What you will learn to do: Account for common payroll transactions

We’ll be using the terms “gross” and “net” again.

• Gross Pay: This is the amount of money employees are promised either hourly, weekly, or annually.
• Net Pay: This is the amount an employee receives after all taxes and voluntary deductions have been taken out. It is also called “take-home pay”.

Deductions from gross pay to arrive at net pay include:

• Federal Income Tax Withheld (also referred to as FIT): Employees fill out a document called a W-4 when hired. This document is used to calculate the amount of federal tax withheld.
• State Income Tax Withheld (also referred to as SIT): A different form than the W-4 but the same concept, except it applies to the state. Not all states have a state income tax.
• FICA Social Security Tax (also referred to as OASDI): This tax helps fund social security and is calculated as gross pay x 6.2% unless employees make OVER $118,500 in 2015 then employees are only responsible to pay 6.2% of $118,500 and nothing more.
• FICA Medicare Tax (also referred to as HI): This tax helps fund medicare and is calculated as gross pay x 1.45%. Everyone must pay 1.45% of gross pay without limit.
• Voluntary Deductions and Garnishments: Any deductions employees authorize will also reduce gross pay. This includes things like medical premiums, 401K and savings accounts, charity donations, etc.

The employer withholds money out of each employee’s paycheck for the items listed above and records those amounts as liabilities. There often is a separate checking or savings account for these amounts, just a liability recorded on the books that indicates a debt to each entity, such as the Federal government (FIT and FICA), state government (SIT) and whatever companies manage the retirement plan, the health insurance plan, etc…

In addition to amounts set aside out of the employee’s earnings, the company has to pay things like:

• FICA Social Security Tax: This tax helps fund social security and is calculated as gross pay x 6.2% unless an employee makes OVER $118,500 in 2015 then employees are only responsible to pay 6.2% of $118,500 and nothing more for that employee.
• FICA Medicare Tax: This tax helps fund medicare and is calculated as gross pay x 1.45%. Everyone must pay 1.45% of gross pay without limit.
• Federal Unemployment Tax (FUTA): This tax is for unemployment claims and is typically calculated as 0.8% of the first $7,000 of an employee’s earnings. Once the employee has earned more than $7,000 in gross pay for the year, the company no longer has to pay FUTA tax.
• State Unemployment Tax (SUTA): This tax is for state unemployment and does not have a consistent rate. The rate is provided by the state annually and can change each year by business.
• Voluntary Deductions Matching: Any matching funds the company provides for insurance or retirement plans.

In the next section, we will look at the entries required for payroll with both the employee and employer side of the transactions.