Liabilities related to payroll
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Question Description
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 ratesand 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
FeedbackReview 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 |
