Chapter 11 Payroll Taxes, Deposits, and Reports

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1 Chapter 11 - Payroll Taxes, Deposits, and Reports Chapter 11 Payroll Taxes, Deposits, and Reports TEACHING OBJECTIVES 11-1) Explain how and when payroll taxes are paid to the government. 11-2) Compute and record the employer s social security and Medicare taxes. 11-3) Record deposit of social security, Medicare, and employee income taxes. 11-4) Prepare an Employer s Quarterly Federal Tax Return, Form ) Prepare Wage and Tax Statement (Form W-2) and Annual Transmittal of Income and Tax Statements (Form W-3.) 11-6) Compute and record liability for federal and state unemployment taxes and record payment of the taxes. 11-7) Prepare an Employer s Federal Unemployment Tax Return, Form ) Compute and record workers compensation insurance premiums. 11-9) Define the accounting terms new to the chapter. SECTIONS 1. Social Security, Medicare, and Employee Income Tax 2. Unemployment Tax and Workers Compensation CHAPTER OVERVIEW/ LEARNING OBJECTIVES Learning Link: Chapter 10 discussed federal taxes that are paid by the employee. Chapter 11 discusses employers payroll taxes and explains how to complete and file the required tax returns and reports. 11-1) This chapter explains how employers act as collection agents for social security, Medicare, and federal income taxes withheld from employee earnings. Employers must remit these sums, with their own share of social security and Medicare taxes, to the government. 11-2) The chapter explains how to compute the employer s portion of the social security and Medicare tax. 11-3) This chapter explains how to record the deposit of social security and Medicare, and employee income taxes. 11-4) The chapter explains how to prepare the Form 941 Employer s Quarterly Federal Tax Return. It explains that the Form 941 reports wages paid, federal income tax withheld, and applicable social security and Medicare taxes owed. 11-5) The chapter explains the end of year preparation of Wage and Tax Statements (Form W-2) and Annual Transmittal of Wage and Tax Statements (Form W-3). By the end 11-1 Copyright No reproduction or distribution without the prior written consent of McGraw-

2 Chapter 11 - Payroll Taxes, Deposits, and Reports of January each employee must be given a Form W-2, showing the previous year s earnings and withholdings for social security, Medicare, and employee income tax. The employer files a Form W-3 with copies of each employee s W-2 by the end of February. 11-6) The chapter describes how to figure the amount of unemployment insurance taxes (FUTA & SUTA) that are paid by the employer to both state and federal governments. State unemployment tax returns differ from state to state but usually require a list of employees, their social security numbers, and taxable wages paid. The rate of state unemployment tax depends on the employer s experience rating. The net FUTA rate can be as low as.8 percent. 11-7) The chapter explains how to complete an Employer s Federal Unemployment Tax Return, Form 940. It explains that the form must be filed in January for the preceding calendar year. The form shows the total wages paid, the amount of wages subject to unemployment tax, and the federal unemployment tax owed for the year. 11-8) The chapter explains how to calculate worker s compensation insurance which is required in most states. For companies with a few employees, an estimated premium is paid at the start of the year. A final settlement is made with the insurance company on the basis of an audit of the payroll at year-end. The chapter explains that premiums vary according to the type of work performed by each employee Copyright No reproduction or distribution without the prior written consent of McGraw-

3 At the beginning of the chapter, there is a short paragraph about The Marek Company. Let s read this together... Ask... What types of employee benefits do you think the employees of The Marek Company enjoy? Answer Many employees enjoy such fringe benefits as sick pay, holiday pay, vacation days, medical insurance, and the like. (All of these benefits must be recorded by accountants.) Many people think that happy employees lead to more productive employees and lower staff turnover rates. FAST FACTS: The Marek Company is one of the nation s largest interior contractors. You may recognize the name from their appearance on the TV show Extreme Makeover, where they completed the building of a home in seven days a task usually taking at least four months. The company attributes much of their success to the hard work and dedication of their employees. Twenty nine employees worked hard to finish the home for the TV show Copyright No reproduction or distribution without the prior written consent of McGraw-

4 Chapter 11 Payroll Taxes, Deposits, and Reports Section 1: Social Security, Medicare, and Employee Income Tax Section Objectives 11-1 Explain how and when payroll taxes are paid to the government Compute and record the employer s social security and Medicare taxes Record deposit of Social Security, Medicare, and employee income taxes Prepare an Employer s Quarterly Federal Tax Return, Form Prepare Wage and Tax Statement (Form W-2) and Annual Transmittal of Wage and Tax Statements (Form W-3). Section 1. SOCIAL SECURITY, MEDICARE, AND EMPLOYEE INCOME TAX Ask, What types of taxes do you pay? Anticipate answers like: sales tax, income tax, property tax, and social security tax. Inform students that individuals pay taxes, but businesses also pay payroll taxes for social security, Medicare, and unemployment. Explain how and when payroll taxes Objective 11-1 are paid to the government. Who Deposits Payroll Taxes Employers make tax deposits for Federal income tax withheld from employee earnings. Employees' share of social security and Medicare taxes withheld from earnings. Employer's share of social security and Medicare taxes. Employers, regardless of size, must remit payroll tax payments via EFTPS (Electronic Federal Tax Payment System.) 11-3 Electronic filing of taxes is now required in most instances. The frequency of deposits depends on: the amount of tax liability, and the amount reported in the lookback period For simplicity this textbook uses $2,500 as the tax liability threshold. The lookback period is a four-quarter period ending on June 30 of the preceding year Is the amount owed less than $2,500? Objective 1 A. Payment of Payroll Taxes Direct students attention to Figure 11-1, and review the columns shown in the Payroll Register. Remind students that the payroll register is the source of information about wages subject to payroll taxes. Emphasize that TAXABLE WAGES are subject to social security, Medicare and federal employment taxes (FUTA). Explain that DEDUCTIONS are amounts taken from taxable wages. Yes The payment is due quarterly with the filing of Form 944 annually No The frequency of payments schedule is determined from the total taxes reported during the lookback period. Most employers are required to deposit the taxes directly using the EFTPS - Electronic Federal Tax Payment system Copyright No reproduction or distribution without the prior written consent of McGraw-

5 Is the amount reported in the lookback period less than or equal to $50,000? Yes No The employer is subject to the The employer is subject to the Monthly Deposit Schedule Rule. Semiweekly Deposit Schedule Rule. For new employers with no lookback period, if the amount owed is $2,500 or more, payments are due under the Monthly Deposit Schedule Rule. If the total accumulated tax liability reaches $100,000 or more on any day, a deposit is due on the next banking day Point out that 941 refers to the form on which the taxes will be reported. 941 Taxes include social security, Medicare and FIT. Point out that the deposit schedules are based on the amount currently owed, the frequency of the pay periods and the amount reported in the lookback period. Discuss the definition and rules of the lookback period. Objective 11-2 Compute and record the employer s social security and Medicare taxes. Remember that both employers and employees pay social security and Medicare taxes Employee Employer (Withheld) (Matched) Social security $ $ Medicare $ $ Total $ Objective 2 Employer s Social Security and Medicare Tax Expenses Remind students that the employer pays the social security tax and Medicare tax at the same rate and on the same taxable wages as its employees do. (Differences due to rounding are settled on the Quarterly Tax Return, Form 941.) 11-5 Copyright No reproduction or distribution without the prior written consent of McGraw-

6 Record Employer s Payroll Taxes Payroll Taxes Social Security Medicare Expense Tax Payable Tax Payable Point out that when the social security and Medicare taxes are calculated, the amount of tax is the same as the total amount deducted from the employees pay: Employee Employer (Withheld) (Matching) Social security $ $ Medicare Total $ $ Combined $ Emphasize that when the employer records his portion of taxes owed, he debits Payroll Tax Expense, NOT Wages Expense. Objective 11-3 Record deposit of social security, Medicare, and employee income taxes. At the end of January, the accounting records for Tomlin Furniture Company looked like this: Employee Employer (Withheld) (Matched) Total Social security $ $ $1, Medicare Federal income tax Total $1, $ $1, Social Security Tax Payable The tax liability which will be deposited is $1, Medicare Tax Payable Payroll Tax Deposit Employee Income Tax Payable Cash Review the journal entry required to record Payroll Tax Expense for the pay period. Objective 3 Recording the Payment of Taxes Withheld Mention to students that, when employees are paid, the company deducts social security and Medicare taxes from their pay. Explain that these deductions, along with the matching employer s contributions, are recorded in the Social Security Tax Payable account and Medicare Tax Payable account. (Some companies refer to the pair of them as FICA Tax payable.) 11-6 Copyright No reproduction or distribution without the prior written consent of McGraw-

7 At the end of each quarter, the individual earnings records are totaled. This involves adding the columns in the Earnings, Deductions, and Net Pay sections Stress that, when a company deposits these funds with the federal government, the company s tax liability accounts are reduced by the amount of the deposit. Review the journal entry required to record the payment of payroll taxes. Emphasize that monthly depositors must make a deposit of 941- taxes by the 15 th of the following month. Indicate that the entry to record the payment of the tax can be made in the general journal or the cash payments journal. February Payroll Records Describe the activity for February. Point out that four payroll periods occurred in February and all payroll periods were identical to the January payrolls. Remind students that individual earning records were updated at the end of each of the four pay periods using information in the payroll registers. The text will show the 941 was filed and the payroll taxes were electronically transferred Copyright No reproduction or distribution without the prior written consent of McGraw-

8 March Payroll Records Describe the activity for March. (Five payroll periods occurred. Individual earnings records were posted, tax deposit form was prepared, taxes were deposited, entry was made in cash payments journal.) Quarterly Summary of Earnings Records Referring to Figure 11-2, explain that individual earnings records for each employee are totaled for each quarter. Direct students attention to Table 11-1 and review the table. Point out that The Summary of Earnings is prepared listing the totals from the individual earnings records. Prepare an Employer s Quarterly Objective 11-4 Federal Tax Return, Form 941. When to File Form 941 The due date for Form 941 is the last day of the month following the end of each calendar quarter. If the taxes for the quarter were deposited when due, the due date is extended by 10 days Completing Form 941 The remainder of the form is completed using the data on the quarterly summary earnings records. (See Table 11.1 in text for an example.) Objective 4 Employer s Quarterly Federal Tax Return Emphasize that each employer must file an Employer s Quarterly Federal Tax Return (Form 941). Point out that Form 941 verifies the employer s compliance with applicable laws relating to federal income tax withholding, social security tax, and Medicare tax. It also verifies total taxes owed and paid by the employer on a quarterly basis Copyright No reproduction or distribution without the prior written consent of McGraw-

9 When to File Form 941 Inform students that Form 941 must be filed quarterly. Point out that the due date from their return and any balance due is the last day of the month following the end of the quarter. Completing Form 941 Review Form 941 with students Explain that Form 941 is completed using information from Table Review the information needed on the form and how to transfer data from The Summary of Earnings to the appropriate lines on Form 941. Point out that an employer s liability for employment taxes occurs when they actually pay the employees their wages, not when the pay period ends. For example, if a pay period ends September 24, but employees are not paid until October 1, their wages would be reported in the fourth quarter, when the company actually became liable for the tax, not the third quarter when the pay period ended Copyright No reproduction or distribution without the prior written consent of McGraw-

10 Objective 11-5 Prepare Wage and Tax Statement (Form W- 2) and Annual Transmittal of Wage and Tax Statements (Form W-3). Ask, How would you verify the accuracy of Line 2 (Total wages and tips subject to withholding, plus other compensation) on the Employer s Quarterly Federal Tax Return? (To verify the amount on this line, check the payroll registers for the quarter in question to see if they add up to the same number on Form 941.) Objective 5 B. Wage and Tax Statement, Form W Ask, Can anyone tell me what kinds of information are reported on the W-2 which you get at the end of the year? (It reports total earnings and the amounts withheld for social security, Medicare and income taxes.) Point out that the form is completed for each employee and the employer must provide the form to each employee by January 31 of the following year. Refer to Figure 11-4: Wage and Tax Statement, Form W Ask, Where does the information to complete Form W-2 come from? (The individual employee earnings record.) Review the information provided in each box of the form. Remind students that employers use a Form W- 2 to report annual wage and tax information to Copyright No reproduction or distribution without the prior written consent of McGraw-

11 Transmittal of Wage and Tax Statements, Form W-3 The amounts on Form W-3 must equal the sums of the amounts on the attached Forms W employees and to the Internal Revenue Service. C. Annual Transmittal of Wage and Tax Statements, Form W-3 Point out to students that a Form W-3 is another of the annual tax reports that employers must complete and file with the IRS. Explain that Form W-3 verifies the company s total social security tax withheld; total wages, tips, and other compensation; total federal income tax withheld; and other information for the year. Emphasize that the amounts on Form W-3 must be the same as the totals of the Forms W-2 and the four quarterly Forms 941. Review the tax forms discussed in this section: Form 941- Employer s Quarterly Federal Tax Return Form W-2-Wage and Tax Statement Form W-3-Transmittal of Wage and Tax Statements Chapter 11 Payroll Taxes, Deposits, and Reports Section 2: Unemployment Tax and Workers Compensation Section Objectives 11-6 Compute and record liability for federal and state unemployment taxes and record payment of the taxes Prepare an Employer s Federal Unemployment Tax Return, Form 940 or 940-EZ Compute and record workers compensation insurance premiums. Section 2. UNEMPLOYMENT TAX AND WORKERS COMPENSATION Copyright No reproduction or distribution without the prior written consent of McGraw-

12 A. Unemployment Compensation Federal and State Unemployment Rates The federal government allows a credit (reduction) in the federal unemployment tax for amounts charged by the state for unemployment taxes. SUTA = state unemployment tax FUTA = federal unemployment tax Explain that the unemployment insurance program is a federal program that encourages states to provide unemployment insurance for employees working in the state Ask, When people collect for unemployment benefits, who pays for these benefits? Students may think that state/federal governments pay these benefits. Emphasize that the federal unemployment tax is levied on employers only; there are no employee withholdings for federal unemployment tax. Coordination of Federal and State Unemployment Rates Explain that the FUTA rate is.8% but a business may receive a credit of state unemployment taxes paid, so the FUTA rate may be reduced to.6% or.006. Point out that state unemployment tax (SUTA) rates differ from state to state and from employer to employer within each state. Explain that an employer s SUTA rate is based on his merit rating or experience rating which the state has assigned Copyright No reproduction or distribution without the prior written consent of McGraw-

13 Federal and State Unemployment Taxes Objective 11-6 Compute and record liability for federal and state unemployment taxes and record payment of the taxes. Explain that under the experience rating system, the state tax rate may be reduced to less than 1 percent for businesses that provide steady employment On Line Furnishings The unemployment taxes for the payroll period ending January 6 are as follows. Federal unemployment tax ($2, x 0.006) = $13.49 State unemployment tax ($2, x 0.040) = Total unemployment taxes = $ GENERAL JOURNAL PAGE 1 POST. DATE DESCRIPTION REF. DEBIT CREDIT Jan. 8 Payroll Taxes Expense Federal Unemployment Tax Payable State Unemployment Tax Payable Unemployment taxes on weekly payroll Objective 6 Computing and Recording Unemployment Taxes Demonstrate the calculation of FUTA and SUTA FUTA = Taxable Wages x SUTA = Taxable Wages x experience rate. Payment of payroll taxes When the amount of tax due in Employer s Quarterly Report is paid, then the liability accounts are debited and cash is credited. In this case, the SUTA tax is paid. GENERAL JOURNAL PAGE Post Date Description Debit Credit Ref Apr 29 State Unemployment Tax Payable Cash Paid SUTA taxes for quarter ending March Earnings in Excess of Base Amount In this textbook example, state unemployment tax is paid on the first $7,000 of annual earnings for each employee. See the next slide for details Review the general journal entry required to record these additional payroll taxes. Reporting and Paying State Unemployment Taxes Explain that most states require employers to file their state returns for each quarter by the last day of the month following the quarter.. Earnings over $7,000 are not subject to state unemployment tax. Earnings Cumulative Taxable Earnings Earnings January $ 2,240 $2,240 $2,240 February 2,240 4,480 4,480 Mar, week 2,240 6,720 6, Mar, week ,280 7,000 Earnings in Excess of Base Amount Point out that State unemployment tax is paid on the first $7,000 of annual Copyright No reproduction or distribution without the prior written consent of McGraw-

14 Depositing Federal Unemployment Taxes Federal unemployment tax deposits must be made electronically. Currently this is the only option available. Electronic deposits are made using EFTPS (previously described.) Deposits are made quarterly and are due on the last day of the month following the end of the quarter. Most employers, regardless of size, must now remit payroll tax payments via EFTPS Federal Unemployment Taxes The federal unemployment tax is calculated at the end of each quarter. It is computed by multiplying the first $7,000 of each employee's wages by A deposit is required when more than $500 of federal unemployment tax is owed. If $500 or less is owed, no deposit is required. QUESTION: ANSWER: Prepare an Employer s Federal Objective 11-7 Unemployment Tax Return. What is Form 940 or 940-EZ? Form 940 or 940-EZ is the Employer s Annual Federal Unemployment Tax Return form. It is a preprinted government form Line 3 shows the total compensation paid to employees. Line 8 shows the total federal unemployment tax paid earnings for each employee. Earnings over $7,000 are not subject to state unemployment tax. Reporting and Paying Federal Unemployment Taxes Depositing Federal Unemployment Taxes ALL employers, regardless of size, must remit payroll tax deposits via EFTPS - Electronic Federal Tax Payment system. Please see Form 901 and 941 in the text for further details. Objective 7 Reporting Federal Unemployment Tax, Form 940 Point out that employers report Federal Unemployment Taxes collected, only once a year on the Employer s Annual Federal Unemployment Tax Return, Form 940 Review Figure 11-8 with students on how to complete the form. Have students visually compare this form with the State Employer s Quarterly Report. Both contain general background information at the top of the form. Both require taxable wages information and the calculation of unemployment tax based on these wages Copyright No reproduction or distribution without the prior written consent of McGraw-

15 Compute and record workers Objective 11-8 compensation insurance premiums. Workers' compensation provides benefits for employees who are injured on the job. The insurance premium, which is paid by the employer, depends on the risk involved with the work performed Workers Compensation Insurance There are two ways to handle workers' compensation insurance: Pay an estimated annual premium in advance. Pay a deposit at the beginning of the year and make monthly payments. The method a business uses depends on the number of its employees Tomlin Furniture Company has two work classifications: Office work Shipping work The workers compensation premium rates are Office workers Workers Compensation Insurance Shipping workers $0.45 per $100 of labor costs per $100 of labor costs Objective 8 Workers Compensation Insurance Introduce and explain workers compensation insurance. (The amount that employers have to pay to protect their employees from work-related accidents and injuries) Mention that the rate of insurance premiums varies with the risk of the work involved. Payment of Premiums The insurance premium rates recognize that injuries are more likely to occur to shipping workers than to office workers. Based on employee earnings for the previous year, Tomlin Furniture Company paid an estimated premium of $1,000 for the new year Jan. 15 Workers Compensation Insurance Expense Cash Estimated workers compensation insurance for 20-- Ask, Can some of you tell me the kinds of jobs you are currently doing, or have done in the past? As students yell these out, create a list on the board Calculate Premium payable (or receivable) Classification Payroll Rate Premium Office work $24,960 $0.45 per $100 $ Shipping work 91, per $100 1, Total premium for year 1, Less estimated premium paid 1, Balance of premium due $ Ask, Which of these jobs do you think is the riskiest in terms of injuries and therefore would have a higher job insurance rate? Explain that the procedures for reporting employee injury or accidents vary from state to state, but require the following general information: Information about the employee: (name, contact info, personal info.) Copyright No reproduction or distribution without the prior written consent of McGraw-

16 On December 31 the balance due to the insurance company is recorded as a liability by an adjusting entry. Tomlin Furniture Company owes $ ($1, $1,000.00) for the workers' compensation insurance Dec. 31 Workers Compensation Insurance Expense Workers Compensation Insurance Payable Information about the employer: (name and policy no. FEIN number, mailing address, etc.) Information about the injury: (date of incident, description of incident and where and when the injury occurred.) Estimated Annual Premium in Advance Explain that employers who have few employees pay an estimated premium in advance. At the end of the year, the employer calculates the actual premium. If the actual premium is more than the estimate, then the employer would submit the balance due to the insurance co. Deposit and Monthly Premium Payments Explain that employers with many employees must make a large deposit at the beginning of the year to the insurance company and then from January through November, they pay the actual premium due based on an audit of the month s wages. (The last month is deducted from the initial deposit.) B. Internal Control over Payroll Operations Copyright No reproduction or distribution without the prior written consent of McGraw-

17 L1 Internal Control Over Payroll 6. Have the payroll checks examined by someone other than the person who prepares them. Compare each check to the entry for the employee in the payroll register. 7. Have payroll checks distributed to the employees by someone other than the person who prepares them. 8. Have the monthly payroll bank account statement received and reconciled by someone other than the person who prepares the payroll checks. 9. Use prenumbered forms for the payroll checks. 10. Maintain files of all authorization forms for adding new employees, changing pay rates, and making voluntary deductions. Also retain all Forms W Emphasize that companies must create and enforce internal control procedures to protect payroll operations. Review the possible controls listed in the text Managerial Implications: Ask, So, can you remember what accounting records are used to prepare Form 941? Answer The Form 941 is prepared from the Quarterly Summary of Earnings Copyright No reproduction or distribution without the prior written consent of McGraw-