fbpx

Payroll

When running a business, we must account for paying our employees their wages. In doing so, we must also pay taxes!

There's a few different types of taxes we need to familiarize ourselves, each paid by one of two parties: the employer or the employee!

TaxBurden
Federal & State Income TaxEmployer
FICA Taxes (a.k.a. Social Security and Medicare)Employee & Employer
Unemployment TaxEmployee

A critical understanding is that...

FICA taxes are paid by both the employee and employer.

Because FICA taxes (for Social Security and Medicare) are required to be paid by both the employer (7.65%) and employee (7.65%). Therefore, the government collects 7.65% + 7.65% = 15.3% in FICA tax on payrolls!

That's why we include FICA taxes on both our Salaries Expense journal entry (representing the employer's tax burden) and the Payroll Tax Expense journal entry (the employee's tax burden).

How to record payroll journal entries

Imagine the following payroll scenario:

Question: Your lemonade stand has 10 employees that work 40 hours a week and make $15 per hour. Federal income tax is 15%, state income tax is 5%, FICA taxes are 7.65%, and unemployment is 6.2%. Record the total salary and payroll tax expense.

The first step here is to determine the total salary expense...

We can calculate the total salary expense with the following equation...

Total Salary Expense = # of Employees x Hours per Week x Hourly Rate

...and considering that there's 10 employees working 40 hours a week at $15 per hour...

Question: Your lemonade stand has 10 employees that work 40 hours a week and make $15 per hour. Federal income tax is 15%, state income tax is 5%, FICA taxes are 7.65%, and unemployment is 6.2%. Record the total salary and payroll tax expense.

...this results in a total payroll of $6,000!

Total Salary Expense = # of Employees x Hours per Week x Hourly Rate
Total Salary Expense = 10 x 40 x $15
Total Salary Expense = $6,000

...which results in a value of $6,000!

From here, let's record the salary expense + the employer tax burden...

Let's start with the easiest element of this process: recording the total salary expense to the Salaries Expense account!

We just determined the total salary expense was $6,000...

Total Salary Expense = # of Employees x Hours per Week x Hourly Rate
Total Salary Expense = 10 x 40 x $15
Total Salary Expense = $6,000

...therefore, we'll debit the Salaries Expense account, as we're incurring an expense by paying our employees (and expenses have a normal debit balance)!

TransactionDebitCredit
Salaries Expense$6,000
     ??????
     ??????
     ??????

From here, we must determine how much of this $6,000 is going out to employees vs. being paid to the government as the employer's tax burden!

Remember: Federal & State Income Taxes and FICA Taxes are the employer's tax burden...

TaxBurden
Federal & State Income TaxEmployer
FICA Taxes (a.k.a. Social Security and Medicare)Employee & Employer
Unemployment TaxEmployee

...therefore, we've gotta determine how much we'll be paying towards those out of our $6,000 total salary expense!

We're able to obtain the following tax rates for Federal & State Income Taxes and FICA Taxes...

Question: Your lemonade stand has 10 employees that work 40 hours a week and make $15 per hour. Federal income tax is 15%, state income tax is 5%, FICA taxes are 7.65%, and unemployment is 6.2%. Record the total salary and payroll tax expense.

  • Federal Income Tax = 15% x ???
  • State Income Tax = 5% x ???
  • FICA Tax = 7.65% x ???

...which need to be multiplied by our total salary expense...

  • Federal Income Tax = 15% x $6,000
  • State Income Tax = 5% x $6,000
  • FICA Tax = 7.65% x $6,000

...to determine our tax amounts!

  • Federal Income Tax = 15% x $6,000 = $900
  • State Income Tax = 5% x $6,000 = $300
  • FICA Tax = 7.65% x $6,000 = $459

From here, what accounts will we place these tax amounts into?

Something critical to understand here is: we owe the government these tax amounts. And whenever we owe something, it represents a liability. Therefore, we're going to store these tax amounts in liability accounts! Specifically... Income Tax Payable & FICA Tax Payable!

Let's start with Income Tax Payable. We have a total of $1,200 owed in income tax...

  • Federal Income Tax = 15% x $6,000 = $900
  • State Income Tax = 5% x $6,000 = $300
  • FICA Tax = 7.65% x $6,000 = $459

...therefore, we'll credit Income Tax Payable by $1,200, since we're increasing the amount we owe to the government in income taxes (and liabilities have a normal credit balance)!

TransactionDebitCredit
Salaries Expense$6,000
     Income Tax Payable$1,200
     ??????
     ??????

Concerning FICA Tax Payable, we owe $459...

    • Federal Income Tax = 15% x $6,000 = $900
    • State Income Tax = 5% x $6,000 = $300
    • FICA Tax = 7.65% x $6,000 = $459

...therefore, we'll credit FICA Tax Payable by $459, since we're increasing the amount we owe the government in FICA taxes (and liabilities have a normal credit balance)!

TransactionDebitCredit
Salaries Expense$6,000
     Income Tax Payable$1,200
     FICA Tax Payable$459
     ??????

Alright, so we've determined we're paying a total of $1,200 + $459 = $1,659 in taxes...

TransactionDebitCredit
Salaries Expense$6,000
     Income Tax Payable$1,200
     FICA Tax Payable$459
     ??????

...meaning that we have $6,000 - $1,659 = $4,341 left over for payout of salaries to our employees!

We owe this amount to our employees, therefore we'll record it as a liability, specifically to the Salaries Payable account! Since we're increasing the amount we owe, we'll credit Salaries Payable by $4,341!

TransactionDebitCredit
Salaries Expense$6,000
     Income Tax Payable$1,200
     FICA Tax Payable$459
     Salaries Payable$4,341

This is our final journal entry to record the salary expense + employer tax burdens!

...resulting in the following journal entry...

TransactionDebitCredit
Salaries Expense$6,000
     Income Tax Payable$1,200
     FICA Tax Payable$459
     Salaries Payable$4,341

...and then record the employee tax burden using the Payroll Tax Expense account...

Remember: Unemployment Taxes and FICA Taxes are the employee's tax burden...

TaxBurden
Federal & State Income TaxEmployer
FICA Taxes (a.k.a. Social Security and Medicare)Employee & Employer
Unemployment TaxEmployee

...therefore, we've gotta determine how much we'll be paying towards those out of our $6,000 total salary expense!

We're able to obtain the following tax rates for Unemployment Taxes and FICA Taxes...

Question: Your lemonade stand has 10 employees that work 40 hours a week and make $15 per hour. Federal income tax is 15%, state income tax is 5%, FICA taxes are 7.65%, and unemployment is 6.2%. Record the total salary and payroll tax expense.

  • FICA Tax = 7.65% x ???
  • Unemployment Tax = 6.2% x ???

...which need to be multiplied by our total salary expense...

  • FICA Tax = 7.65% x $6,000
  • Unemployment Tax = 6.2% x $6,000

...to determine our tax amounts!

  • FICA Tax = 7.65% x $6,000 = $459
  • Unemployment Tax = 6.2% x $6,000 = $372

From here, what accounts will we place these tax amounts into?

Something critical to understand here is: we owe the government these tax amounts. And whenever we owe something, it represents a liability. Therefore, we're going to store these tax amounts in liability accounts! Specifically... Unemployment Tax Payable & FICA Tax Payable!

Let's start with Unemployment Tax Payable. We have a total of $372 owed in unemployment tax...

  • FICA Tax = 7.65% x $6,000 = $459
  • Unemployment Tax = 6.2% x $6,000 = $372

...therefore, we'll credit Unemployment Tax Payable by $372, since we're increasing the amount we owe to the government in unemployment taxes (and liabilities have a normal credit balance)!

TransactionDebitCredit
??????
     Unemployment Tax Payable$372
     ??????

(You may see unemployment tax separated into federal & state. In that case, you can use the "Unemployment Tax Payable - Federal" and "Unemployment Tax Payable - State" accounts to separate the amounts!)

Concerning FICA Tax Payable, we owe $459...

  • FICA Tax = 7.65% x $6,000 = $459
  • Unemployment Tax = 6.2% x $6,000 = $372

...therefore, we'll credit FICA Tax Payable by $459, since we're increasing the amount we owe the government in FICA taxes (and liabilities have a normal credit balance)!

TransactionDebitCredit
??????
     Unemployment Tax Payable$372
     FICA Tax Payable$459

From here... what account will we debit?

Well, these taxes are payroll taxes on the employee, which are expensed through the Payroll Tax Expense account over the course of a given period of time.

Therefore, since we're increasing our Payroll Tax Expense by paying out payroll, we'll debit the account (since expense accounts have a normal debit balance)!

TransactionDebitCredit
Payroll Tax Payable$831
     Unemployment Tax Payable$372
     FICA Tax Payable$459

...resulting in the following journal entry!

TransactionDebitCredit
Payroll Tax Payable$831
     Unemployment Tax Payable$372
     FICA Tax Payable$459

Practice!

Want some more practice with payroll? Check out the practice problems below included in Practice Problems (Exam 3)!

Consider the following scenario: For company operations, Steez Inc. has 5 employees that work 20 hours a week and make $10 an hour. Below is the relevant tax information:

  • Federal Income Tax: 10%
  • State Income Tax: 5%
  • FICA:  7.65%
  • State Unemployment: 3%
  • Federal Unemployment: 0.5%

Question #1 - In a given week, what amount should Steez Inc. pay out to employees?

Answer: $773.50

When determining the amount to pay out to employees, we should lean on the following equation:

Employee Payout = Total Payroll - (All Income Taxes + FICA)

First, however, we must determine the Total Payroll...

Employee Payout = Total Payroll - (All Income Taxes + FICA)

...then utilize the tax rates to calculate the taxes amounts.

To calculate payroll, we're going to take the number of hours worked per week...

Total Payroll = Total Hours Worked per Week ...
Total Payroll = 20 ...

...and multiply that by the hourly rate...

Total Payroll = Total Hours Worked per Week x Hourly Rate ...
Total Payroll = 20 x $10 ...

...and then multiply that by the number of employees working...

Total Payroll = Total Hours Worked per Week x Hourly Rate x Number of Employees
Total Payroll = 20 x $10 x 5

...resulting in a Total Payroll of $1,000!

Total Payroll = Total Hours Worked per Week x Hourly Rate x Number of Employees
Total Payroll = 20 x $10 x 5
Total Payroll = $1,000

We can plug this value into our Employee Payout equation for Total Payroll like so:

Employee Payout = Total Payroll - (All Income Taxes + FICA)
Employee Payout = $1,000 - (All Income Taxes + FICA)

Next, we must calculate the value for All Income Taxes. The prompt gives us Federal and State Income tax rates...

  • Federal Income Tax: 10%
  • State Income Tax: 5%
  • FICA:  7.65%
  • State Unemployment: 3%
  • Federal Unemployment: 0.5%

...and we can find the amounts for these taxes by multiplying the rates by our Total Payroll like so:

  • Federal Income Tax: 10% x $1,000 = $100
  • State Income Tax: 5% x $1,000 = $50
  • FICA:  7.65%
  • State Unemployment: 3%
  • Federal Unemployment: 0.5%

Let's go ahead and plug in these values for All Income Taxes!

Employee Payout = Total Payroll - (All Income Taxes + FICA)
Employee Payout = $1,000 - (($100 + $50) + FICA)

Lastly, for FICA, we're going to do the same thing we did for Federal and State Income Tax...

  • Federal Income Tax: 10%
  • State Income Tax: 5%
  • FICA:  7.65% x $1,000 = $76.50
  • State Unemployment: 3%
  • Federal Unemployment: 0.5%

...and plug in the tax amount for FICA like so!

Employee Payout = Total Payroll - (All Income Taxes + FICA)
Employee Payout = $1,000 - (($100 + $50) + $76.50)

Now, we can solve for Employee Payout...

Employee Payout = Total Payroll - (All Income Taxes + FICA)
Employee Payout = $1,000 - (($100 + $50) + $76.50)
Employee Payout = $1,000 - ($226.50)
Employee Payout = $773.50

...resulting in a final value of $773.50!

Answer: $773.50

PAID CONTENT

This is the end of the preview. To unlock the rest, get the Lifetime Access, ACC 221 Final Exam Cram Kit or ACC 221 Cram Kit Bundle.

Already purchased? Click here to log in.

Final Cram Kit

Want to unlock content? Get your Final Cram Kit now!

ApplyPRACTICE PROBLEMS (PREVIEW ONLY)
LessonDepreciation
LessonPayroll
LessonNotes Payable (PREVIEW ONLY)
LessonBonds (PREVIEW ONLY)
LessonCommon Stock & Dividends (PREVIEW ONLY)

Leave a Comment