 which would look at a comprehensive payroll exercise that illustrates the concept of income tax withholding, how to compute FICA, including the limit, how to compute SUDA and FUDA, including the limit, how to compute the net amount, how to journalize the salary and wages expense, how to journalize the employer payroll tax expense, and how to journalize the payment of taxes. So this exercise is, I believe, it's a comprehensive, it's covered in an intermediate accounting course, the CPA exam, and a typical payroll course. Whether you are an accounting student or a CPA candidate, I strongly suggest you take a look at my website, farhatleptures.com. I do not replace your CPA review course. I am a useful addition to your CPA review course. My resources will provide alternative explanation, alternative multiple choice questions, alternative resources. Your risk is one month of subscription, your potential gain is passing the exam. If not for anything, take a look at my website to find out how well or not well your university doing on the CPA exam. I do have a list of other accounting courses. Here's a sample of my catalog. My supplemental resources are aligned with your Becker, with your Roger, with your Gleam. So it's very easy to follow back and forth between my courses and your CPA review course. If you haven't connected with me on LinkedIn, 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. So let's take a look at this payroll exercise for the Adam company. Adam company has six employees and this is their payroll sheet for the month of November. The unemployment compensation state rate is 1%. The federal unemployment rate is 0.8%. The limit for both is 7,000. We need to talk about the limit. Assume a 10% federal income tax rate. We're going to assume 10%. 7.65 FICA tax on employee and employer, both pay this tax and a maximum of 128, 400. We need to talk about the maximum. The 7.65 represent 6.2% for FICA social security, 1.45 for Medicare Social Security or Medicare FICA. There's no maximum on the Medicare Social Security or the Medicare FICA and we're going to explain this, each one of these numbers separately. So let's start to complete this payroll sheet in order to be able to journalize the payroll tax expense. We have earnings to date for each employee and we have this month November earnings, how much they earned. Starting with Peking, this month they earned $800 for income tax withholding, for the federal income tax withholding, we are told it's 10%. Well, 10% of $800 is $80. For SHARP, 700 times 10% is 70. MTURBO, 10% of their earnings, 10% of their earnings in total. The income tax withholding for all the employees is 3,350 and the total payroll for the month is 33,500. It works. 10% of 33,500 is 3,500. Now we need to compute FICA withholding for each employee. Now what do we know about FICA? We know about FICA that there is a limit. The limit is 128,400, a limit or a maximum. What does that mean? It means as long as the employee have not earned more than that, all the earnings are subject to 7.65 which is subject to FICA because FICA has two components. FICA has two components, has a social security component of 6.2% and a Medicare component of 1.45. Together, they make 7.65. Any amount below 128,400 is subject to both social security and Medicare. Once the employees start to earn more than 128,400, any amount above 128,400 is subject to only Medicare 1.45. And I explained this when I did the lecture about payroll, why above the limit we no longer pay social security. Now bear in mind this limit changes every year from year to year. So this limit is subject to inflation. The Congress determined that limit every year and they obviously they raise it. And if inflation is still creeping up on us as what it looks like now, it's going to be higher and higher in the future the limit. But it doesn't matter. We need to know how the limits work. So let's start with peaking. Peaking is right here. 6,800 plus 800 is way below the limit. Therefore, we're going to take peaking earnings times 7.65. If we look at S-sharp, 6,500 plus 700 is way below 128,400. If we look at M-turbo, if we look at their prior earnings plus their current earnings, all those earnings are below the limit. Therefore, the earnings for the first four employees are the earnings times 7.65. When it comes to H-heil, 1,6900. So now we have to be careful. H-heil is starting to be close to the limit. So we're going to assume it 1,6900 here. And if we're going to add 13,000, if you add 1,6400, let me get the calculator here and show you what we're doing here. Once you get closer to the limit, well, you're going to see are they going above the limit. So if we take 1,6900 plus 13,000, that's 1,29900. It's going to bring them above the limit. So now we need to find out what's that amount here because this amount is subject to 7.65 and this amount is only subject to 1.45. Well to find, we're going to have to take the limit, 1,28400 minus 1,16900. Let's see what the limit is. 1,28400 minus 1,16900, 11,500. So this amount here is 11,500. We're going to multiply this by 7.65 times 7.65 and that's going to be 870 dollars and 75 cents. So of the 13,000, 11,500 is subject to the full amount. What's left is 11,400 above the limit, only subject to 1.45%. So if we take 11,500 times 1.45 and that's going, let me see, 1,500, 1,500, not 11,000, 1,500, 1,500 times 1.45 times 1.45 that's equal to 21 dollars and 75 cents plus 879 dollars and 75 cents. That's going to give us 901, 901, 901 dollars and 50 cents and that's the FICA for Hyal. Now let's see, see wood, see wood. See wood the same, basically the same concept. See wood earnings is even closer, 121, 121900, very close and if we add 16,000 you know we're going to go above the limit. Well what does that mean? It means we have to go back and find out how much of the 16,000 is subject to the full amount of the full FICA and how much of its only subject to Medicare. So if we take 128,400 minus 121900, let's do that 128,400 minus 121900. So 6,500 is subject to the full amount times 7.65 percent times 7.65 and that amount is 497 dollars and 25 cents. Now Kathy, let's call it Kathy Wood earned 16,000 of this amount 6,500 is subject to the full amount the remainder is 9,500 and that's subject to 1.45 times 1.45 and that's equal to 137.75 plus the full amount 497.25 that's going to give us 635 in total withholding for FICA which is this amount and this amount together 635. Now FICA is the total FICA paid by the employee is 1,880. Just want to remind you right away that also the employer will have to come up with that same amount. Okay the employer will have to match FICA because half of FICA paid by the employee the other half of FICA is paid by the employer and that's why as a self-employed you pay both you pay your share and the company share but that's a different story. So we learn how to compute FICA. FICA has a limit which is 128,400. Now we're going to compute the unemployment tax rates Sura and Fuda which are bared by the employer. Again for Fura and Sura let me clear my screen because we also have a limit. So basically Fura and Sura the limit is 7,000. In other words once the employee earned 7,000 the company will stop paying Fura and Sura. If you look at Peking, Peking so far earned 6,800. Peking is very close and with this payroll they're going to go above. Well guess what if they are at 7,000 if the limit is 7,000 and they already got paid 6,800 it means the remainder 200 is subject to Sura. Well it means if they if we pay them 800, 200 is subject to Sura only 200 times 0.001, 200 times 0.01 not 0.001 1%, 0.01 is $2. It means of this 800, 200 was subject to Sura and 600 is subject to zero Sura and going forward we no longer pay any tax for for Peking on Sura. S-Sharp the same concept S-Sharp is right here 6,500 very close and for with this paycheck S-Sharp will be over. So the only amount that's subject to Sura is 500 500 times 0.01 is $5. Therefore Sura is $5. M-Turbo already is above 7,000 7,600 none of it none of this amount is subject to Sura and the same thing apply to the other employees therefore our total Sura is $7. This is total Sura. We'll do the same thing for Fuda the limit is the same but Futa is the rate is 0.8% which is 0.008 times 200 and that's going to give us $1.60. In other words Fuda rate is $1 only $1.60 why because only 200 is subject to Fuda 0.008 $1.60 same thing with S-Sharp the rate is 0.08 times 500 it's $4. Therefore the total Fuda is $5.60. Now we are ready to compute the net pay how much each employee will take home. What's the net pay? Well we're going to take the earnings 800 minus the income tax withholding minus FICA. Now in the real world you'll have federal income tax withholding you'll have state you have health insurance you will have all sorts of deductions but here we're keeping it simple so if we take $800 minus $80 minus $60.120 that's equal to $685.80 and that's the net amount and we'll do the same thing for the other employees therefore the net amount is $28,269.25. Again why didn't we deduct the the unemployment tax because the unemployment tax is paid by who by the company. Now we are ready to process the payroll we are ready to process the journal entries. We paid the employees in total $33,500 debit salaries and wages expense $33,500. We're going to credit income tax withholding which is a liability $33,350. We're going to credit FICA taxes payable $1,875 and we're going to credit cash so or payable if we did not pay them today we're going to credit cash $28,269.75 and $25. Okay so this is the salaries expense are we done yet? Absolutely not. Remember the employer will have to come up with the same amount of FICA therefore the employer will have another entry crediting their FICA taxes payable. They're also responsible for the federal unemployment insurance they're also responsible for the state unemployment insurance and they will debit an expense called payroll tax expense so this is basically the employer portion and this is the employee entry we have two entries one for the employee and one for the employer okay and notice the FICA is the same because they have to match a dollar for dollar now the the company is going to pay their taxes they're going to debit income tax federal income tax withholding $33,50 to remove this account they're going to have to debit FICA taxes payable $18,8075 plus $18,8075 those two together $37,61 they're going to debit FURA taxes payable and SURA taxes payable debit those accounts and what happened as a result basically what happened is this once we pay our taxes notice what happened this account is gone we paid FICA we paid FURA and we paid SURA simply put all these payables cancelled each other out and we obviously have to pay cash so all in all what happened at the end of the day what's left is the salaries expense and the cash amount okay that's it so we debit salaries expense for the employer and the employee portion and we credit cash for the amount paid basically this exercise is a summary is a comprehensive example for a payroll exercise I mean will you see this on the CPA exam possible I doubt it but you want to be familiar with how we do the journal entries you are responsible for understanding how FICA Medicare FICA social security works whether you are taken far or taken back so this applies to both at the end of this recording I'm going to remind you whether you are an accounting student or a CPA candidate take a look at my website farhatlectures.com I do not replace your CPA review course but I strongly encourage you to use all your resources you pass your CPA once in your lifetime throw everything on it don't short change yourself invest in yourself good luck study hard and of course stay safe