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Unit 3: Payroll
Performance Indicators:
3.1 Account for payroll transactions (e.g., earnings, taxes, benefits, other deductions) (SP)
3.2 Process payroll payments and remittances (e.g., employees, benefits, taxes) (SP)
3.3 Prepare federal, state, and local payroll tax returns and reports (SP)
FI:686 Account for payroll transactions (e.g., earnings, taxes, benefits, other deductions)
Curriculum Planning Level: SP
Objectives:
a. Define the following terms: payroll, payroll transaction, deductions, earnings, and benefits.
b. Explain the importance of accounting for payroll transactions.
c. Describe types of payroll deductions (e.g., taxes, benefits, etc.)
d. Describe the role of payroll software programs in payroll accounting.
e. Explain steps involved in accounting for payroll transactions.
f. Demonstrate procedures for recording payroll transactions.
Teacher Notes
3.1 Account for payroll transactions (e.g., earnings, taxes, benefits, other deductions) (SP)
Discussion Guide
Performance Indicator: Account for payroll transactions (e.g., earnings, taxes, benefits, other deductions)
THINK ABOUT IT
Payroll is a foundational element of any business, big or small.
It’s not enough that employers just pay their employees, though – they need to account for those payroll expenses in their records.
It is vital that businesses account for payroll transactions to remain up-to-date, compliant, and efficient.
KEY CONCEPTS
Slide #1 Why Account for Payroll Transactions?
Payroll is the sum of money paid to employees in a given period.
Payroll transactions are the items or events that make up the payroll expense, such as earnings, taxes, benefits, and more.
Recording payroll transactions is a part of payroll accounting.
Typically, payroll is managed by accounting or human resources departments, although sometimes small business owners will handle payroll themselves.
Employee livelihood depends on accurate and timely compensation procedures.
Ensuring that employees are duly compensated for their work is not just beneficial to employees.
It’s important for businesses, too.
Payroll is typically a large expense for businesses.
Companies depend on payroll accounting to provide an accurate and up-to-date visual of the business’s finances.
Accurately accounting for payroll transactions also helps companies remain compliant with federal, state, and local regulations.
Slide #2 Types of Payroll Deductions
Payroll deductions are withholdings from an employee’s earnings, or income.
Some deductions are mandatory, which means they are required by law.
Many mandatory deductions contribute to public services, like education and the military, or to federal programs like Social Security and Medicare.
Mandatory deductions include the following:
FICA tax
Federal income tax
State and local taxes
Garnishments
Other deductions are voluntary, which means employees consent to withhold money from their paychecks.
They do this in order to take advantage of benefits, which are advantages employees receive in addition to their wages.
Voluntary deductions include the following:
Health insurance premiums
Retirement plans (401k, IRA, etc.)
Keeping accurate records of these payroll transactions is crucial to ensuring that all money is being distributed and/or withheld according to both law requirements and employee wishes.
Slide #3 Payroll Software Programs
Payroll is clearly important.
However, recording and processing payroll can be extremely time-consuming because there are several responsibilities that are involved in payroll.
Some small businesses might be able to process payroll manually, but most companies, especially larger ones, automate this process with the help of payroll technology.
Implementing payroll software programs helps to streamline the payroll process, provides more transparency to employees (e.g., through online portals), and allows company leadership to focus on running the business.
A big benefit of using payroll technology is that programs automatically calculate and deduct taxes from employee paychecks, so businesses don’t have to worry about misreporting wages.
While some payroll software programs can be expensive, many companies find that the cost is far outweighed by the many advantages the technology provides.
Slide #4 How To Account for Payroll Transactions
Before employees receive compensation and the government receives tax money, businesses must account for payroll transactions in their accounting books.
Payroll transactions are recorded through payroll journal entries in a chart of accounts, which is a list of all financial accounts in the company’s general ledger.
The following steps outline how to account for payroll transactions:
Establish payroll accounts.
Generally, when doing payroll accounting, companies use expense, liability, and asset accounts.
Within each account is a sub-account, which describes more specifically the entry being made (e.g., payroll expenses, payroll tax liability, savings account, etc.)
Sub-accounts will vary from business to business.
Determine deductions.
Calculating taxes and other deductions is important, because employers need to determine company contributions and how much money must be withheld from employee wages.
Tax requirements will vary, so businesses must be sure to do their research in order to remain compliant with payroll regulations.
Record expenses.
Expenses represent money that a business spends.
For example, businesses record gross wages in an expense account.
When an employee is paid, the expense account is increased because the company is spending money to pay them.
Record liabilities.
Liabilities are the debt that a business owes but has not yet paid.
For example, businesses increase their liability accounts as employees earn compensation, because as workers earn more, the company owes more.
Maintain records when transitioning accounting periods.
Eventually, companies must pay the money due to employees and the government.
When the accounting period shifts, employers make additional journal entries to reflect the change in finances, such as by decreasing the liability and asset accounts.
Assets are anything of value that a business owns.
For example, as businesses pay employees, they decrease their asset account – because money they once owned now belongs to the employees as part of their compensation.
When recording payroll journal entries, remember to record debits and credits.
Debit is the amount a business owes.
Credit is the amount a business is owed or paid by someone else.
Whether your payroll entry notates debit or credit depends on the transaction made.
It’s also important that companies double-check their records for accuracy throughout the payroll process.
Ensuring that debits equal credits (i.e., keeping the books “balanced”), helps keep records accurate – which is of the utmost importance.
To dive further into payroll accounting and journal entries, check out this example from “The Basics of Payroll Accounting: How to Record Payroll Entries in your Books”:
FI:687 Process payroll payments and remittances (e.g., employees, benefits, taxes)
Curriculum Planning Level: SP
Objectives:
a. Define the following terms: payroll, remittance, and benefits.
b. Explain the importance of processing payroll payments and remittances on time.
c. Describe possible consequences of failing to process payroll on time.
d. Discuss steps in processing payroll payments and remittances.
e. Demonstrate procedures for processing payroll.
Activity:
Teacher Notes
3.2 Process payroll payments and remittances (e.g., employees, benefits, taxes) (SP)
Discussion Guide
Performance Indicator: Process payroll payments and remittances (e.g., employees, benefits, taxes)
THINK ABOUT IT
Jerome works at a local pizza shop and gets paid every other Friday.
Tomorrow is payday, and he’s looking forward to using his paycheck for a weekend dinner and movie with his partner.
However, when Jerome looks at his bank account the next morning, his paycheck isn’t there!
Turns out, the pizza shop didn’t process payroll on time—a serious mistake.
Processing payroll payments and remittances on time is one of the most important things companies must do for their employees and for themselves.
Read on to learn more about this crucial function of business.
KEY CONCEPTS
Slide #1 The Importance of Processing Payroll
Payroll processing is a multistep process that involves compensating employees for work completed and withholding appropriate amounts for taxes, benefits, and other deductions in a given accounting period.
When an employee is hired, they are expected to do work in exchange for compensation.
When Jerome agreed to work at the pizza shop, he did so with the knowledge that the company would compensate him for his work.
Payment isn’t just given to employees automatically, though—businesses need to work behind the scenes to prepare and process payroll to make sure employees are paid.
Companies also need to make sure they are making appropriate deductions for benefits (advantages employees receive in addition to wages, such as health insurance) and remittances (payments of money transferred to other parties, such as taxes paid to the government).
Some components of payroll processing are regulated by government agencies, like the Internal Revenue Service (IRS) and the Department of Labor (DOL), and regional processing laws.
Slide #2 Consequences of Payroll Processing Failure
Processing payroll payments and remittances accurately and on time is essential for businesses.
Companies may face serious consequences for failing to process payroll, such as the following:
Financial repercussions
Decreased employee morale
Damaged business reputation
Civil and criminal penalties
Most importantly, failure to process payroll can result in serious consequences for employees and their livelihoods.
Without compensation, workers may not be able to pay for housing, utilities, and other life necessities for themselves and their families.
Slide #3 How To Process Payroll
Processing payroll looks different from business to business.
Companies might choose to process payroll themselves, or they might outsource payroll processing to an accountant or payroll provider.
Whatever the business decides, they generally complete the following steps to process payroll:
Create an employer identification number (EIN).
The EIN is like a social security number for a business.
The government uses this number to track the business and ensure payroll tax requirements are being met.
Gather employee information.
Before processing payroll, businesses need to make sure they have relevant tax documentation for employees, such as Form W-4 (Employee’s Withholding Certificate) and Form I-9 (Employment Eligibility Verification).
Companies will likely also want to have employee job applications on hand, as well as information regarding worker classification, elective deductions, and wage garnishments, if applicable.
Develop payroll policy.
Businesses must choose a payroll schedule that both works for the company and adheres to any payday requirements.
Options include monthly, semimonthly, biweekly, and weekly.
Additionally, businesses should make sure there are clear guidelines surrounding policy items like workweek definitions, overtime, and wage structure.
Calculate gross pay.
Gross pay is the money an employee makes before taxes.
Businesses need to make sure time and attendance are tracked accurately, and then make calculations as appropriate regarding number of hours worked, hourly rates, overtime, etc.
Determine deductions.
Deductions are withholdings from an employee’s earnings.
Some deductions are mandatory, such as federal, state, and local taxes.
Other deductions are voluntary, such as health insurance or retirement contributions.
These amounts must be calculated for each employee and then subtracted from their gross pay to calculate net pay, or the amount the employees will actually receive for their paychecks.
Issue paychecks and remittances.
After all calculations have been made, businesses need to send earned money to the employees and report and submit taxes to government agencies.
This is done on a consistent, ongoing basis to remain compliant with payroll regulations.
Slide #4 Keeping Processes Efficiently
Many businesses find integrating technology in their payroll systems helps ensure that processing is accurate and timely.
Investing in payroll software and digital timekeeping tools helps eliminate manual data entry, which saves time and reduces the chances of human error.
It’s also important to consolidate pay periods for different types of employees (e.g., hourly vs. salaried workers), integrate payroll with other processes when possible, and stay updated on payroll requirements.
FI:443 Prepare federal, state, and local payroll tax returns and reports
Curriculum Planning Level: SP
Objectives:
a. Explain the importance of preparing federal, state, and local payroll tax returns and reports.
b. Describe employer tax responsibilities for preparing federal, state, and local payroll tax returns and reports.
c. Explain the role of recordkeeping in preparing federal, state, and local payroll tax returns and reports.
d. Describe possible consequences of failing to accurately prepare and submit federal, state, and local payroll tax returns and reports.
e. Demonstrate procedures for preparing federal, state, and local payroll tax returns and reports.
Activity:
Have students read the article Understanding payroll tax payment and filing requirements (https://www.wolterskluwer.com/en/expert-insights/understanding-payroll-tax-payment-and-filing-requirements) about preparing payroll tax payments and information. Then, have them answer complete the worksheet found on page 4-131. An answer key is provided on pages 4-132—4-133.
3.3 Prepare federal, state, and local payroll tax returns and reports (SP)
Discussion Guide
Performance Indicator: Prepare federal, state, and local payroll tax returns and reports
THINK ABOUT IT
You probably know that each spring, individuals across the U.S. prepare and submit federal, state, and local tax returns.
However, individual taxpayers aren’t the only ones who need to prepare and submit tax returns and reports—businesses do, too!
Filing payroll taxes is an important part of any company’s operations.
Read on to learn more about this significant business responsibility.
KEY CONCEPTS
Slide #1 Why Are Tax Returns & Reports Important?
Taxes are monies that individuals or businesses must pay to the government.
Taxes go to the federal, state, or local government and help pay for services that support people within those respective communities.
(For example, federal taxes help pay for national services like Social Security and Medicare.)
Preparing tax returns ensures that the payer (i.e., the business) is paying the exact amount of money due to the government—no more, no less.
Without this money, many of the goods and services we depend upon the government for would no longer be available.
Slide #2 Employer Tax Responsibilities
Employers have several obligations related to payroll taxes.
Businesses are responsible for calculating income tax withholding, depositing payroll taxes, and reporting payroll activities throughout the year.
These responsibilities are explained further below:
Calculating.
Employers must figure the amount of income tax to withhold from employees’ paychecks in order to cover federal income tax for the year.
This calculation also extends to state and local taxes as applicable.
While employees ultimately pay for the income taxes out of their paychecks, employers are responsible for calculating and making the deposits.
Depositing.
Employers must deposit withholdings (e.g., Federal Insurance Contributions Act [FICA] tax, which funds Social Security and Medicare) and other payroll taxes (e.g., Federal Unemployment Tax Act [FUTA]) to the appropriate parties according to set deadlines.
Deadlines are established by the Internal Revenue Service (IRS) and are typically either semi-weekly or monthly, depending on the size of the business.
Reporting.
Businesses must maintain transparency with both employees and government agencies (such as the Social Security Administration) by making timely reports regarding taxes and compensation.
Employers make these reports by filing forms with the IRS.
Slide #3 Important Payroll Tax Forms
Maintaining payroll tax compliance includes having a foundational knowledge of important payroll tax forms.
In addition to any required state and local required tax forms, employers may need the following:
Form I-9 (Employment Eligibility Verification).
This form must be completed for all employees upon hire to verify that they are eligible to work in the United States.
Form W-2 (Wage and Tax Statement).
This form must be completed annually for all employees to report wages paid and taxes withheld. It provides tax information to the Social Security Administration and must also be sent to each employee for their own tax returns each spring.
Form W-4 (Employee’s Withholding Allowance Certificate).
This form provides information to the employer about how much federal income tax to withhold on each employee paycheck.
Form 941 (Employer’s Quarterly Federal Tax Return).
Employers use this form to report withholding amounts for federal income and FICA taxes, among other tax information.
Form 940 (Employer’s Annual Federal Unemployment Tax Return).
Employers use this form to annually report and pay unemployment taxes to the IRS.
Slide #4 How Recordkeeping Can Help
Failing to accurately prepare and submit tax returns and reports can result in serious consequences.
Employers and responsible parties may face heavy fines and penalties due to noncompliance.
Additionally, if a responsible party willfully fails to deposit taxes withheld from employee paychecks, they may be subject to personal liability.
The severity of possible consequences and the complex nature of payroll tax rules means businesses must take steps, like diligent recordkeeping, to ensure accuracy.
Recordkeeping is the process of systematically recording and organizing all types of information necessary to complete payroll taxes.
There are typically federal and state record-keeping requirements that instruct employers to retain records for a certain length of time.
Many businesses choose to outsource payroll tax responsibilities to ensure accuracy, timeliness, and compliance.
The information that employers should keep record of includes the following:
Employee information (name, address, social security number, etc.)
Compensation information (payment amount, date, period of service, etc.)
Copies of tax returns and forms (W-4, W-2, any undeliverable forms, etc.)
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