The preparation of a payroll is a specialized accounting’ function beyond the scope of this text But we believe that every business student should have some understanding of the various costs ‘associated with payrolls.
Every employer must compute, record, and pay a number of costs in addition to the wages and salaries owed to employees; In fact, one might say that the total wages and’salaries expense (or gross pay) represents only the starting point of payroll computations. To, illustrate, assume that a manufacturing company employs 50 highly skilled factory employees.
If monthly wages for this workforce average $100,000, the costs incurred ,employer in a typical monthly. payroll might be follows:
The amounts shown in red are payroll taxes and insurance premiums required by law. Costs shown In green currently are not required by law but often are included in the total compensation package provided to.employees.In our example, total payroll-related costs exceed wages expense ‘by more than 30%. “
‘This relationship will vary from one employer to the, next, but our illustration is typical of many payrolls.Payroll Taxes and .Mandated Costs,
All employers mu§t pay Social Security and Medicare taxes on the wages or salary paid to each employee. These taxes t)idyllically amount to about 7.3%of the employee’s screaming Unemployment taxes apply only to “Exceptions are made to this rule if the liability will.be refinanced (unit is, extended or renewed) on a long term basis or if a special sinking has been accumulated for the purpose of repaying this obligation.
In these .cases, the debt remains classified as a long-term liability, even though it will mature within the current period Social Security and Medicare taxes of the’same amount are also levied on the employees and are withheld from their paychecks.
Thus total Social Security and Medicare taxes mountaintop more than 15% of gross wages and salaries. There is a limit on the portion of an employee’s earnings subject to Social Security taxes. However this limit, now Just over $68,000 (and increasing annually), exceeds. most employees’ annual earnings.
There is no cap. on employee wages or salaries subject to Medicare taxes: off dramatically as the year progresses.Workers’ compensation is a state-mandated program that provides insurance to employees against job-related injury. The premiums vary greatly by state and by occupational classification. In some high-risk industries (e.g., roofers), workers’ compensation
premiums may exceed 50% of the employees wages.
Other Payroll-Related’ Costs Many employers pay some or all of the costs of health insurance for their employees as well as make contributions to employee pension plans.. Annual health insurance premiums ‘usually cost between $ I,800 and $3.600 per employee (including family members). Contributions to employees’ pension plans, if any, vary
greatly among employers.
Amounts Withheld from Employees’ P.y Our illustration specifies only those taxes levied on the employer. Employees, too, taxes on their earnings. These Federal and state income taxes and the employees’ shares of Social security and Medicare taxes. Employers must withhold these amounts from the employees’ pay and forward them directly to the appropriate tax authorities.
(The net amount of cash actually paid to employees that is, total wages and salaries expense less the amounts with held often is called the employees’ take-home pay.
Amounts withheld from employees’ pay do not representatives 01\ the employer. These .amounts are simply portions of the original wages and salaries expense that must be sent. directly to tax authorities, rather than paid to the employees. With respect to these taxes, the employer is.required by law to act as the tax collector.
In the employer’s balance sheet, these withholding represent current liabilities until they are deposited with the proper tax authorities.
A liability for unearned revenue arises when a customer pays in.advance. Upon receipt , of an advance payment from a customer, the company debits Cash and credits a liability account such as Unearned Revenue or Customers’ Deposits.
As the services are rendered to the customer, an entry is made debiting the liability account crediting a revenue account. Notice that the liability for unearned revenue normally. ·is “paid” by rendering services to the creditor, rather than by making cash payments.
Unarmed revenue ordinarily is classified as a current liability because activities involved in thing revenue are part of the business’s normal operating cycle.