is increasing . | ||
| Cash | 2,858.81 | ▼ Cash is an asset account that is decreasing . |
Below is an excerpt from the federal income tax tables:
Below is an excerpt from the state of Georgia income tax tables:
By law, the employer must match and contribute what an employee pays in Social Security and Medicare taxes. Since Marta paid $248.00 and $58.00 of her salary, the company must also pay $248.00 and $58.00 toward her retirementbenefits. Also, an employer is required to pay federal and state unemployment insurance taxes for the employee, and these amounts are based on a percentage of gross pay. We will use .8% for federal unemployment insurance and 5.4% for state unemployment insurance.
Therefore, here is the second journal entry that Excess Company would make when Marta is paid to account for the expenses that the company itself must absorb.
| Date | Account | Debit | Credit | |
| 10/31 | Payroll Tax Expense | 554.00 | ▲ Payroll Tax Expense is an expense account that is increasing . | |
| Social Security Tax Payable | 248.00 | ▲ Soc. Sec. Tax Payable is a liability account that is increasing . | ||
| Medicare Tax Payable | 58.00 | ▲ Medicare Tax Payable is a liability account that is increasing . | ||
| Federal Unemployment Insurance Tax Payable | 32.00 | ▲ FUTA Payable is a liability account that is increasing . | ||
| State Unemployment Insurance Tax Payable | 216.00 | ▲ SUTA Payable is a liability account that is increasing . |
Notice that every month that Marta is paid $4,000, she actually costs the company $4,554.00 due to the payroll taxes it must pay!
Finally, you must actually pay all of these payables. Let’s say you do so 15 days later. The federal income tax, Social Security Tax, Medicare tax, and federal unemployment tax would be sent to the Internal Revenue Service. The state income tax and the state unemployment tax would be sent to the Georgia Department of Revenue. Here is the journal entry to reflect all these payments.
| Date | Account | Debit | Credit | |
| 11/15 | Federal Income Tax Payable | 620.00 | ▼ Fed. Income Tax Payable is a liability account that is decreasing . | |
| Social Security Tax Payable | 496.00 | ▼ Soc. Sec. Tax Payable is a liability account that is decreasing . | ||
| Medicare Tax Payable | 116.00 | ▼ Medicare Tax Payable is a liability account that is decreasing . | ||
| Federal Unemployment Insurance Tax Payable | 32.00 | ▼ FUTA Payable is a liability account that is decreasing . | ||
| State Income Tax Payable | 215.19 | ▼ State Income Tax Payable is a liability account that is decreasing . | ||
| State Unemployment Insurance Tax Payable | 216.00 | ▼ SUTA Payable is a liability account that is decreasing . | ||
| Cash | 1,695.19 | ▼ Cash is an asset account that is decreasing . |
Notice that the Social Security tax and Medicare tax amounts include both what Marta paid in and what the company contributed.
The total cash that the company paid out for Marta is the $2,858.81 paid to her and the $1,695.19 paid to the government revenue agencies, for a total of $4,554.00.