Financial Accounting

Learn the toughest concepts covered in your Financial Accounting class with step-by-step video tutorials and practice problems.

9. Current Liabilities

Payroll and Payroll Taxes

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concept

Payroll Liabilities

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paying your employees is one of the largest expenses for the business. Right? So let's dive into these payroll expenses and the related payroll liabilities. Okay? So when we talk about payroll, we're going to be focused on this idea of salaries and wages expense. And that's where we keep track of all the money associated with paying our employees. So the salary and wage expense, it's gonna include the gross pay earned by the employees. And when we talk about gross gross basically means total. So this is the total amount that they earned. But we don't usually pay them their gross amount earned, right? We usually withhold some for taxes net is usually what they get paid right? The net amount is what they get paid. We take the gross, we adjust it for some things like taxes and then we give them their net pay. Okay? That that becomes important when we start making journal entries right? Because we might take the salary expense as our debit, but we don't pay that total amount in cash to the employee. What we do is we withhold some of that money and then we pay that to the government on their behalf. Right? If we if you've ever received a paycheck and you know, it's got all of these adjustments before you get to your final pay. Well that's the company paying things on your behalf. So they're gonna take on some liabilities on your behalf credits, right? These are the payroll liabilities and then they're also gonna pay you cash. So we won't just see one credit for just the cash because they're withholding some of it, that they'll later remit to the government on your behalf. And they'll also have their own taxes that they're gonna have to pay. Okay. So what we'll see is that the employees are liable for certain payroll taxes and that's what we see here, that the company is paying them less right there, taking a credit for some of those salary expenses and paying them a little less because they they're withholding and then they'll later pay those on behalf of the employee. But the employees aren't the only ones that pay taxes. Employees are, employers are also liable for their own payroll taxes. So everybody's paying taxes around here isn't that great? So let's go ahead and discuss some of the main taxes, luckily in your class, they don't dive into so much detail about these calculations. Most of the time, they're just gonna give you the numbers, they might say, you know, the federal income taxes withheld from employees was $20,000 and they'll just tell you the number, You don't have to do percentage calculations. Some teachers like to do it because they wanna make you deal with the percentages, but it's not that hard. We'll practice it a little bit. Okay, So the first ones we see here, the first types of taxes is those income taxes, we've got federal and state income taxes, luckily I'm here in florida and we don't have to pay a state income tax, that's one of the great benefits of living in florida. Well, we still have to pay federal income taxes. And as an employee, I would be liable for some of that. Okay. So what happens is when I get paid, well, I get paid a little less because the company is gonna pay the government on my behalf some of this money. So when we calculate those federal income taxes, there's gonna be a tax schedule. Okay. And that's beyond the scope of this class. It depends on how much money you make, how much taxes you're gonna, oh, they're just gonna give you this number. They'll just say this is the amount of federal taxes owed. Same thing with the state income taxes. And especially because every state is different, they're not gonna have you learning all these different rules for each state, Nothing like that. They're just gonna be giving you numbers when these, these income taxes come up. But remember that the person responsible for these is the employee. So the employee is the one paying these taxes, but we're the one we, as the company are the ones remit ng the taxes to the government. Okay. So when the employee earns their paycheck, we give them a little less money because we're holding a bit of that to pay to the government and that's those liabilities I was talking about above. Okay, because we're liable to pay those to the government on the employee's behalf. So we've got those income taxes next we have FICA tax, the FICA taxes, the federal insurance contribution act. And this is basically the Social Security tax. So this one is the Social, I'll write it out Social Security tax. Okay. That's basically what goes in there. And it also includes um the Medicare, Social Security And Medicare. Okay. So not only is the employee employee responsible for paying some of these taxes, the employer also pays these taxes as well and each of them pay 7.65% of the gross pay. So that means if the employee employer is paying you $50,000, well you're gonna have to pay 7.65%. And the employers also gonna pay 7.65% of that 50,000. Okay. Sometimes they make you calculate this one. Like I said, most times when you deal with payroll in this class, they're just giving you numbers, but this would be the most likely one they make you calculate because this precise percentage of 7.65%. Okay, so that's the FICA tax and then we also deal with on the employer side. So just like the employee above had to deal with the income taxes. Well the employer deals with unemployment taxes, unemployment taxes are paid by the employer And those there can be federal and state again, right? So there's gonna be a federal unemployment rate and that's gonna be 6.2% of the 1st 7000 earned by the employee that can get complicated. Like I said it's usually they'll just make you deal with the 6.2% or they'll just give you numbers altogether. Mostly I just want you to be exposed to these taxes and who has to pay them. Okay so the income taxes is the employee, the unemployment taxes is the employer and the FICA tax is both. Cool. Alright so state unemployment taxes similar thing there. Um We call that one Suta. So we got food to and Ceuta for our our unemployment taxes and the last part of our salary expense right? Because we're dealing all with payroll here. The salary expense is the employee benefits. We might pay benefits to the employee, we might offer them health insurance, 401k. Plans, things like that. Well that that's part of their compensation and it's part of our salary and wage expense. Okay so whenever this happens we might have additional withholding from the employee. So the employee might take even less on their paycheck and we're going to pay stuff on their behalf. So we'll get liabilities like that. Or we're just going to be directly paying if it's an employer sponsored health care that they pay for the employees. Health care. Well that's gonna be a salary expense for us but it's gonna be coming off of our books, right? We're gonna be paying those with our cash. Cool. So this is basically everything that goes into salary and wage expense. We've got the actual compensation, the cash that we pay them. Then we got to deal with the taxes and the employee benefits. Those are the three basic components of this payroll stuff. So let's go ahead and dive into an example. So you can kind of see it all in action. All right, let's do that in the next video.
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example

Payroll Liabilities

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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.
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Problem

The following information relates to the monthly payroll expenses at ABC Company:

Record three journal entries:(1) employee salary expense, (2) employer-sponsored benefits, and (3) employer payroll taxes

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