9. Current Liabilities
Payroll and Payroll Taxes
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Alright. So let's try this example here. During April, the employees of Stern Company earned wages of $120,000. The related withholdings include 7,000 for social security, FICA, 13,000 for federal income taxes, 4,000 in state income taxes. Additionally, costs incurred for federal and state unemployment totaled a 180 and 300 respectively. Stern Company also paid 2,500 for an employer sponsored health insurance program. So prepare April 30th journal entries, assuming all amounts are paid in May. So this last sentence, assuming all amounts are paid in May, that means we don't have any cash going out. This is all just liabilities we're going to be accruing, okay? So notice they told us that the liabilities we're going to be accruing. Okay? So notice, they told us that the the employees earn a $120,000, right? That's their gross pay. That's the gross pay that they've earned, but they're not going to get that amount in cash when they get paid, right? So let's go ahead and deal with this. I like to deal with these entries in 3 parts. I like to first deal with the employee compensation which includes their withholdings for FICA, their income tax withholdings. Then I like to do the employer. So first we're going to do employee. And then over here, let's do employer. So that's going to be the employer paying their part of FICA. Remember, both employee and employer pay FICA. And then the employer is also responsible for which taxes? The unemployment taxes, right? The FUTA and the SUTA unemployment taxes. And then the 3rd entry that we're going to do is going to be related to the employee benefits. Okay? I always like to do 3 entries here to deal with with this. Sometimes you don't have employee benefits. Well, there would be no 3rd entry. But in this one, we have that health insurance plan, so we're going to deal with it here. Let's start with the employee, wages here. So the first thing we know is that they earned a $120,000, right? The employees earned a $120,000 so we're going to have salary expense. It could be salary and wage expense. I'm just going to say salary expense for short and we have to debit that for the $120,000 that they earned, right? But they're not going to get all of that in cash. We're going to withhold some of that amount and what are we going to withhold? We're going to withhold FICA, right? So we got FICA payable, could be FICA tax payable, whatever it might be. And that's in the amount of 7,000. So we've got this liability to pay this on the employee's behalf, the 7,000. What else? We've got income taxes. So federal taxes payable and that's going to be in the amount of 13,000 and I'm going to move this down because we're going to need a little more space for this entry. So I'll write that in a second. Federal taxes payable and they've got state income taxes payable. State taxes payable and that was in the amount of 4,000, right? So that's all of the money we're withholding from the 120,000. We're going to withhold FICA, we're going to withhold federal taxes and withhold state taxes. When I say withhold, that just means we're not going to pay that money to the employee. We're going to hold that money and then pay it to the government on their behalf. So this entry is not balanced, right? We've got a lot more debits than credits, so the rest of our credits is gonna be the actual amount that gets paid to the employees. So we've got the 120,000 minus 7,000 minus 13,000 minus 4,000 well that comes out to 96,000 left in credits, right? We need this 96,000 credits and that's the amount that we're gonna gonna pay them next month. So we'll say that's salaries payable, okay? So when the employees get paid in May, well they'll be paid a total of 96,000 and the rest of that money we're going to remit to the government. Okay? So that's the employee, entry right there. We've put in a lot of different liabilities here, right? We've booked all of these different taxes payable as well as the salary payable that's actually going to the employee, okay? So notice these first three, these are going to the government. We're gonna pay that to the government on the employee's behalf and this right here is going to the employees themselves. So that's their net pay. The net pay they're gonna get is the 96,000. Alright? Let's go ahead and do the employer entry over here, okay? So the employer entry, well we're gonna take a little more salary expense based on these taxes that we have to pay. So let's find out which taxes we have to pay. We're going to have to pay FUTA tax, right? The federal and state unemployment. So I'm going to do my credits here first, total them up and then whatever the total of all these taxes we have to pay, that's going to go into salary expense. So I'm starting here with credits. The first one being the FUTA payable and that's gonna be in the amount of a $180 as a credit, so we now have a liability for that. We also have the SUTA, right? The state unemployment. So we have the federal and the state. The SUTA payable, that one's $300 and there's one more tax the employer is liable for. Which one was that? That's the Social Security, right? The FICA. Both employer and employee have to pay that. So we're gonna have one more credit here for the FICA payable. So notice this is happening twice, right? FICA payable, that's because the employee is liable for 7,000 but also the employer has to pay 7,000 as well. So we're when we pay the government for that, we're gonna send them $14,000 both of those payments, okay? So those are all the taxes that the employer is liable for, so now we can just add that to our salary expense. Now we're gonna debit salary expense for the total amount of these taxes, and that comes out to 7,480, okay? So that all goes into our salary expense as well. So our 3rd entry, I'll scroll down just a little bit. Our 3rd entry was for those employee benefits, right? So there could have been a whole list of employee benefits, but in this one, we just have 25100 paid for a health insurance program. Okay? So during the month, they they paid 25100 for the health insurance program. Those are the premiums. So we're going to add that to our salary expense, right? Because this is a benefit for the employees. So we're going to debit salary expense for 2,500 and we're going to credit well, I guess we didn't pay it yet, right? It says all amounts will be paid in May. Even though it says also paid, usually when we see paid, it's going to be cash. Well, let's just assume that they're gonna pay it in May. We'll say insurance payable, right? Insurance payable, it could have been cash as the credit if they paid it in cash right away. Either way, we we end up in the same boat here, okay? So this is the 3 entries we would have made to deal with our payroll liabilities here, our payroll expenses. So what what is our total salary expense then for the for the month of May? Salary expense is going to be the total of all of these entries. So it's going to be equal to the 120,000 from the first entry plus the 7480 from the second entry plus the 25100 in the third entry for the health insurance. Let's see what that comes out to. Plus 74.80 plus 25100. We get a total salary expense for the month of 129,980. Cool? So they could have asked you the professor could easily just ask you to make these journal entries or they could ask for the total salary expense and you would have to find the total from all of the information given here. 129,980. I think the trickiest thing when it comes to doing payroll expenses and payroll liabilities is remembering that the FICA tax is paid by both, employer and employee, okay? And then just remember that the unemployment taxes are for the employer and the income taxes are for the employee. Cool? All right. Why don't we pause here and you guys practice and you guys try one out related to payroll liabilities. Let's do that in the next video.