Problem 11 - Accounting

Question

According to a summary of the payroll of Glitz Publishing Co., \(\$ 350,000\) was subject to the \(6.0 \%\) social security tax and \(\$ 420,000\) was subject to the \(1.5 \%\) Medicare tax. Also, \(\$ 14,000\) was subject to state and federal unemployment taxes. a. Calculate the employer's payroll taxes, using the following rates: state unemployment, \(4.3 \%\); federal unemployment, \(0.8 \%\). b. Journalize the entry to record the accrual of payroll taxes.

Step-by-Step Solution

Answer

The employer’s payroll taxes are $28,014. Journal entry will debit Payroll Tax Expense: $28,014 and credit the respective tax payables.

Step 1: Calculate Social Security Tax

First, calculate the amount that Glitz Publishing Co. has to pay for Social Security taxes. The formula for this is: \[\text{Social Security Tax} = \text{Subject Amount} \times \text{Tax Rate}\]Therefore, \[\text{Social Security Tax} = 350,000 \times 0.06 = 21,000\]

Step 2: Calculate Medicare Tax

Next, calculate the Medicare tax using the subject amount and the rate. The formula is the same as the Social Security tax:\[\text{Medicare Tax} = \text{Subject Amount} \times \text{Tax Rate}\]So, \[\text{Medicare Tax} = 420,000 \times 0.015 = 6,300\]

Step 3: Calculate State Unemployment Tax

Now calculate the state unemployment tax using the subject amount and rate:\[\text{State Unemployment Tax} = \text{Subject Amount} \times \text{Tax Rate}\]Therefore, \[\text{State Unemployment Tax} = 14,000 \times 0.043 = 602\]

Step 4: Calculate Federal Unemployment Tax

Then calculate the federal unemployment tax similarly:\[\text{Federal Unemployment Tax} = \text{Subject Amount} \times \text{Tax Rate}\]So, \[\text{Federal Unemployment Tax} = 14,000 \times 0.008 = 112\]

Step 5: Calculate Total Payroll Taxes

Add up all the individual taxes calculated to get the total payroll tax for the employer:\[\text{Total Taxes} = \text{Social Security Tax} + \text{Medicare Tax} + \text{State Unemployment Tax} + \text{Federal Unemployment Tax}\]Therefore,\[21,000 + 6,300 + 602 + 112 = 28,014\]

Step 6: Journalize the Payroll Taxes

Record the transaction in the journal entry by debiting and crediting the appropriate accounts: - Debit Payroll Tax Expense: 28,014 - Credit FICA Taxes Payable: 27,300 (21,000 from Social Security + 6,300 from Medicare) - Credit State Unemployment Taxes Payable: 602 - Credit Federal Unemployment Taxes Payable: 112

Key Concepts

Social Security Tax

Social Security Tax is a crucial aspect of payroll calculations as it funds the social security program, which provides benefits for retirees and disabled workers. Employers and employees both contribute to this tax based on a specific percentage of the employee's wages. In the case of Glitz Publishing Co., a total of \(350,000 in wages was subject to a 6% social security tax. To calculate the amount owed for social security, you multiply the taxable wages by the tax rate: \[21,000 = 350,000 \times 0.06\]This results in a Social Security Tax expense of \)21,000 for the employer, which is combined with the employee's contribution to pay to the IRS.

Medicare Tax

Medicare tax provides funding for the Medicare program, which offers healthcare coverage to eligible seniors and certain younger individuals with disabilities. Similar to Social Security, both employers and employees pay a specified percentage of wages in Medicare tax. For Glitz Publishing Co., \(420,000 in wages was subject to a 1.5% Medicare tax. The calculation for this tax is straightforward:\[6,300 = 420,000 \times 0.015\]Thus, the company's portion of the Medicare Tax is \)6,300. Both employer and employee contributions are sent to the IRS, ensuring Medicare receives adequate funding.

State Unemployment Tax

State Unemployment Tax is vital for funding the state's unemployment insurance program, which provides temporary benefits to workers who lose their jobs without fault. Employers are solely responsible for paying this tax. Glitz Publishing Co. had \(14,000 in wages eligible for a state unemployment tax at the rate of 4.3%. By calculating: \[602 = 14,000 \times 0.043\]The State Unemployment Tax amounts to \)602. Employers often need to manage different rates and taxable wage bases depending on the state, making understanding local tax laws essential for accurate payroll management.

Federal Unemployment Tax

Federal Unemployment Tax contributes to the federal program that supports state unemployment funds. This tax is paid exclusively by employers and helps ensure that all states can provide unemployment benefits. For the company, \(14,000 in wages was subject to federal unemployment tax at a rate of 0.8%. The calculation for this tax goes as follows: \[112 = 14,000 \times 0.008\]The Federal Unemployment Tax responsibility for Glitz Publishing Co. becomes \)112. This demonstrates the relatively small federal burden compared to other payroll taxes.

Journalizing Payroll Taxes

Journalizing payroll taxes is an essential step for accountants to ensure accurate financial records. It involves recording various tax expenses against the company's liabilities. For Glitz Publishing Co., total payroll tax liabilities amounted to $28,014, broken down as:

• Social Security and Medicare combined at $27,300
• State Unemployment Tax at $602
• Federal Unemployment Tax at $112

The journal entry records a debit to Payroll Tax Expense for $28,014 and credits to the respective payable accounts:

• Credit FICA Taxes Payable: $27,300
• Credit State Unemployment Taxes Payable: $602
• Credit Federal Unemployment Taxes Payable: $112

Accurately journalizing these entries ensures the company remains compliant with tax regulations, while also providing clear financial documentation for review and planning.