 Hello and welcome to this session in which we would look at employee-related liabilities. This is part three of four discussing current liabilities. In the first session we looked at what is the big idea of current liabilities. We defined current liabilities with defined current assets because current assets were needed in order to explain current liabilities and we looked at the operating cycle. In the first session we specifically covered account spayable and note spayable. In the second session we looked at dividend payable, customer advances and deposit, unearned revenue, sales taxes payable and income taxes payable. In this session we would look at the employee-related liabilities. What are the employee-related liabilities and how do they work? The best way to illustrate this concept is to actually look at a simple paycheck. For example this paycheck in here the individual worked for 50 hours, they earn $50 an hour, so the total current earnings is $2,500. Now in financial accounting what we learned is we debit wages expense $2,500, we credit cash $2,500 and this is what we learned in our financial accounting or introductory accounting course. Well in the real world this does not happen. In the real world what happened is the employee will have to pay their taxes. So what's going to happen the employee will have to pay certain taxes which we're going to be covering in this session such as FICA Medicare tax for example $36 this period and so far this employee paid $1,631.25 FICA Social Security tax $155 and this employee paid so far $6,975 federal tax California state tax which is state tax SDI I believe this is state disability insurance tax so on and so forth. We could have more deductions then the employee will have a net pay so notice they were paid $2,500 this is the gross amount then they deducted $959.19 from their paycheck and the cash that they receive is $1,514 therefore the cash has to be $1,540.81 and those remaining deductions that they were taken away from the employees those will be various liabilities for the difference. So simply put amount owed to employees for salary and wages are reported as current liabilities so those amounts the deductions that the employer took from you for the employer those are liabilities so current liabilities could include obviously payroll deduction of course that's the biggest one that's including taxes for example notice here we took taxes and we could have many type of taxes we could have federal taxes as you notice in this paycheck they took federal taxes we could have state taxes which is for the state and in some states we could have local taxes for example in Pennsylvania we have a local tax for example there is no local tax in New Jersey but there is a local tax in Pennsylvania also the employee will pay federal insurance contribution act FICA social security we're going to talk about this a little bit more in details the employer the employee also pay FICA Medicare notice here FICA SS FICA Medicare and we could have other taxes they also the employee could pay insurance from their paycheck they can have savings taken out from their paycheck they can have 401k deductions taken out from their paycheck whatever they want to have taken out from their paycheck the employer with what hold but it will be considered for the employer a current liability a current liability let's talk about let's start to dive into each one of those FICA starting with FICA FICA med F federal insurance contribution act the federal country the federal insurance contribution act has two parts social security and Medicare and notice here on the paycheck if you notice here let me highlight this in yellow maybe maybe it will stand out notice we have two FICAs we have FICA med and FICA SS so it has two parts FICA Medicare and FICA social security now the social security is also known as the old age survivor and the civility insurance or OASDI not O OASDI just know that it's it has another name now when the social security started social security started in 1937 after the great depression now why is that important it's important to understand the purpose of social security the purpose of social security is once an employee retires once they reach a certain age they can have they can receive a paycheck from the government it's not really from the government it's their money but think of it as a government sponsored employee retirement plan think of it that way so basically you pay to the system now you will get money when you retire this is this is the purpose of social security and the reason it came after 1937 after the great depression because in the great depression many people lost older savings lost their savings as a result the government says we need a solution for this and the solution is to is to have a government sponsored retirement plan where at least the employee even if they don't save privately the government will help them will help them when they retire so who pays social security obviously you just saw the employee pays social security but we what you did not see yet is also the employer pays social security so two parties pay social security and you're going to see how in a moment the employee as you saw on the paycheck pay social security also the employer will pay the same amount simply put let me just kind of plan the seed here you notice here that the employee paid 155 dollars this period the employer which is you don't see on the paycheck will have to come up with 150 dollars you don't see it we're going to talk about it later so the employer also pay how much do they pay how much do you pay in social security well there's a rate the rate is 6.2 percent well let's see if that's let's see if this rate is correct so if the employee earned 2500 this period and we multiply this by 6.2 percent we'll get we'll get 155 dollars so how did you come up with this 155 dollars we multiply this amount by 6.2 the gross wages and we come up with 155 dollars so the rate is 6.2 percent this could change but usually it does not change up to a limit what do we mean by a limit this is important in 2021 the tax limit is 142 dollars and 800 dollars what does that mean it means if this is zero wages as long as the employee have not reached this is the limit 142 dollars 800 dollars and this is the limit specifically in year 2021 the employee will keep and the employee and the employer will keep paying social security so simply put to tell you to tell you in another way so the maximum social security an employee pays per per year employee as well as employer because they have to pay the same thing if we take 142 800 times 6.2 percent is 8853 dollars and 60 cents so this is the maximum why because once the employee earned more than 140 to 800 they stopped paying social security so the social security tax stops at some point when that employee reaches certain amount now in 2022 the raising the limit to 147 so in 2022 the raising the limit to 147 what does that mean it means the government wants to collect more money from people how do they do it they raise the limit but at some point you stop paying social security and the reason is you stop paying social security because when you take out your social security money when you're retired you are limited to a certain income that's why your deduction is limited and your contribution is limited your contribution is limited how much you contribute is limited and your income is limited so that's very important to understand when it comes to social security and very important to understand the idea of a limit in other words you don't keep paying social security forever so for example bill gates only pay 8,853 and 60 cents although they could be making millions of dollars let's assume in wages which it and someone else who only made $150,000 per year will pay the same amount because they're above the limit so they stop paying social security now what's the limit in 2023 it's really unknown why because the limit changes every year and definitely you would expect that limit to go up with inflation or government need of income or whatever the reason is so but the limit changes from year to year so if you're looking in your textbook now the limit might be different so this is about FICA Insurance Contribution Act part one of two the second part is Medicare before we talk about Medicare I would like to remind you that whether you are an accounting student or a CPA candidate to look at my website farhatlectures.com I don't replace your CPA review course if you're studying for your CPA or your accounting course I'm a useful addition think of me as a vitamin pill for your education for your CPA exam preparation I explain the material differently I provide you additional resources CPA exam questions multiple choice true false to help you understand the topics better your risk is one month of subscription to give me a try try it if you see it's helping you you keep it if not you cancel your potential gain is improving your performance if not for anything take a look at my website to find out how well or not well your university the wing on the CPA exam this is a list of all my accounting courses managerial accounting advanced accounting cost accounting governmental accounting so on and so forth my CPA exam modules are aligned with your becker roger wiley gleam so it's very easy to go back and forth between my material and your CPA review course I also give you access to the 1500 previously released AI CPA questions with detailed solution you have not connected with me on LinkedIn please please do so take a look at my LinkedIn recommendation like this recording share it with other connect with me on Instagram Facebook Twitter and Reddit now let's go ahead and take a look at the second part of FICA which is part two of two which is FICA Medicare FICA Medicare started in 1965 and the reason is the government had so much money in the federal insurance contribution act so they wanted to have another spending spree it's also known as the hospital insurance and the purpose of it is very important to understand is to help retirees with medical expenses so once you retire they will help you with medical expenses so who pays that Medicare who pays FICA Medicare well also the employee and the employer just like just like social security both pays Medicare it's very important to see this how much do you pay well the rate is 1.45 1.45 percent and there's no limit what does that mean well let's go back to that paycheck to show you how FICA Medicare is computed and I hope they computed it the right way remember when we computed social security we took 2500 times 6.2 we're going to take 2500 now and multiplied by 1.45 percent and let's do that let's do that and see if they computed Medicare correctly and it's 36 dollars and 25 cent and this is how they come up with this figure 36 dollars and 25 cent now the difference between Medicare and Medicare and social security is Medicare has no limit what does that mean it means whether you earned 10 000 or whether you earned 10 million dollars you keep paying 1.45 percent now why is Medicare different than social security well let me maybe maybe if I explain it to you you will remember it rather than memorizing it because when you retire we don't know how much you're going to have in medical expenses the government don't know whether you're going to incur zero dollar or one hundred million dollars so what happened is you keep paying and some people are healthy they don't need the money and some people they are ill and they will need the help so simply put there's that's why there's no limit in contrast to social security now bear in mind the total FICA the total FICA is 7.65 why 6.2 for social security and 1.45 for Medicare so total is 7.65 so on your textbook certain textbook the way they do it they break down the social security and the Medicare and in some textbook they combine them for the purpose of my lecture I'm going to combine them in one example then in another example I'm going to separate them but you have to understand the difference between the two so 7.65 remember that 7.65 times 2 because the employer also pays 7.65 let's talk about other withholding and income tax withholding now employers your company is required to withhold federal state and in some places local income taxes from your wages who pays this income tax you pay it the employee pays their income tax withholding how much do they pay well it depends for federal depending on your w4 withholding there's a form you fill out you fill out when you are hired now if you want to see this form how it's work go to my income tax course the far hat lectures and also you have to pay state and local for example in pennsylvania we have a local tax usually that tax is flat flat rate it means one two three percent flat rate and it's different for each state and obviously it's different in pennsylvania for each locality and just to show you the sample example of the income tax withholding let's go back to that paycheck that we were we are looking at notice here they have california state tax of 183 dollars and 76 cents i'm not really sure how they came up with this and there's a federal state tax it doesn't have to be flat it could be progressive i'm just saying most states as flat where i where i live in pennsylvania it's a flat rate so maybe in california it's not but the point is they take money away from your paycheck and notice here we have sdi i believe this is state disability insurance you pay it in california each state has will have different withholding so simply put as you can see your paycheck you have a lot of money deducted from your paycheck that you will see that clearly now what you don't see is there are certain taxes that you don't see on your paycheck but they are but they are paid by your employer one of those taxes is called state unemployment or state unemployment tax act or known as sura not sura sura we're going to look at sura in a moment sura what is the purpose of sura state unemployment tax act the purpose is to compensate the employee they pay the employee when they are laid off or let go so an economic downturn companies may lay off some employees as a result the the government says well since you lay off the employees you need to kind of have some sort of an insurance or social insurance production and this is the social insurance production you might get paid for a year and when we had the last downturn this state unemployment tax went for longer than a year who pays this tax well the employer now inserting state and pennsylvania happens to be one of them also the employee pay a small part but for most tax book and for most states the majority of the state only the employer pays this tax how much do you pay so how much do the employer pay well since it's a state tax it will be different the rate is different in each state and guess what the rate is different for each employer in each state what does that mean well it means one company could be paying four percent another company could be paying two percent another company could be paying five percent within the same state now bear in mind there's a limit in other words you don't keep paying that percentage forever usually the limit is seven thousand or eight thousand but each state is different it means once you once your employer each asserting amount of wages you stop paying state unemployment tax it's a merit system merit system means depending on your company you could be paying two you could be paying five what does it depend on if your company keeps on laying off people letting people go then you are using this social insurance program if you're using the program you have to contribute more if your company don't lay off employees and they keep paying into the system your rate will go down and this is what we mean by a merit system for example in pennsylvania if when i was in practice you would start at three point seven then it might go up it might go down so it doesn't matter what you start with what matters is what's going to happen next if you don't lay off employee the state would say well you are not using the system you should not be paying more taxes less taxes then we have food a federal unemployment tax act it's also an unemployment federal it's a bit it's an unemployment federal insurance program so we have you're saying we have a state and a federal yes the federal is to administer help and help the state when needed and some in some years the state my my run out of funds so as a result we have a federal insurance program where the federal government will will help the state to pay for their employees because they run out of money who pays the stacks who pays food employer employer pays food and not employee how much do they pay well the official rate i'm gonna put the official rate so if you look at the form the official rate is six percent then again this could change from year to year but right now the rate is six percent then the employer gets a credit up to five point two percent so what does that mean it means when you start the form you said yet well you have to pay six percent and at some point they'll ask you are you paying your state unemployment as a company and you would say yes i am in good standing as a result okay we're gonna deduct five point two percent and now you are responsible the net rate for the food is point eight percent what does that mean it means they will give you a credit remember the federal and the state are the reason for the state for the federal program is to assist the state so if you are paying your state unemployment dues and most companies do well guess what the government says well we're only gonna charge you point eight percent we're gonna give you a credit so let's take a look at a summary who pays what employee pays their income tax withholding of course they paid their phyka social security they paid their phyka medicare they paid their medical insurance they pay their unions they pay they might have they may participate in charity they may pay their 401k this is what are some possible deductions okay could be unlimited okay now what what do the employer pay the employer pay phyka social security and phyka medicare so simply put those two whatever the employee pays the employer will have to come up with the same amount so if you end up paying a thousand dollar that's what your paycheck is showing what's not showing is your employer will have to come up with the same amount of money then the employer will pay furath federal unemployment tax and they will pay suda state unemployment tax now the best way to illustrate these is to look at a simple example and the reason i say simple example because i am not going to be using the limit so i'm going to stay away from the limit for this example don't worry i have another example where you are required to know how the limit worked but for now it's i'm going to keep it simple because you know when i introduce the topic get a keep it simple so students can follow adam company had a weekly payroll of 20 000 entirely subject to phyka and medicare so what i did is i said you know so so those employees that earn 20 000 remember there's a limit they are all below the limit none of them reach the limit so that's why the full amount is subject to phyka social security and obviously there is no limit for medicare so they have to pay 7.65 the federal unemployment rate is 0.8 and the state happens to be 5 income tax withholding from more employees is 3 500 and the employees deducted health insurance of 1 600 that's all what we have we don't have a 401k we don't have any savings account that's those are the savings so keeping it simple those are the deduction keeping it simple so what entry would the employee makes well they paid the employee 20 000 they will debit salaries expense and wages 20 000 then they're going to start to take out the taxes withholding taxes payable 3 200 so the employee contributed 3 200 therefore we're going to credit 3 200 for withholding taxes payable could be federal state whatever then we're going to withhold phyka taxes phyka social security taxes phyka taxes we're going to combine both so notice where did i combine both so this is 6.2 for social security 1.45 for medicare together 7.65 and we're going to take out 15 30 but remember in the real word they break them down okay they break them down medical insurance the employee contributed 1 600 so those are the withholding so what's going to happen the employee will get a check the employees this is for many employees will get a check of 13 670 and we this could be one employee for that matter this could be one employee or could be the whole payroll it doesn't matter the entry is the same but the point is the net amount the take-home amount is 13 670 are we done yet no we're not every time we pay the employees the employer will have a liability what does that mean a liability of what a liability of paying taxes what is the employer liability well the employer liability is 2690 how did we come up with this number well let's see first the employee the employer will have to match social security we have to match we'll have to match social security so notice here the employee paid 15 30 in social security right here the employer will have to come up with the same amount responsible for the same amount and that's why self-employed people if you are self-employed you pay both if you're self-employed you pay both so if you're self-employed technically your FICA rate is 7.65 times 2 why because you are the employee and the employer now you will get a deduction but again this that's a different topic yeah that's covered in my tax course but as an self-employed you pay both now we have footer footer is 0.8 percent so 20 000 times 0.8 percent the employer is responsible for 160 and we have that's footer and we have suda 5 which is a thousand dollar so if my math is right and we add up those three figures the employer is responsible there's a payroll tax expense of 2690 so they paid you 20 000 they paid the employees 20 000 then they are responsible for 2690 for the government on your behalf because they are the employer they are required to do so now what's the best way to learn this once again i'm going to work an exercise with limits so very important to understand how the limits work i ignore the limit here also it's very important to go to my website and start to work multiple choice questions to consolidate this knowledge at the end of this recording i'm going to remind you whether you are an accounting student or a cpa candidate you're going to invest in your cpa and your accounting career once for a lifetime invest wisely don't shortchange yourself the cpa exam is worth it invest in yourself invest in your career invest in your certifications you have to pass them once you put them behind you you focus on your career and they will pay dividend forever good luck study hard and of course stay safe