Liabilities related to payroll

In most businesses, payroll costs are a major category of expenses, and there are many liabilities related to employee earnings. When employees earn wages and salaries, those amounts are subject to taxes and other deductions that the employer must withhold. The taxes and other deductions that the employer withholds become liabilities for the employer.

The employer is also required by law to pay employer taxes on employee earnings. Since these amounts must be paid to government agencies, they are liabilities for the employer.

Most employers must pay FUTA, FICA and SUTA taxes. Employer FICA taxes are levied on employers at the same rates and on the same earnings bases as the employee FICA taxes. FUTA (Federal Unemployment Tax Act) tax is levied only on employers and it is not deducted from employees’ earnings. The SUTA (state unemployment tax) tax is also levied only on employers in most states and the purpose of this tax is to raise funds to pay unemployment benefits

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Review the defined terms in this section. Because of the matching principle, the company will recognize the employer payroll taxes expense and related liabilities at the same time as employee wages and salaries expenses.

APPLY THE CONCEPTS: Record payroll entries

The payroll clerk at Diego, Inc., has used a spreadsheet program to produce a printout of the salaries for April 15.

Employees' total earnings		$50,000
Deductions from earnings:
Federal income tax	$8,000
State income tax	2,000
Social Security tax	3,100
Medicare tax	725
Health insurance premiums	1,000
Total deductions		14,825
Net pay		$35,175

Use the data in the spreadsheet for the following entries. If an amount box does not require an entry, leave it blank or enter "0".
1.	Prepare the journal entry for the payment of the weekly salaries. The salaries will not be paid until April 20.
2.	Prepare the journal entry to record the employer's payroll taxes. In addition to the data for Social Security and Medicare in the table, which the employer must also pay, assume a 6.0% federal unemployment tax rate and a 5.4% state unemployment tax rate. Also assume that all wages are subject to these two taxes.

Not sure about the account title?

Assets Cash Notes Receivable Accounts Receivable Allowance for Doubtful Accounts Interest Receivable Prepaid Insurance Prepaid Rent Petty Cash Supplies Office Equipment Accumulated Depreciation—Office Equipment

Liabilities Accounts Payable Notes Payable Employee Federal Income Tax Payable State Income Tax Payable Social Security Tax Payable Medicare Tax Payable Health Insurance Premiums Payable FUTA Tax Payable SUTA Tax Payable Interest Payable Salaries Payable Utilities Payable

Owner's Equity Income Summary Peggy Diego, Capital Peggy Diego, Drawing

Revenues/Gains Sales Interest Revenue Sales Discounts Fees Earned Rent Revenue

Expenses/Losses Cost of Merchandise Sold Interest Expense Salaries Expense Bad Debt Expense Miscellaneous Expense Supplies Expense Delivery Expense Postage Expense Utilities Expense Rent Expense Payroll Taxes Expense Insurance Expense Repairs and Maintenance Expense Depreciation Expense

Page: 1

	DATE	DESCRIPTION	DOC. NO.	POST. REF.	DEBIT	CREDIT
1	1.	Salaries Expense					1
2		Employee Fed. Inc. Tax Payable					2
3		State Income Tax Payable					3
4		Social Security Tax Payable					4
5		Medicare Tax Payable					5
6		Health Insurance Premiums Payable					6
7		Net Pay					7
8							8
9	2.	Payroll Taxes Expense					9
10		Social Security Tax Payable					10
11		Medicare Tax Payable					11
12		FUTA Tax Payable					12
13		SUTA Tax Payable					13

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Because of the matching principle, the company will recognize the employer payroll taxes expense and related liabilities at the same time as employee wages and salaries expenses.

Note that both the employer and the employee normally pay equal amounts for Social Security and Medicare.

Indicate the effect of the journal entries above on the accounting equation. Each row in the table corresponds to the row in the journal.

Accounting Equation
Row	Assets	=	Liabilities	+	Owner's Equity
1.	no effect		no effect		–
2.	no effect		+		no effect
3.	no effect		+		no effect
4.	no effect		+		no effect
5.	no effect		+		no effect
6.	no effect		+		no effect
7.	no effect		+		no effect
9.	no effect		no effect		–
10.	no effect		+		no effect
11.	no effect		+		no effect
12.	no effect		+		no effect
13.	no effect		+		no effect

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Review the chart of accounts in the previous step to determine the effect of each line in the journal entry.

The total payroll cost of the employees for Diego, Inc., for this period is $

In the future, as each of the payroll liabilities is paid, the liability will be debited and Cash will be credited

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Add up both the total direct employee cost and the taxes paid by the company.

Recall that the entries above recognize payroll tax expenses before the cash is actually paid. When the cash finally is paid (at different points in the future for each deduction), what happens to the liabilities created in the entries above?

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Correct