Payroll Liabilities

Brian Krogol
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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 with holdings include 7000 for social security. FICA 13,000 for federal income taxes, 4000 in state income taxes. Additionally costs incurred for federal and state unemployment totaled 183 100 respectively. Stern company also paid 2500 for an employer sponsored health insurance program. So prepare April 30. The 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 gonna be accruing. Okay so notice they told us that the the employees earned $120,000 right? That's their gross pay, that's the gross pay that they've earned. But they're not gonna 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 three parts. I like to first deal with the employee compensation which includes their with holdings for FICA their income tax withholdings. Then I'd like to do the employer. So first we're gonna do employee and then over here let's do employer. So that's gonna 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 third entry that we're gonna do is going to be related to the employee benefits. Okay I always like to do three entries here to deal with with this. Sometimes you don't have employee benefits. Well there would be no third entry. But in this one we have that health insurance plan. So we're gonna deal with it here. Let's start with the employee uh wages here. So the first thing we know is that they earned $120,000 right? The employees earned $120,000. So we're gonna have salary expense. It could be salary and wage expense. I'm just gonna 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 gonna withhold some of that amount. And what are we gonna withhold? We're gonna withhold FICA. Right so we got FICA payable Could be fight fight a tax payable, whatever it might be. And that's in the amount of 7000. So we've got this liability to pay this on the employee's behalf, the 7000. 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 gonna move this down because we're gonna 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 4000, right? So that's all of the money we're withholding from the 120,000. We're gonna withhold FICA we're gonna 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 gonna 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 120,000 -7,000 -13,000 -4000. 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 pay them next month. So we'll say that 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 uh entry right there. We've we've put in a lot of different liabilities here, right? We 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 going to get is the 96,000. Alright let's go ahead and do the employer entry over here. Okay. So the employer entry what 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 gonna have to pay for a tax, write the federal and state unemployment. So I'm gonna do my credits here first, total them up and then whatever the total of all these taxes we have to pay, that's gonna go into salary expense. So I'm starting here with credits, the first one being the food to payable And that's gonna be in the amount of $180 as a credit. So we now have a liability for that. We also have the suit to write the state unemployment. So we have the federal and the state the suit a 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 7000 but also the employer has to pay 7000 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 going to debit salary expense for the total amount of these taxes. And that comes out to 7480. Okay. So that that all goes into our salary expense as well. So our third entry, I'll scroll down just a little bit. Our third 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 2500 paid for a health insurance program. Okay? So during the month they paid 2500 for the health insurance program. Those are the premiums. So we're gonna add that to our salary expense, right? Because this is a benefit for the employees. So we're going to debit salary expense For 2500. And we're gonna 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 well say insurance payable. Right insurance payable. It could have been cash as the credit if they paid it in cash right away. Either way. Uh we we end up in the same boat here. Okay. So this is the three 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 gonna 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 74 80 from the second entry plus the 2500. In the third entry. For the health insurance. Let's see what that comes out to. Plus 74 80 plus 2500. We get a total salary expense for the month of 100 and 29,980. 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. 9 129,080. I think the trickiest thing when it comes to doing payroll 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.