 Hello and welcome to this session. This is Professor Farhad and this session would look at payroll liabilities and deduction. This topic is covered in introductory course as well as the CPA exam. As always I would like to remind you to connect with me only then if you haven't done so. YouTube is where you would need to subscribe. I have 1,600 plus accounting or I think finance and tax lectures. This is a list of all the courses that I cover including many CPA questions. If you like my recording please like them, click on the like button. It doesn't cost you anything. Share them, subscribe, put them in playlists. If they help you it means they might help other people as well and connect with me on Instagram. On my website farhadlectures.com you will find additional resources if you are looking to supplement your accounting education to pass the CPA exam. In this session we'll talk about something that you should be familiar with which are payroll liabilities. How does payroll liabilities work? Well think about when you get paid. When you get paid you'll get paid a net amount, an amount that something was deducted from it. So let's take a look at a sample paycheck. The sample paycheck is for DH Jones and the company is organization LMNOP. In this organization paid Mr. Jones or Mrs. Jones $1,400. That's the gross pay. Now DH Jones walked away with only $1,044. So what happened between $1,400 to $1,044? Well the employer is required to withhold certain taxes. What are those certain taxes? For example the employer withheld means they took from the paycheck $98 for federal income tax. They took $70 for this for the state. They took $42 for social security and $56 for Medicare. Those are simply in a sense mandatory deductions. Then the employer wanted to participate in the health insurance program so they paid $25. They also held dental insurance and they have retirement. So after you deduct all of those all of those deductions DH Jones walked away with $1,044 in net pay. So this is the take home amount or the net pay amount. Net means something was deducted. And this is what we mean. Those that I those right here those are liabilities for the company. Those are liabilities. Why they are liabilities? Because that's not the company's money. That's the employee's money. All what the employee did is paid that money to the employer and the employer will eventually send that money to the federal government to the state government to social security and Medicare so on and so forth. Enter the health insurance company to the dental and the retirement plan. Another picture to look at the same thing is something like this. For example the gross pay is $1,400. Well we have social security deductions of $42. We're going to talk about those. We have Medicare deduction of 56. We have voluntary deductions which are these three are voluntary deduction the 25, the 15 and the 50 which is $90 different voluntary deduction. The state took $970. The federal is $98 and the net pay for this individual was $1,044. Now eventually we're going to look at the journal entry for this. So basically payroll liabilities those are all liabilities. Those are all liabilities are from salaries and wages, employee benefit and payroll taxes levied on the employer. We're going to look at them shortly a little bit more in a journal entry. Now we need to talk about two specific taxes so we're going to focus on those two taxes which is which is in this on this paycheck let's let me highlight them in yellow because they are important we're going to have to talk about them. Social security and Medicare tax okay those taxes are mandatory and we have to know a little bit more about them. So what do we need to know about them? Those two taxes are under something called FICA. What is FICA? FICA stands for Federal Insurance Contribution Act. It's the law that allows the government to take that money away from you. How does FICA work? FICA is two taxes. One is called FICA Social Security and the other one is FICA Medicare. It's the same law but it's imposed on two different taxes. FICA Social Security I'm going to say SS for Social Security and Med for Medicare okay. Now how does FICA Social Security and how does FICA Medicare works? So you have to know the rules so now pay attention pay a little bit of attention here. And these numbers are for 2018 they could change you know in 2019 2020 they already changed in 2019 because we are we are already in 2020. So FICA rate so there is a rate the rate is a percentage FICA takes 6.2 percent of your paycheck 6.2 percent so if you made a thousand dollar you multiply this by 6.2 and that's your social security tax however once you have earned up to once you have earned up to 128,400 they stop listen to me carefully once the individual earned in a year to be more specific once in any particular year once in 2018 you earned more than 128,400 once you earn more so if you earned 128,400 and one dollar that additional one dollar that you earned above that 128,128,400 is social security tax free you no longer have to pay social security on that additional dollar very important so there is a limit the rate is 6.2 but there is a limit now this limit a change I believe in 2019 was in the 130,000 I don't know the exact amount it's gonna change anyhow every year it changes okay so that's very important to remember that social security rate is 6.2 but there's a limit Medicare the rate is 1.45 the rate is 1.45 lower but it doesn't matter there's no limit if you make five dollars five thousand dollars five million dollars or five million dollars you would keep on paying 1.45 percent on all your wages so there's no limit 1.45 percent okay so the employer must withheld notice it's must it's not option they must withheld taxes to the internal revenue service so when it comes to FICA social security and FICA Medicare they have to withheld those taxes okay remember social security they stop at some point once you reach 128,400 now the employee income they could be subject to other taxes and withholding like what like federal tax and state tax and local tax in the U.S. so the federal government wants their share the state government wants their share and and and local government you know local tax is not in everywhere but we have to you know talk about it so in the U.S. you could have not you could you're usually subject to three different taxes actually actually up to this point five you are subject to FICA social security FICA Medicare then you have federal income taxes to pay state income tax to pay and local up to this point five different taxes so those amount are withheld depending on the employee's earning tax rate and the number of withholding allows so how much do they take federal income tax well depending on when you what you tell them what's your status single married how many withholding you have it's it's a topic for a different discussion but the point is you tell them do you fill out a form called to be more specific form called w4 and based on that that will take your federal withholding state and local usually they are flat rate for example in Pennsylvania the state is 3.07 and most local is 1% okay but the point is it's usually flat now you have to remember that employer must pay the taxes from the employee gross pay to the appropriate government agency so when when when your employer takes that money they don't keep it they send it to the federal government they send it to the state government they send it to the local government so they have to it's a liability on them remember that's a liability again the amount withheld depend on the employee request because the employee could have also other voluntary deductions other voluntary deductions like what union dues if you're part of a union you have to pay your dues you'll tell your employer take $20 from my paycheck if you want to send some money to your savings account if you are contributing to your pension if you are paying for insurance if you would like to give some money to the Red Cross or to your favorite charity those are amount withheld but those are voluntary deduction you tell them to take it out okay employers of voluntary amounts with held from the gross pay to the designated agency so they take this money based on what you tell them then they send it to your union they send it to the Red Cross they send it to Blue Cross Blue Shield you know your tier 401k administrator whoever you want the money to be sent to now the best way to illustrate this is let's take a look at an actual journal entry so let's assume a company paid an employee $2,000 let's take a look at the journal entry for that $2,000 okay if they pay $2,000 the company will debit salaries expense $2,000 now in previous sessions you say they pay $2,000 debit salary expense credit cash $2,000 well that's not really what happened what happened is from that $2,000 the the employee the employee now we're assuming that this employee did not reach $128,400 the limit they'll have to pay 6.2% for their FICA federal insurance contribution act which is social security if you take $2,000 times 6.2 will give us $124 now we have now we credit an account called social security taxes payable which is a liability the employee will have to pay $1.45 for their Medicare so if you take $2,000 times $1.45 will give you $29,000 again FICA Medicare payable and I'm going to highlight those two taxes because we're going to get back to them shortly so I just want to make a note of them for now give me one moment please okay so let me just let me highlight them because we're gonna we're going to see those two taxes down the road so I just want to highlight them for a reason give me one moment please so just remember those the $124 and the $29 just make a note of them okay also the employee will have to pay based on their income $213 to the federal government employee federal income taxes payable again a liability this the medical seems there is no state taxes employee medical insurance payable payable notice it's a liability $85 and union dues payable another liability that the employee takes from your paycheck 25 so what's left to the employee of the $2,000 what's left is $1,524 it's salaries payable okay so this is to accrue the payroll for January then on February 1st we pay the employee we debit the payable and we credit cash so what happened is now all these withholdings are liabilities to the company liabilities means they have to send the FICA money to the to Washington DC the FICA the federal government goes to the same place Washington DC the medical goes to you know Blue Cross I'm just making this a Blue Cross Blue Shield the insurance company employee union dues goes to the union so all this money is being withheld and every time they pay it they will debit the payable and they will credit the liability so that's one part of payroll liabilities or payroll expense so what's the other part what's what you don't see behind the scene what you don't see behind the scene is this if you are an employee if you are an employee in other words if you work for a company your employer the company that you work for they have their own taxes they are responsible for paying taxes what are we talking about here well let's talk about them your employer is supposed to match FICA taxes which is FICA social security and FICA Medicare employer pay amount equal to what would help from the employee's gross pay so let's go back to those two that I highlighted in yellow let me go back and highlight them in yellow and talk about them if you pay if you paid 124 dollars your employer will have to match that 124 if you pay 29 dollars your employer will have to match that so your employer behind the scene will have to match that why because the true rate for FICA social security is 12.4 percent not 6.2 you pay 6.2 your employer pays 6.2 the true rate for FICA Medicare is 2.9 not 1.45 you pay 1.45 your employer pays 1.45 now if you're self-employee if you have your own company you have to pay both so the first thing you need to know that the employer behind the scene the employer behind the scene pays those two taxes on your behalf which is they are responsible for doing so because you are an employee in addition to those two taxes your employer pays federal and state unemployment there are two additional taxes two additional taxes that you don't pay now in pennsylvania because i live in pennsylvania i'm familiar with the state you do pay a small amount in state unemployment but we don't have to worry about this in general in general employer only pays federal and state unemployment what are those federal and state unemployment basically let's talk about first social security because we didn't really talk about why do you pay social security you pay social security so when you when you are retired or disabled okay when you usually when you are retired that's the purpose of it you are getting you get paid some amount of money to live off based on what you contributed Medicare is when you retired the government will cover you from an insurance perspective so any medical expenses you are covered by the government so that's what you paid for those FICA social security and FICA Medicare what about the federal and state unemployment the state unemployment and this is a big issue now especially with the coronavirus many people are going to be laid off state unemployment is when you are when you lose your job of a fault that's not of your own so basically you were laid off for example now the coronavirus many people many people already 3.2 million people lost their job last week so what happened is when your employer says i'm sorry i don't have any business i have to let you go so what happened is you file unemployment with the state as long as your employer which they have to pay into the state pool they have to pay money to the state then when you are laid off you will get you will get money from the state basically 60 to 80 percent of your salary generally speaking within a limit so why do you pay why does the government also pay federal why does the employer not the government also pay federal unemployment where the state is to get your money back the federal the federal basically monitor the state and if the federal needs if the state need help the federal government will intervene and help them with the unemployment because that happened in 2007 2008 the government the federal government kicked in a lot of money to help the state funder unemployment so that's why you pay both obviously pay more to the state and a little bit to the federal government okay so how much do you pay in taxes for the state and how much do you pay for the federal government so listen to me careful let's talk about the federal government first this is food it's called abbreviated as food a federal unemployment tax act food here we go the rate is the rate is six percent that's the rate but watch you only pay six percent on the first 7 000 off wages so once the employee make more than 7 000 the employer the company will stop paying taxes on your behalf so the rate is six percent however they will give you a credit up to 5.4 for sura paid so what happens they would say okay you are responsible for six percent then on literally on the form and i used to fill out a lot of these forms let literally on the form they would say okay are you in good standing with your state in other words are you paying your unemployment with the state in 99.999 percent of the time the answer is yes if that's the case the federal government says i'm going to give you a credit of 5.4 percent so all you have to pay is 0.6 percent so the rate the food rate is 0.6 percent but no it's six percent originally then the federal government gives you a credit and remember there is a limit so let's explain a little more how does the limit work it means the maximum amount we pay per year is 7 000 times 0.6 percent it's even less than 1 percent it's even less than 1 percent 0.6 percent that's the maximum amount we pay on behalf of an employee so this is sura now let's talk about sura sura as a state unemployment tax well each state is different so in the problem when you are you know when you are giving the problem you're going to be told it's 5.4 or 3.7 or 6.2 it doesn't matter and also there is a limit and we're going to assume the limit is 7 000 the limit each state has a different limit but for our purposes we're going to use a limit of 7 000 same exact concept it means the maximum you will pay per year is 5.4 assuming the rate is 5.4 times 7 000 for any particular employee now the state they have a meritorating system meritorating it means if you don't let your employee go a year after year the 5.4 goes down to 5.0 then again if you don't let your employee goes it goes to 3.7 so it goes down however your credit for the real world would still be 5.4 so the point is if you don't lay off employees that's the point i'm trying to make if you don't lay off employees your rate your expense for the sura will go down the sura goes down so remember in addition to paying the employee your employer will have to incur sura and sura on your behalf so let's take a look at an example to see how this will all work you remember we paid that employee in the prior example $2 000 remember that what we did is we paid they paid 124 in taxes in social security taxes the employer will have to come up with 124 they also paid $29 in taxes you have to come up with $29 you means the employer okay so notice those two you remember i highlight them in yellow and i told you remember those two numbers we're going to see them again and this is where we are seeing them now this is where we are seeing them sorry about that this is where we are seeing those two numbers remember i highlight them in yellow in addition to those two your employer will have to pay sura and sura how much do they pay sura and sura remember this employee got paid $2 000 we're going to assume that this employee did not reach $7 000 yet we're going to assume that this employee did not earn $7 000 yet therefore they'll have to pay 5.4 percent which is $108 and for sura 0.6 percent which come up to $12 so adding all these up those up well those four figures will add up to the payroll tax expense of $273 so simply put you paid the employee $2 000 plus you incurred $273 and payroll tax expense so simply put this employee cost the company $2273 why because they paid the employee $2000 and the employee walked away with $2000 they did not really walk away with $2000 because the employee took the $2000 then they had to pay their taxes but the company incurred $2000 then the company had to pay $273 on behalf of that employee in various taxes now so faika amount are the same as the amount what held from the employee gross wages notice they are the same so the those two are the same whatever the employee pay the employer will have to pay now I would say the best way to illustrate this is to actually work an actual example which I will work an example in the next recording just to make sure we clarify this example because we did not work with a limit so it's very important to understand how the limit work in these exercises anyhow in the next session I would look at I would look at an example then we'll move on to estimated libraries if you like this recording please like it share it put it in playlist if you're looking for additional resources visit my website study hard stay motivated and stay safe during those coronavirus outbreak good luck