Problem 12 - Accounting

Question

The payroll register for Hillsdale Company for the week ended December 14 indicated the following: \(\begin{array}{lr}\text { Salaries } & \$ 690,000 \\ \text { Social security tax withheld } & 32,700 \\ \text { Medicare tax withheld } & 10,350 \\ \text { Federal income tax withheld } & 138,700\end{array}\) In addition, state and federal unemployment taxes were calculated at the rate of \(0.8 \%\) and \(5.2 \%\), respectively, on \(\$ 26,000\) of salaries. a. Journalize the entry to record the payroll for the week of December \(14 .\) b. Journalize the entry to record the payroll tax expense incurred for the week of December 14 .

Step-by-Step Solution

Answer

Record the payroll with a total expense of $690,000 and taxes withheld of $181,750. Calculate and record additional payroll tax expenses of $44,610.

Step 1: Prepare Payroll Entry for Salaries

Begin by recording the gross salaries of $690,000 in the journal. This represents the total payroll that Hillsdale Company is liable to pay its employees before deductions.

Step 2: Calculate and Record Withheld Taxes

Subtract the withheld taxes from the gross salaries: Social Security tax is $32,700, Medicare tax is $10,350, and Federal income tax is $138,700. These amounts must be journalized as credits indicating liabilities for withheld taxes.

Step 3: Calculate and Record Net Payroll

Calculate the net payroll by subtracting the total taxes withheld from the gross salary: Net Payroll = $690,000 - ($32,700 + $10,350 + $138,700) = $508,250. Record it as a debit to represent the cash that will be paid out to employees.

Step 4: Journalize the Payroll Entry

Prepare the journal entry for payroll. Debit Salaries Expense: $690,000 Credit Social Security Tax Payable: $32,700 Credit Medicare Tax Payable: $10,350 Credit Federal Income Tax Payable: $138,700 Credit Cash/Payroll Payable: $508,250.

Step 5: Compute Unemployment Taxes on Taxable Salaries

Calculate the state unemployment tax at 0.8% and federal unemployment tax at 5.2% on $26,000 of salaries. State Unemployment Tax = $26,000 * 0.8% = $208 Federal Unemployment Tax = $26,000 * 5.2% = $1,352.

Step 6: Calculate Total Payroll Tax Expense

Add together all payroll taxes including employer's share of Social Security and Medicare, and unemployment taxes. Assume employer's Social Security and Medicare are the same as employee's. Total Payroll Tax Expense = $32,700 (Social Security) + $10,350 (Medicare) + $208 (State Unemployment) + $1,352 (Federal Unemployment) = $44,610.

Step 7: Journalize the Payroll Tax Expense Entry

Prepare the journal entry for the payroll tax liability. Debit Payroll Tax Expense: $44,610 Credit Social Security Tax Payable: $32,700 Credit Medicare Tax Payable: $10,350 Credit State Unemployment Tax Payable: $208 Credit Federal Unemployment Tax Payable: $1,352.

Key Concepts

Journal Entries

Journal entries act like a financial diary for businesses. They record every transaction, providing a log of what happened, when, and why. When dealing with payroll accounting, the journal entries capture various aspects of payroll such as gross salaries, withholdings, and net pay. Each component of payroll is entered individually to maintain clarity:

• Salaries Expense: Represents the total amount due to employees before deductions.
• Social Security and Medicare Tax Payable: These are the withholdings turned into liabilities for the company to pay later.
• Federal Income Tax Payable: Amount withheld as a liability to be settled with the government.
• Cash/Payroll Payable: Reflects the net amount to be paid to employees after deductions.

Journal entries aim to balance debits and credits, ensuring every cent is accounted for.

Payroll Taxes

Payroll taxes refer to taxes a company is mandated to withhold or pay on behalf of its employees. They're split into two primary categories: employee withholdings and employer liabilities.

• Employee Withholdings: These include taxes deducted from employees' pay, such as federal and state taxes.
• Employer Liabilities: These are payroll taxes paid by the employer, including the employer’s share of Social Security and Medicare taxes, and any state and federal unemployment taxes.

Understanding payroll taxes is essential, as mismanagement can lead to penalties and interest fees.

Withheld Taxes

Withheld taxes are portions of an employee's pay that an employer retains each pay period to cover anticipated taxes. This ensures the employee doesn't face a significant tax bill at the end of the year. For Hillsdale Company, these include:

• Social Security Tax: Withheld to contribute to current beneficiaries of Social Security.
• Medicare Tax: Withheld to fund the Medicare system.
• Federal Income Tax: Withheld based on each employee’s W-4 submission to cater their tax obligations.

Companies must meticulously track withheld taxes, as they are held in trust until remitted to the appropriate tax authorities.

Unemployment Taxes

Unemployment taxes are specific taxes that fund unemployment insurance. This insurance supports employees who lose jobs through no fault of their own. Key Aspects:

• State Unemployment Tax (SUTA): A state-level tax that varies between states, calculated in this example at 0.8%.
• Federal Unemployment Tax (FUTA): A federal tax, fixed at a certain percentage, calculated here at 5.2%.

Unemployment taxes differ from other payroll taxes, as they are entirely the employer's obligation. Understanding these taxes helps employers predict payroll expenses better and ensure compliance.