 Hello and welcome to this session. This is Professor Farhad. In this session, we would look at a comprehensive example that deals with payroll liabilities and deduction. Every time I mention the word example, it means I explain the concept in a separate recording. So if you want to see the explanation about this concept, please look at the previous recording. This topic is covered in financial accounting as well as the CPA exam. As always, please connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1600 plus accounting, auditing, finance and tax lectures. If you like my lectures, please like them, share them, subscribe to the channel. If they benefit you, it means they might benefit other people. Please share the wealth, especially these days with the coronavirus. Most students are staying home to learn their accounting material and please connect with me on Instagram. On my website, farhadlectures.com, you will find additional supplementary information. If you are looking to supplement your accounting education and or especially your CPA exam, looking for those six to ten extra point to get the 75 to pass the exam, check out my website. So let's take a look at this exercise. First, we want to make sure we understand what we are giving and what we are told to do. So this example basically illustrates all about payroll liabilities and a payroll register. So we have Star Company that has five employees. Employees paid by the hour earn $10 per hour for regular 40 hour work week and $15 per hour overtime beyond beyond the 40 hour work week. Hourly employees are paid every two weeks, but salaried employee are paid monthly on the last bi-weekly pay day of each month. FICA social security taxes are 6.2 for the first 128,400 pay to each employee. So the first thing we want to draw your attention to here we are using the limit. So social security, you'll you pay social security up to 128,400 and the rate is 6.2. The Medicare rate is 1.45. There is no limit. FUDA taxes is 0.6 and SUDA taxes 5.4% on also on the first 7,000. The company has a benefit plan that include medical insurance, life insurance and retirement funding for employees. Under this plan, the employees must contribute 5% of their gross income as a payroll withholding, which the company matches with double amount. So you pay and they match it, they match your contribution. Following is a partially completed payroll register for the bi-weekly period ending August 31st, which is the last day of August. So they are giving us enough information that we can complete this payroll register. So what are we looking at? So first let's take a look at the payroll register and make sure we know how to read it. For example here we have the employee name, Caitlin Anthony Nicole Durkumleth pay execute the current period. This is how much they earned up to this point. Caitlin 126,600, Anthony 6,800, Nicole 15,100, so on and so forth. The current pay for this period we have some individuals who are salaried and some who are hourly. So they're telling us which one is salary and which one is hourly. We are giving this the pay, how many hours they work this week. If any overtime remember the overtime they get $15 for the overtime and the gross pay for the salary employee. Also they're giving us the federal income tax withholding and the state income tax withholding, the federal as well as the state. Then we have to compute for each employee FURA and SURE, the FURA amount and the SURE amount for each employee. Then we have to compute FICA Social Security for the employee and FICA Social Security for the employer. It's the same for both. We're going to have to compute FICA Medicare for the employee and FICA Medicare for the employer. Again it's going to be the same for both employee and employer because they are the same. The employee benefit plan withholding, EE benefit plan withholding, it's going to be 5% of their gross pay and the employer will double that amount, will double that amount. Then the last column which is not clearly shown, it's going to be the net pay. So starting with Caitlyn, again as we said FICA, I'm sorry federal and state income taxes are being computed for us or giving already. We have to compute FURA and SURE. Here's what we are told from the problem. FURA is 0.6 and SURE is 5.4 on the first 7,000. Well only the first 7,000. Caitlyn already made 126,600. Caitlyn already exceeded 7,000 long time ago. Therefore there is no FURA and there is no SUTA for her. Now we need to compute if any the FICA Social Security for the employee and the FICA Medicare for the employee. Now there's also a limit for FICA Social Security. What's the limit? The limit is we are told the limit is 128,400 and this could change 128,400. Now as of today, as of the prior period, Caitlyn already made 126,600. If we add the $7,000, if we take 126,600 and we add $7,000 to that amount, it's going to take her to 133,600. What happened is this? So if this is the limit, if this is, let me change the pen here, if this is the limit, if this is 128,400, Caitlyn was right here. Caitlyn was at 126,600 and with this pay, she's going to go above the limit. She's going to be 133,600. Remember any amount above the limit, any amount above the limit, so this amount here is SS Social Security tax free. So the amount here is not Social Security tax free. And how much is the amount here? Well, we have to take the difference between 128,400 minus 126,600. So if we take 128,400 and we deduct from it 126,600, the amount that's subject to Social Security is 1,800. So simply put, she's going to be paid 7,000 of this amount. 1,800 is subject to Social Security in the remainder, whatever the remainder is, which is the difference between 7,000 and 1,800, which is 5,200. This is SS tax free and this is the 1,800 is taxable. Now we're going to take the 1,800 and multiply it by 6.2%. That's the rate for Social Security. So if we take 1,800 times 0.062, that's going to give us $111.60. So that's Social Security, FICA Social Security 111.60 and that's going to be both for the employee, for the employee and the employer, for both the employee and the employer. Now we found the Social Security. So Caitlyn, part of it was taxable, part of it was not taxable. Why? Because she already, with this paycheck, she exceeded the limit. Now going forward till the end of the year, going forward, she will not have to pay Social Security and the employer will not have to pay Social Security as well because Caitlyn exceeded the limit. Okay, so that's Social Security. Let's find out about Medicare. Well, Medicare is pretty straightforward. We'll take the gross pay, $7,000 times 1.45%. And that's going to give us $100, $1.50, $101.50. Well, now we have to compute the benefit. The benefit, it's going to be 5%. The benefit is 5% of the gross pay. All what you do is you'll take 7,000 times 5% and that's going to give us $3.50. The employer is going to double that amount. It's going to be $700. The employer will contribute $700. Okay, now we have to compute the net pay. So what is the net pay? Okay, the net pay is the gross pay minus all the deductions. So what is the net pay for this example? The net, sorry, what's the gross pay? The gross pay is $7,000. Then we have to deduct from the gross pay. We have to deduct from the gross pay and this is going to be for all of them. But now you know because I can do the computation every time. So we're going to deduct state income tax, federal income tax. We're going to also going to be deducting $111.6 for the employee portion, $101.50 for the employer portion and we're going to be deducting the employee benefit portion. So if we take $7,000, so let's take $7,000 minus $2,000 for federal income tax minus $300 for the state income tax, minus $111.6 for social security, minus $101.5 for Medicare, minus $3.50 for the benefit, the employee, this employee would earn net $4,136.90. The other ones, this amount, this amount and this amount, those were paid by the employer. That's why we did not deduct them because they were paid by the employer. Now let's take a look at Anthony's pay. Now we're done with Caitlyn. Now we're going to look at Anthony's pay. Anthony is getting $500. It's a salary and Anthony already earned $6,800. Well, they already gave us the federal income tax. They already gave us the state income tax. Now we need to compute FURA and SURA if any. With his earning of $500 be subject to FURA and SURA, yes, no, or partially. And the answer is partially because the limit for SURA and FURA is $7,000. Anthony is right here. Anthony is at $6,800. With this paycheck, Anthony will be at $7,300. So of this $500, part of it will be taxable. I'm sorry, part of it will be subject to FURA and SURA and part of it will not. So the only part, it's $200 because once you add $200 to $6,800, you would reach $7,000. Now we need to do a state $200 multiplied by the rate and rate for FURA is 0.6%. So FURA is $1.20. $1.20 and for FURA, I'm sorry, for SURA for the state times 5.4%. And that's going to give us $10.80. $10.80. So we're done with FURA and SURA. Social security, Anthony is way, way, way far from the limit. So he only earned $6,800 and the limit is $1.28.400. Simply we have to take $6,800 times 6.2% and that's going to give us $31 for social security. He pays $31. The employer pays $31. Then for Medicare, the same thing. Actually, there's no limit. It's $6,800 times $1.45, which is $7.25. $7. He pays $7.25. The employer pays $7.25 and they already filled out the benefit. If he pays $25, the employer pays double that amount. So Anthony's net pay is $3.36.75. Remember, we only deduct the one that I showed you with Caitlin in red. Nicole worked 80 hours, regular hours, which is that's going to give Nicole $800 because 80 times 10. And Nicole worked an extra 8 hours, which is times 15, which is going to be 120. So the gross pay for Nicole is 920, the gross pay. We're already given federal and state. Now we have to compute Sura. No Sura because Nicole already earned $15,100. There is no Sura and there is no Fura for her. Now when it comes to social security, no problem. She's way far away from the limit. So 920 times 6.2. That's going to be $57.04. Same thing with employer and the employee $57.04. For Medicare, the same thing, 920 times 1.45, which is $13.34. $13.34. Now we're going to take 920 times 5% for the benefit. That's $46. That's going to be $46 and the employer will double that in benefit. That's 92, the double of $46.92. Then we have to compute Nicole's net pay. Again, it's the gross pay, 920 minus the federal, minus the state, minus the social security, minus the Medicare, minus the benefit. And that's going to give Nicole a net pay of $668.62. Now let's look at Zoe. Zoe already earned $6,500. So let's see. Let's see what's going to happen here. Same concept. She worked 80 hours times 10. That's $800. She worked four extra hours, which is going to be $60, four times 15. The gross pay is $860. Now notice what's going to happen. This $860, it's going to put her above the 7,000 limit for Fura and Sura. So before this pay, if this is the limit, this is 7,000 is the limit, before this pay, $6,500 is here. After this pay, if we take $6,800 plus $860, it's going to put Zoe above $7,000. What does that mean? It means only $500 is subject to Fura and Sura. Therefore, we'll take $500 times 0.6%. And that's going to give us, that's going to give us $3. That's going to give us $3. And we're going to take $500 times 5.4%. And that's going to give us $27 for Fura. Now for Social Security, it's $860 times $860 times 6.2, which is $53. $53.32. $53.32. And she pays that amount and the employer pays that amount. We're going to take the gross pay times 1.45. That's going to be $12.47. $12.47. Take the gross pay 860 times 5%. That's going to give us $43. She pays 43. The employer matches, double that amount and matches 86. And Zoe's gross pay is 6.29.21. Now we still have Gracie, Gracie, the Gracie amount. Okay, let's take a look at Gracie's amount. Gracie already earned $5,000 and the regular pay is $740. Okay, well, guess what? $5,000 plus $740, she's going to be below $7,000. Therefore, the full $740 is subject to Fura and Sura. Therefore, we're going to take $740 times 0.6% and that's going to be $4 and $0.44. And we're going to take $740 times 5.4%. And that's going to be $39.96. Now with Social Security, it's going to be $740 times 6.2, which is way Gracie away from the limit, which is $128.400. And that's going to give us $45.88, $45.88, $45.88, $45.88. For Medicare, the same thing, the gross pays $740 times 1.45. That's going to give her $10.73, $10.73 for Medicare. And for the employee benefit, she's going to have to pay 5% of her gross pay, which comes up to $37. Multiply that by 2. The employer will have to come up with $74. And Gracie take home pay is $535.39. Now on the payroll register, what you do is you add up everything. So all the federal state unemployment is $2,380. All the state unemployment withholding is $3.38. If we add up all of FURA, it's going to add up to all of FURA. So basically what I'm doing now is adding up all of FURA for the period. And they add up to $8.64. All of SURA at up to $77. This is for all the employees during this period and $0.76. All of Social Security, $298.84. And the other number has to be the same because they're always equal to each other. All of Medicare, $145.29, $145.29. And for the benefit, the employee paid $5.01, and the employer paid the double $1,002. And the net pay for all the employee is $6,306.87. So this is the net pay. Now what you'll be asked is to complete the journal entry. The journal entry, okay, so when the company pay those employees, they have to make a journal entry. What journal entry do they make? Well, what journal entry do they make? Think about it. If we look, if we add up the total of the gross pay, we didn't add up the gross pay, we have to add up the gross pay. So we're going to add up $7,000 plus $500 plus $920 plus $860 plus $740. They add up to $10,020. So this is the expense. So we're going to debit salaries expense, $10,020. We're going to credit all the withholding, and we're going to credit the payable for the employees. So it will look something like this. We debit salaries or wages expense, then we credit FICA payable for Social Security, $298. And it's coming from here. This is the employee portion. Medicare payable $145. Again, it's coming from this $145.29. Then employee federal taxes payable, employee state income taxes payable, employee benefit and salaries payable. We're going to pay the employees net $6,306. This was on August 31st when we paid them the following day, September 1st when we cut the check, we debit the payable and we credit the cash. So what we did, we filled out the payroll register and we cut the check. This is not the only thing that you have to do. Remember what we did now, let me highlight in yellow, what I just did, I recorded the expense and I withheld, this is what I did, my journal entry, everything that I highlighted in yellow coming from those highlighted in yellow. Now what's going to happen is the employer, remember the employer also, so I'm going to highlight this in green, see if this is work, I'm going to highlight those numbers in green. Those are the employer portion of things. So simply put the employer paid FICA, we'll have to pay FICA, Social Security, FICA Medicare, federal unemployment, state unemployment and they also have to accrue the employee benefits. So let's do the entry for those highlighted in green. So what's going to happen is we're going to have to credit FICA, Social Security payable for the employer, same amount, FICA Medicare for the employer, the same amount, federal unemployment, $8.64, state unemployment $77.76 and for all of these we will debit payroll tax expense. So this is the employer payroll tax expense because they paid the employee, which is $530.53. Now also we have to accrue the employee benefit expense because the company was responsible for doubling the benefit, whatever the employee paid, they paid the double and the amount is 1,002, we'll debit an expense and we credit a payable. Now eventually what's going to happen, all these payable will have to cut a check for all these payable. So when we cut the check for all these payable as well as these payables, okay. Now we can combine, for example, we can combine FICA, Social Security payable here and FICA, FICA, Social Security payable here because, sorry, we can combine, we can combine this FICA payable Social Security with this FICA payable Social Security, we can combine this FICA Medicare with this FICA Medicare. So those are combined. So what we do, once we are ready to cut the check, we combine the FICAs, Social Security, the FICA Medicare, we debit the payable, the federal, when we pay the state, we debit the state, when we pay the employee benefit, we debit the employee benefit plan payable, when we debit the federal and we debit the federal unemployment and the state unemployment, then we credit the cash for the full, for the full amount, for the full amount. Then we credit the check, we credit the amount, we credit the check for the full amount, okay, which is the full amount, 5,245. Actually we don't, we don't write, we don't write the same check, simply put in the real world here's what happened. FICA, FICA and federal, those goes to Washington DC, actually they go to the same amount, they go to, we can cut the same check for those. Then depending what your state you live in, you know, the state income tax goes to the state capital, whatever you live in, the employee benefit, remember they have for, they had the health insurance dental and 401k retirement. So we have to cut separate paychecks, federal unemployment goes separate to a separate place and state unemployment goes to a separate place. So basically we have one, two, three, four, five, six, eight, eight different checks. This is one check, this is two, and the employee benefit, we have three type of benefits, that's three, one and one. So sorry, one, two, five, seven, we got literally in the real world, you'll have to cut seven separate checks. So I hope this, this exercise helped you understand how we, how we journalize entries for payroll, payroll. If you have any questions, I suggest, if you are totally lost, I suggest you view the recording explaining the concept of payroll liabilities. Otherwise, hopefully this exercise kind of reinforces your knowledge about this topic. Any questions, email me. If you like this recording, please like it. In the next session, we will look at estimated and contingent liabilities. Like the recording, share it, visit my website for additional resources, study hard and stay motivated.