Payroll Accounting and Determination

Tina S
Tina S
Nov 14, 2009
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Payroll Accounting:

The term “payroll” pertains to both salaries and wages. Managerial, administrative and sales personnel are generally paid salaries. Salaries are often expresser in terms of a specified amount per month or per year rather than an hourly rate.
For example: in the faculty and administrative personnel at the college or university are paid salaries. In contrast, store clerks, factory employees, and manual laborers are normally paid wages. Wages are based on a rate per hour or on a piecework basis. Frequently, the terms “salaries” and “wages” are used interchangeably.

The term “payroll” does not apply to payments made for services of professionals such as certified public accountants, attorneys, and architects. Such professionals are independent contractors rather than salaried employees. Payments to them are called fees, rather than salaries or wages. This distinction is important because government regulations relating to the payment and reporting of payroll taxes apply only to employees.
Payroll accounting also involves payroll withholdings, such as Social Security and Medicare taxes, federal and state income tax withholding, and voluntary withholdings. Voluntary withholdings include union dues, health insurance premiums, United Way contributions, and contributions to savings and retirement plans.

Because of accrual accounting and the matching principle, it is reasonable that companies should recognize the expense and liability of payroll related costs when they are earned by the employees—not when the company pays the costs.

For example, the cost of providing agreed upon vacations should be reported as an additional labor cost and a liability when the employee is earning the vacation. Retirement pay and company-paid health insurance during employees' retirement years should also be recorded as an additional cost of labor and as a liability when the employees are working and earning these benefits.

Determining the payroll:

Determining the payroll involves computing three amounts:
1. Gross earnings,
2. Payroll deductions and
3. Net pay.

1.Gross Earnings:
Gross earnings is the total compensations earned by an employee. It consists of wages or salaries, plus any bonuses and commissions.
Total wages for an employee are determined by multiplying the hours worked by the hourly rate of pay. In addition to the hourly pay rate, most companies are required by law to pay hourly workers a minimum of 1.5 times the regular hourly rate for overtime work in excess of 8 hours per day or 40 hours per week. In addition, many employees pay overtime rates for work done at night, on weekends and on holidays.

The salary for an employee is generally based on a monthly or yearly rate. These rates are then prorated to the payroll periods used by the company. Most overtime pay for administrative positions are salaried. Federal law does not require overtime for employees in such positions.
Many companies have bonus agreements for management personnel and other employees.

For example:
An employee worked 44 hours for the weekly pay period ending January 14. The computation of his gross earning(total wages) is as follows:

Types of Pay
Hours*Rate = Gross Earnings
Regular 40*$12.00   $480.00
Overtime 4*18.00 = 72.00
Total Wages   = $552.00

This computation assumes that this employee receives 1.5 times his regular hurly rate ($12*1.5) for his overtime hours.

2.Payroll Deductions:
As anyone who has received a paycheck knows, gross earnings are usually very different from the amount actually received. The difference is due to payroll deductions. Such deductions do not result in payroll tax expense to the employer.
The employer is merely a collection agent, and subsequently transfers the amounts deducted to the government and designated recipients. Payroll deductions may be mandatory or voluntary. Mandatory deductions are required by law and consist of FICA taxes and income taxes. Voluntary deductions are at the option of the employee.

FICA taxes:
In 1937 congress enacted the Federal Insurance Contribution Act(FICA). FICA taxes are designed to provide workers with supplemental retirement, employment disability and medical for individuals over 65 years of age. The benefits are financed by a tax levied on employees’ earnings. FICA taxes are commonly referred to as social security taxes.

3.Net pay:
Net pay is determined by subtracting payroll deductions from gross earnings.




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