Name: 12 - Accounting for Payroll
Uploaded: 2017-06-23T14:00:08.000Z
Duration: 8 min 19 s
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I'm Larry Walther, this is principlesofaccounting.com, Chapter 12.

And in this module, we will look at the basic accounting for payroll.

recognize that many services are provided to a business by other than employees.

Payroll and tax record keeping requirements differ, whether someone

providing service to a company is an independent contractor, or an employee.

An independent contractor performs a designated task, or service for a company.

direct only the result of the work done by an independent contractor.

Conversely, an employee works for a specific business and

performs activities as directed by that business.

The business controls what will be done, and how it will be done.

These subtle definitional differences between an independent contractor and

as they define the relationship between the company and

the worker, and who's responsible for various payroll tax obligations.

Amounts paid to an independent contractor generally does not involve

the payer will report the amount of earnings on a Form 1099.

That 1099 is provided to both the Internal Revenue Service, as well as the worker.

And the independent contractor then becomes responsible for

paying payroll taxes, as are associated with their earnings.

Amounts paid to employees, however, are usually reduced by variety of taxes and

Employers may also pay costs related to these deductions.

So, we'll look closer at this, but first some terminology.

Gross Pay is the total earnings of an employee.

Hourly employees would determine their gross pay by

looking at the number of hours worked times the hourly rate.

Salaried employees may be subject to a flat amount for a period of time.

In any event, overtime rules may cause an increase in the pay for

Net pay is the gross pay less applicable deductions.

So, let's look at a paycheck, here on the top, we've got a paycheck to I.M.

Fictitious for $1834, even though their gross earnings was $3000.

We have 1834 paid to the employee or the net pay.

This is offset by a variety of deductions related to Federal Income Tax,

State Income Tax Social Security, Medicare, insurance, retirement plans,

charitable contributions, healthcare, child care plans, and so forth.

So, you can see there's quite a difference potentially between gross pay and net pay.

Let's consider some of these deductions more closely.

Income taxes, these are taxes on income that are required to be

withheld by federal, and sometimes state, and even city governments.

Withheld amounts must be remitted periodically to the government

In essence, that money that was withheld by the employer from the employee's pay,

the employer becomes an agent for the government, and is responsible for

carrying that amount on their liability until it's remitted to the government.

The level of withholdings are based upon the employees level of income,

the frequency of the pay period, the marital status of the employee, and

the number of other withholding allowances that the employee may be entitled to.

The employee will claim their withholding allowances by

filling out a form W4 at the time they're hired by the employer.

Employers who fail to make timely remittances are subject to

This is simply nothing to mess around with.

It's not the employers money, it's due to the government.

So, the employer needs to make timely remittance to these amounts.

the employer to remit the amounts withheld from employee.

Most commercial banks are approved to accept the amounts.

And there's even online systems that allow very easy transfer of funds for

The frequency of the required remittance is based upon the size of the employer,

Social Security and Medicare Taxes are another category of tax,

also known as FICA, or Federal Insurance Contributions Act.

certain persons not able to provide for themselves.

So, the beneficiaries of these payments are retirees and so forth.

Social security provides a modest income stream to beneficiaries.

Medicare provides for the healthcare costs of the beneficiary.

The social security tax is usually calculated as a percentage of income up to

If an employees income exceeds the annual limit, the tax ceases to be withheld for

It'll start up in the next calendar year.

Medicare and Medicaid is subject to a lower percentage tax rate, but

It continues up to the full amount earned by the employee.

The employee's amount for these taxes, the amount withheld from the employee,

the employer has to pay an equal amount to match that, so

the full cost of the employee is much higher than simply the gross pay.

There are other employee deductions that can relate to healthcare insurance

premiums, contributions to retirement programs, charitable contributions, and

certain tax-advantaged health and child care savings programs.

Employer that collects these amounts from the employees has also a duty, of course,

to remit the appropriate entities, such as an insurance company.

Here, we've got a gross pay of $3,000 with debiting salary expense, but

we're only crediting cash, 1834, the amount remitted to the employee.

All of the other items reflect the differences,

the various payable federal income tax, payable state income tax,

payable social security payable and self-worth.

Let's turn to the employer payroll taxes.

The social security and Medicare taxes, I've already mentioned, must be matched.

Employers are also subject to unemployment taxes,

that are levied that the employee never sees.

If there's a Federal Unemployment Tax, that's usually a fair nominal rate.