Chapter 9: Payroll Liabilities

Payroll Liabilities Payroll liabilities are obligations arising from compensation, benefits, and payroll taxes. Employers are responsible for withholding various deductions from employee pay and for covering additional employer-related payroll taxes. Key areas include employee payroll deductions, employer payroll taxes, and the importance of internal controls. 1. Employee Payroll and Deductions • • • Gross Pay and Net Pay: o Gross pay includes all compensation (wages, salaries, bonuses) before deductions. o Net pay, or "take-home pay," is gross pay minus required and voluntary deductions. Required Deductions: o Include income taxes (based on IRS tables and employee allowances) and Federal Insurance Contributions Act (FICA) taxes. o FICA covers Social Security (6.2% on income up to a cap) and Medicare (1.45% on all income, with an additional 0.9% for high earners). Voluntary Deductions: o Include items like health insurance premiums, union dues, and charitable contributions, which employees choose or are obligated by contracts to pay. Employers must record these deductions as liabilities until remitted to the relevant entities. 2. Employer Payroll Taxes • In addition to employee deductions, employers also incur payroll tax liabilities, which include: o Employer FICA Taxes: The employer must match employee contributions for Social Security and Medicare. o Federal Unemployment Tax Act (FUTA): Employers pay up to 6% on the first $7,000 of employee wages, reduced to 0.6% after credits for state unemployment contributions. o State Unemployment Tax Act (SUTA): Varies by state, generally around 5.4% of the first $7,000 in wages, with adjustments based on the employer’s "merit rating" related to workforce stability. These taxes are recorded as payroll liabilities and are essential to payroll expenses beyond direct employee compensation. 3. Recording Payroll Liabilities • • Employee Payroll Entry: Includes gross pay with deductions for FICA, income taxes, and voluntary contributions, resulting in the net pay owed to the employee. Employer Payroll Entry: Records employer payroll taxes (FICA, FUTA, SUTA) and calculates tax liabilities based on employee wages subject to unemployment tax caps. 4. Internal Control of Payroll • Internal controls in payroll management are critical to prevent fraud. Controls should focus on: 1. Authorizations for employee additions, deletions, and rate changes, 2. Verification of time and payroll records, 3. Secure payment processes, and 4. Regular audits of payroll records. Fraud detection is important, as payroll-related fraud is prevalent and costly. Proper controls reduce risks of fictitious employees, falsified time records, and unreported deductions. 5. Multi-Period Known Liabilities • Unearned Revenues and Long-Term Debt: Multi-period liabilities are split into current and long-term liabilities. For instance, a multi-year note payable may have both current and long-term portions on the balance sheet, reflecting the portion due within a year as current and the rest as long-term. Example Calculations: • • Employee Payroll Deductions: o If an employee earns $30,000 with a 6.2% Social Security deduction and 1.45% Medicare deduction, these amounts are withheld along with income tax and other deductions, reducing gross pay to net pay. Employer Payroll Taxes: o Using a $2,000 salary example, FICA tax calculations and unemployment tax applications vary based on limits, with the employer liable for FICA, FUTA, and SUTA taxes. This comprehensive approach to payroll liabilities ensures that companies accurately report obligations and effectively manage payroll-related expenses and compliance.