Payroll accounting and examples

3. Liabilities for employee payroll withholdings

Employers may withhold the following taxes and benefits: social security and Medicare taxes, federal and state income taxes, medical and life insurance premiums, pension payments, charitable contributions, union dues, etc.

Social security and Medicare taxes are combined into the FICA (Federal Insurance Contribution Act) tax. Social security program covers disability and retirement benefits, survivor's benefits, and some medical benefits while Medicare offers hospitalization and medical coverage for individuals over 65. Both employees and employers pay FICA taxes at the same rate. The employer deducts the taxes from the employee's wage and remits them along with the employer's matching amount to the government agencies.

The employers are also required to withhold federal income taxes. The amount withheld depends on the employee's earnings and number of dependants. To calculate the amount of federal income tax withholdings, employers may use tables published by IRS (the Internal Revenue Service).

In addition to the federal income taxes, employers also withhold state income taxes, which vary among states. Some states have income tax brackets, in which case the amount of state income tax depends on the amount of employee's earnings. Other states do not have income tax brackets and apply a single state tax that is often a certain percentage of federal income tax liability.

For instance, let us assume Friends Company, an Indianapolis-based company, manufactures industrial valves. The company pays Jim Roberts, its Vice President of Operations, an annual salary of $150,000. For the week of January 23, 2009, the company recorded the following payroll expenses and liabilities:

Account Titles

Debit

Credit

Office Wages Expense

2,884.62

 

      Social Security Tax Payable

 

178.85

      Medicare Tax Payable

 

41.83

      Employee's Federal Income Tax Payable

 

497.47

      Employee's State Income Tax Payable

 

16.91

      Medical Insurance Premiums Payable

 

110.50

      Life Insurance Premiums Payable

 

20.00

      United Way Charities Payable

 

5.00

      Wages Payable

 

2,014.06

In our example we have calculated payroll expenses and liabilities only for one employee and only for one week. Most businesses combine all employees' payroll expenses and all payroll liabilities instead of making a separate entry for each employee. Also, many businesses record their payroll expenses biweekly. Companies may keep separate expense accounts for office wages, sales wages, etc.

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