Payroll and Payroll Taxes - Online Tutor, Practice Problems & Exam Prep

Payroll expenses are significant for businesses, encompassing gross pay, taxes, and employee benefits. Gross pay is the total earnings before deductions, while net pay is what employees receive after tax withholdings. Employers and employees share payroll tax responsibilities, including federal and state income taxes, FICA (7.65% each), and unemployment taxes (FUTA and SUTA). Employee benefits, such as health insurance, also contribute to payroll expenses. Understanding these components is crucial for accurate accounting and financial management.

Payroll Liabilities

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 wage expense. And that's where we keep track of all the money associated with paying our employees. So this salary and wage expense, it's going to 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. The net amount is what they get paid. We take the gross, adjust it for some things like taxes, and then we give them their net pay. Okay? 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 you've ever received a paycheck and 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 going to take on some liabilities on your behalf. Credits, right? These are the payroll liabilities and then they're also going to 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 going to 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? They're taking a credit for some of those salary expenses and paying them a little less because 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. Employers are also liable for their own payroll taxes. So, everybody is 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 going to give you the numbers. They might say, 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 want to make you deal with the percentages, but it's not that hard. We'll practice a little bit. Okay? So the first ones we see here, the first types of taxes are those income taxes. We've got federal and state income taxes. Luckily, I'm here in Florida and we don't have to pay 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 going to pay the government on my behalf, some of this money. So when we calculate those federal income taxes, there's going to 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 going to owe. They're just going to 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 going to be giving you numbers when 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, as the company, are the ones remitting 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 the FICA tax. The FICA tax is the Federal Insurance Contributions Act and this is basically the Social Security tax. So this one includes Social Security and Medicare. Okay? Not only is the employee responsible for paying some of these taxes, the employer also pays these taxes as well. And each of them pays 7.65% of the gross pay. So that means if the employer is paying you $50,000, well, you're going to have to pay 7.65 percent and the employer is also going to 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 going to be a federal unemployment rate and this is going to be 6.2 percent of the first $7,000 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, a similar thing there. We call that one SUTA. So we got FUTA and SUTA for 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, 401(k) plans, things like that. Well, that's part of their compensation and it's part of the salary and wage expense. Okay? So whenever this happens, we might have additional withholdings 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 healthcare that they pay for the employee's healthcare. Well, that's going to be a salary expense for us, but it's going to be coming off of our books. We're going to 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've got to deal with the taxes and the employee benefits. Those are the 3 basic components of this payroll stuff. So let's go ahead and dive into an example so you can kinda see it all in action, alright? Let's do that in the next video.

Payroll Liabilities

Alright. So let's try this example here. During April, the employees of Stern Company earned wages of $120,000. The related withholdings include $7,000 for Social Security FICA, $13,000 for federal income taxes, $4,000 in state income taxes. Additionally, costs incurred for federal and state unemployment totaled $180 and $300, respectively. Stern Company also paid $2,500 for an employer-sponsored health insurance program. So, prepare April 30th journal entries, assuming all amounts are paid in May. This last sentence implies we don't have any cash going out, as all these are just liabilities we're going to be accruing. Notice, they told us that the employees earn $120,000; that's their gross pay, the gross pay they have earned, but they're not going to get that amount in cash when they get paid, right? Let's go ahead and deal with this. I like to address these entries in three parts. First, I handle employee compensation, which includes their withholdings for FICA, and their income tax withholdings. Then, I address employer contributions, which covers the employer's part for FICA, as well as federal and state unemployment taxes. Finally, the third entry will relate to employee benefits. We have that health insurance plan to deal with.

Let's start with the employee side. The employees earned $120,000, so we're going to have a salary expense. We have to debit that for the $120,000 that they earned. However, they're not going to receive all of that in cash. Some will be withheld, such as $7,000 for FICA payable, and $13,000 for federal taxes payable. Additionally, $4,000 will be for state taxes payable. This means not all of the $120,000 will be paid directly to employees. We're withholding FICA, federal taxes, and state taxes, effectively holding this money to then pay to the government on behalf of the employees. There's a discrepancy here, with debits exceeding credits, so the balance of $96,000, which is $120,000 minus $7,000, minus $13,000, minus $4,000, is what will actually be paid to the employees, which we'll reflect as salaries payable.

Now for the employer's contributions. The employer is also liable for FICA, at the same rate as the employee, adding another $7,000 to FICA payable. Unemployment taxes for the employer include $180 for FUTA and $300 for SUTA. These too are liabilities the employer has to meet, resulting in a total employer tax expense of $7,480, which we'll add to the salary expense.

The third entry involves employee benefits, specifically the $2,500 paid for a health insurance program. Although typically treated as a salary expense because it is an employee benefit, we haven't paid this amount yet. Assuming payment will occur in May, we'll recognize this as insurance payable.

So, by making these three entries, we manage all payroll liabilities and expenses. In summary, for April, the total salary expense is the $120,000 from the employee's earnings, plus $7,480 for employer's taxes, plus $2,500 for health insurance, totaling $129,980. Remember, the complexity in payroll accounting often lies in correctly attributing and balancing the various employer and employee taxes and benefits.

Alright, why don't we pause here, and I'll encourage you to practice with another exercise related to payroll liabilities in our next video.

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

All right, how did you guys do with payroll liabilities? Let's check it out. The following information relates to the monthly payroll expenses at ABC Company. So we got quite a bit of information here, gross salaries, income taxes, health insurance premiums, 401ks, and then some tax rates as well. All right? So we got to record 3 journal entries just like we did above. Let's start with the employee salary expense, okay? So let's start with the employee salary expense here. And remember, we just have to remember which taxes the employees are liable for and we're going to debit our salary expense is going to be for the gross amount, the total amount of salaries that they earned. So our debit here is going to be the salary expense, could be salary and wage expense, wages expense. You can have a number of names, but salary expense works just fine here. And that's going to be for the total gross pay of 200,000, okay? But remember, they're not going to receive all of that in cash. We're going to lower that, for the taxes we withhold on their behalf. So what are the taxes that the employee pays? They're going to pay income taxes, federal and state, which they gave us in one line here, right? Federal and state is in one line, so that makes it a little easier. And they're also responsible for the FICA tax, right? The Social Security tax. Notice, they didn't give it to us straight up here, but they gave us a rate. The 7.65 percent rate. So let's go ahead and calculate that. First, we know we're going to have the income tax payable on the employee's behalf and that's going to be the 48,000. Right? 48,000 in income tax payable. But now we also need to find the FICA payable, right? FICA that the employee is responsible for. And what's that amount going to be? The FICA, let's do it up here. The FICA is going to be the gross pay times the 7.65%. So the gross pay here was 200,000 times 7.65. Well, that's 0.0765. That might be one of the tougher things that happens here is making sure you do that decimal just right, okay? So let's go ahead and figure out how much that is. 200000⋅0.0765, that comes out to 15,300 in FICA, okay? The FICA payable is going to be 15300. But remember with FICA, it's not just the employee but the employer that has to pay it as well. So we're going to have this payable from the employee for 15,300 and then the rest of it is going to be the actual pay that they're going to receive. So it could be cash, they might have received it in cash or it could just be salaries payable, if we haven't paid them yet. So this is actual money that's going to the employees right here and that's going to be the net amount after these taxes. So let's take it out, 200,000 minus the 48,000 in income taxes minus the 15,300 in FICA, well the employees are going to receive a net amount of 136,700 in cash when they do get paid. Cool? So that's the employee amount, let's go ahead and do the employer over here. Employer and let me do a little line separate. Okay. So the employer, what we just have to deal with the employer taxes. Well, I guess this was entry number 3 above. They said to do this okay. Let's do the benefits first. Employer sponsored benefits. That was entry number 2. So let's go ahead and just stay in order here. What were the employer sponsored benefits? They paid for health insurance premiums and they paid for 401 k contributions. Right? Right? So we're going to have to take those and we're going to increase our salary expense because this was a benefit to the employee. So it's part of our salary expense and it's going to be in the total amount, but let's see what that total is going to be. Let's put the payables in there first. So it says we already paid them, so it could have been credits to cash, but let's go ahead and put them as liabilities as if we hadn't paid them yet. So we get a better picture because it's easy to just put cash. Let's put in the payables. So let's say health insurance premiums paid by the employer. And if you put cash when you did it, that's acceptable. I'm just trying to be a little more full in my lesson here. Salary expense, so we're going to have insurance payable and that's going to be in the amount of the 10,000. And that's a credit, right? We're creating a liability for when we finally pay that. And then 401 k payable, and that'll be the 20,000, right? So these are going to increase our salary expense. We'll add those together. Let me get out of the way and that'll be 30,000, right? We're going to debit salary expense 30,000 for those 2, expense 2 employer-sponsored benefits that they get. Alright. Let's go ahead and do the 3rd entry which is the employer taxes. So let's try and remember what were the employer taxes. The employer has to pay FICA, right? Both play FICA. The easy thing is that they both pay the same amount. So we already calculated the FICA amount so that's easy. But they also pay the FUTA and SUTA, right? They pay the unemployment taxes, okay? So let's go ahead and see what that's going to be. Let's put in our FICA payable. So we know we're going to have a credit to FICA payable because we already calculated that. So we'll have our credit here, oop, should be all caps. FICA Payable and we know that our debits are going to be salary expense. Okay, it's always going to be salary expense in these cases. So FICA payable and that's going to be the 15300 that we calculated previously, right? Both the employer and employee pay 7.65 percent of the gross pay. And then we're also going to have the FUTA and SUTA. Here, they don't talk about SUTA at all, right? Maybe the state doesn't have a state unemployment, whatever it might be. We're only talking about Federal, so that's all we need to think about. So this is going to be 6.2% off of that gross $200,000, right? They had $200,000 gross pay and 6.2%. They didn't tell us anything special about the $7,000 rule, so we're just going to deal with the 6.2% altogether here. So let's do that here on the left-hand side. We'll do FUTA and that's going to equal the gross pay times the 6.2% that they just they just mentioned to us. So our gross pay was 200,000 times 0.062, Let's see what that gives us. 12,400 is going to be the FUTA that we're going to have to pay the federal unemployment tax. So this is the employer that's responsible to pay this. So we've got this liability now in the amount of 12,400 and that's it. Right? They only pay FICA, FUTA, and SUTA. They didn't talk about SUTA here. So that's all of the employer taxes. So let's just add these 2 together. 15300 plus 12400 that comes out to 27,700. Right? So that's going to increase our salary expense as well for those two taxes that we have to pay. So if we wanted to know our total salary expense, it didn't ask us, but it's always nice to know the total salary expense. We just have to add the 3 salary expense from these three entries, and that was 200,000 plus 30,000 plus 27,700. That's going to come out to 257,700. That is our total salary expense for this month. Cool? So right there behind me, 257,700, alright? And that's just the total salary expense from the 3 entries, all right? So this one's a little involved because we've got different percentages for the different taxes, but you'll see it's not too complicated. Once you just remember which tax is who's responsible for each tax, you should be good to go. All right? Let's go ahead and move on to the next video.

Here’s what students ask on this topic:

What is the difference between gross pay and net pay?

Gross pay is the total amount of money an employee earns before any deductions are made. This includes their base salary or hourly wages, overtime, bonuses, and any other earnings. Net pay, on the other hand, is the amount of money an employee takes home after all deductions have been subtracted from the gross pay. These deductions typically include federal and state income taxes, Social Security and Medicare taxes (FICA), and any other withholdings such as health insurance premiums or retirement contributions. Understanding the difference between gross and net pay is crucial for both employees and employers to manage finances effectively.

What are the main types of payroll taxes that employers and employees are responsible for?

The main types of payroll taxes include federal and state income taxes, FICA taxes, and unemployment taxes. Federal and state income taxes are withheld from employees' paychecks and remitted to the government. FICA taxes, which include Social Security and Medicare taxes, are shared between employers and employees, each paying 7.65% of the employee's gross pay. Unemployment taxes, such as FUTA (Federal Unemployment Tax Act) and SUTA (State Unemployment Tax Act), are paid solely by the employer. These taxes fund unemployment benefits for workers who lose their jobs. Understanding these taxes is essential for accurate payroll accounting and compliance with tax regulations.

How do employers calculate FICA taxes?

FICA taxes are calculated based on the employee's gross pay. Both the employer and the employee are responsible for paying 7.65% of the employee's gross earnings. This percentage is divided into two parts: 6.2% for Social Security and 1.45% for Medicare. For example, if an employee earns $50,000 annually, both the employer and the employee would each pay 7.65% of $50,000, which amounts to $3,825. This ensures that both parties contribute equally to Social Security and Medicare, which fund retirement, disability, and healthcare benefits for eligible individuals.

What are FUTA and SUTA taxes, and who is responsible for paying them?

FUTA (Federal Unemployment Tax Act) and SUTA (State Unemployment Tax Act) taxes are unemployment taxes paid by employers. FUTA taxes are used to fund federal unemployment programs and are calculated at a rate of 6.2% on the first $7,000 of each employee's annual earnings. SUTA taxes vary by state and are used to fund state unemployment benefits. Employers are solely responsible for paying both FUTA and SUTA taxes. These taxes help provide financial assistance to workers who lose their jobs through no fault of their own, ensuring a safety net during periods of unemployment.

What are employee benefits, and how do they impact payroll expenses?

Employee benefits are non-wage compensations provided to employees in addition to their regular salaries or wages. These benefits can include health insurance, retirement plans (such as 401(k) plans), paid time off, and other perks. Employee benefits impact payroll expenses because they represent additional costs that employers must account for. For example, if an employer offers health insurance, they may pay a portion or all of the premiums, which increases the overall payroll expenses. Additionally, some benefits may require payroll deductions from the employee's paycheck, further affecting the net pay they receive. Properly managing and accounting for employee benefits is crucial for accurate financial reporting and budgeting.