Deitz J.E., Southam J.L. Contemporary Business Mathematics for Colleges
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184 Part 3 Accounting Applications
Using the percentage method steps given, verify the federal income tax withholding for
Fran Garcia as recorded in the payroll register.
$680.00 (gross earnings from payroll register)
$ 65.38 (one withholding allowance)
3 2 (number of withholding allowances)
$130.76 (total withholding allowance amount)
$680.00 (gross earnings)
2130.76 (total withholding allowance amount)
$549.24 (amount subject to withholding)
$549.24 (amount subject to withholding)
2195.00 (less “excess over” amount in Figure 10-4)
$354.24 (amount subject to percentage computation)
$354.24 (amount subject to percentage computation)
3 0.15 (15% computation)
$53.14 (amount of tax withheld on percentage computation)
$53.14 (amount of tax withheld on percentage computation)
114.40 (base tax amount)
$67.54 (total amount of tax withheld)
Use the wage-bracket method to find the federal income tax withholding for Fran Garcia. Then
compute the difference between the percentage method and the wage-bracket method.
Wage-bracket method (Figure 10-5 because she is single) $68.00
Percentage method 267.54
Difference $ 0.46
✔
CONCEPT CHECK 10.2
The Federal Insurance Contributions Act (FICA) provides for a federal system of
old-age, survivors, disability, and hospital insurance. The old-age, survivors, and
disability insurance part of FICA is financed by the Social Security tax. The hospital
insurance part of FICA is financed by the Medicare tax. These taxes are reported
separately and are levied on both the employer and the employee. These taxes have
different rates, but only the Social Security tax has a wage base, which is the maximum
wage that is subject to the tax for the year.
The Social Security tax rate of 6.2% is levied on both the employer and the employee.
For 2007, the wage base was $97,500.
Computing Social Security, Medicare, and
Other Withholdings
Compute Social Security, Medicare,
and other withholdings.
3
Learning Objective
Chapter 10 Payroll Records 185
The Medicare tax rate of 1.45% is levied on both the employer and the employee. There
is no wage-base limit for Medicare; all covered wages are subject to the Medicare tax.
Although both rates are subject to change by legislation, they were current when we
compiled the payroll register illustrated in this chapter. All amounts are rounded to the
nearest cent. The amounts for Kyle Abrum were $33.42 for Social Security and $7.82 for
Medicare.
EXAMPLE B EXAMPLE C
Social Security deduction: Medicare deduction:
$539.00 (gross earnings) $539.00 (gross earnings)
3 0.062
(Social Security rate) 3
.0145
(Medicare rate)
$ 33.42 (Social Security amount) $ 7.82 (Medicare amount)
Many employers today provide some form of group medical insurance for their
employees. Frequently, the employee is asked to pay a portion of the premium charged
for such insurance, based on the number of dependents the employee has named to be
insured. For the payroll register shown in Figure 10-2, we assumed the weekly rates for
medical and dental plans shown in Figure 10-7.
10.5 The employer is required to
deposit FICA employee deductions
and employer contributions in a local
depository bank monthly or more
often,depending on the amount,and
to file reports and complete full
payment quarterly.
Depository requirements for FICA
taxes are similar to the requirements
for federal income tax withholdings.
Figure 10-7 Weekly Medical and Dental Plan Rates
Employee only $18.00 $9.00
Employee plus
one dependent $22.00 $10.00
Employee plus
2 or more dependents $39.00 $12.00
Weekly Medical Plan Weekly Dental Plan
Premium Paid by Premium Paid by
Employee Employee
The payroll register presented in Figure 10-2 showed that Kyle Abrum subscribed to
both the medical and the dental programs. Because of his three dependents, the amounts
of his deductions were $39 and $12, respectively.
Frequently, employees will arrange to have special payroll deductions made by the
employer to pay union dues, put money into special retirement or savings plans, or make
contributions to charitable organizations.
In addition, 42 of the 50 states have some form of state income tax, which normally
requires withholding in the same manner as the federal income tax. In such states, state
income tax withholding columns are added to the payroll register and withholdings are
made according to wage-bracket or percentage charts established by the state, in the
same manner as federal income tax withholdings.
The payroll register illustrated in Figure 10-2 reflects a $42 weekly deduction that
Kyle Abrum requested be made for payment of his union dues (other).
186 Part 3 Accounting Applications
Using the format in examples B and C, compute Social Security and Medicare amounts for
Fran Garcia, based on her gross weekly earnings of $680.
Social Security deduction: Medicare deduction:
$ 680 (gross earnings) $ 680 (gross earnings)
3
0.062 (Social Security rate) 3 0.0145 (Medicare rate)
$42.16 (Social Security amount) $9.86 (Medicare amount)
✔
CONCEPT CHECK 10.3
Completing an Employee’s Earnings Record
An employer must submit quarterly and annual reports to the federal government and
appropriate state government and pay the amount of taxes withheld from employees’
earnings for the period. To obtain the necessary information, most employers keep an
employee’s earnings record for each employee. The employee’s earnings record
summarizes by quarter the employee’s gross earnings, deductions, and net pay.
EXAMPLE D
Figure 10-8 Employee’s Earnings Record
The employee’s earnings record presented in Figure 10-8 shows that Kyle Abrum is
married, claims four allowances, and for the first quarter of the year earned total wages
of $7,250. His net pay was $5,313.51 after first-quarter withholdings as follows:
Federal income tax withholding $ 172.86
Social Security withholding 449.50
Medicare withholding 105.13
Other deductions 1,209.00
Total deductions $1,936.49
10.6 When a company processes its
payroll by computer, the employee’s
earnings record is one of the key
outputs.It is updated after each
payroll period.
Complete an employee’s earnings
record.
4
Learning Objective
Name Social Security No.
Deductions
Medicare
Federal
Inc. Tax
Other
Deductions Total
Net
Pay
Period
Ending
Quarter
Totals
Cumulative
Wages
Total
Wages
Social
Security
Address
1/4
1/11
3/29
$ 550.00
550.00
539.00
$7,250.00
$ 550.00
1,100.00
7,250.00
$ 34.10
34.10
33.42
$449.50
$ 7.98
7.98
7.82
$ 105.13
$ 13.45
13.45
12.35
$172.86
$ 93.00
93.00
93.00
$ 1,209
$ 148.53
148.53
146.59
$1,936.49
$ 401.47
401.47
392.41
$5,313.51
Kyle Abrum
4052 Oak Ave.
123-45-6789
4 Married
No. of Allowances Marital Status
Chapter 10 Payroll Records 187
Every employer who withholds federal income tax and FICA taxes (Social Security and
Medicare) must file a quarterly return, Form 941—Employer’s Quarterly Federal Tax
Return. Figure 10-9 shows the data that the employer must include on Form 941 (the
completed form is slightly abbreviated here). The return must be filed with the IRS
within one month after the end of the quarter.
The employer obtains Social Security and Medicare amounts by multiplying the
taxable wages paid by 12.4% for the first $97,500 for Social Security and by 2.9% for all
wages for Medicare. These amounts represent the employees’ deductions and matching
amounts required to be paid by the employer.
Assuming that Fran Garcia’s weekly earnings and deductions have remained constant for
each of the 13 weeks in the first quarter of the year, compute the following totals, which
would appear on her employee’s earnings record for the first quarter:
Total wages $8,840.00 ($680.00 3 13)
Federal income tax withholding 878.02 ($67.54 3 13)
Social Security withholding 548.08 ($42.16 3 13)
Medicare withholding 128.18 ($9.86 3 13)
Group medical insurance deductions 234.00 ($18.00 3 13)
Group dental insurance deductions 1 117.00
($9.00 3 13)
Total deductions $1,905.28
Net pay $6,934.72
✔
CONCEPT CHECK 10.4
Computing an Employer’s Quarterly Federal
Tax Return
10.7 Form 941 is prepared and
submitted quarterly by all employers.
Copies of the full form are available
from the IRS.
EXAMPLE E
For the first quarter of 2007, Yeager Manufacturing paid total wages of $2,132,684.27.
The company withheld $372,486.20 for federal income tax. Since no employee earned
more than $97,500 in taxable wages, all wages paid were subject to Social Security and
Medicare taxes. If during the quarter Yeager had deposited $680,000 toward its taxes due,
how much would it be required to send in with itsfirst-quarter Form 941?
Gross wages $2,132,684.27 3 12.4% (Social Security) $264,452.85
Gross wages $2,132,684.27 3 2.9% (Medicare) 61,847.84
Subtotal 326,300.69
Income taxes withheld 372,486.20
Total 698,786.89
Less deposit 680,000.00
Balance due $ 18,786.89
5
Learning Objective
Compute an employer’s quarterly
federal tax return.
188 Part 3 Accounting Applications
Figure 10-9 Form 941 Employer’s Quarterly Federal Tax Return (extract)
As displayed in Figure 10-9, the total taxes due the IRS consist of the $4,997.45 in federal in-
come taxes withheld from employees, plus $7,457.13 and $1,744.01 for Social Security and
Medicare taxes, respectively, half of which is withheld from the employees’ paychecks and half
of which is paid by the employer. Although the employer files Form 941 quarterly, the amount
of taxes due is usually deposited in a qualified depository (bank) monthly or more often, and it
is only the difference between the monthly deposits and the total taxes due that is sent with the
Form 941 report.
✔
CONCEPT CHECK 10.5
Chapter 10 Payroll Records 189
In the preceding section, you learned that the employer must match the employee’s
contributions to Social Security and Medicare taxes. In addition, employers must pay
two payroll taxes for federal and state unemployment programs.
The Federal Unemployment Tax Act (FUTA) annually requires the employer to pay a
6.2% tax on the first $7,000 paid to each employee to fund the federal unemployment
compensation program for those who have lost their jobs. Most states have also passed
a State Unemployment Tax Act (SUTA), requiring the employer to pay 5.4% tax on the
first $7,000 paid to each employee to fund state programs for the unemployed. This
5.4% state tax is deductible from the federal tax payment. Thus, in most cases, employers
pay the federal government just 0.8% FUTA tax: 6.2% FUTA 2 5.4% SUTA 5 0.8%
requirement.
Computing an Employer’s Federal and State
Unemployment Tax Liability
10.8 Requirements for FUTA and SUTA
taxes vary not only from state to state
but often from one year to the next in
the same state.
EXAMPLE F
During the first quarter, Johnson and Johnson paid wages of $976,550.80. Of this
amount, $172,400.60 was paid to employees who had been paid $7,000 earlier in the
quarter. What was the employer’s liability for FUTA and SUTA taxes, assuming that the
state rate was 5.4%?
$976,550.80 2 $172,400.60 5 $804,150.20 subject to FUTA and SUTA taxes
$804,150.20 3 0.008 5 $6,433.20 FUTA tax payment
$804,150.20 3 0.054 5 $43,424.11 SUTA tax payment
$6,433.20 1 $43,424.11 5 $49,857.31
Warner-Lambert Company employed Rojas Perez for 13 weeks during the period January 1
through March 31, 2007. His salary was $1,350 per week. At the end of the quarter, how much
in FUTA and SUTA taxes did the company have to pay to the federal and state governments
based on Rojas’s income?
$1,350 per week 3 13 weeks 5 $17,550 total wage
$7,000 maximum 3 0.008 5 $56 FUTA tax
$7,000 maximum 3 0.054 5 $378 SUTA tax
$56 1 $378 5 $434 total federal and state unemployment taxes
COMPLETE ASSIGNMENTS 10.1 AND 10.2.
✔
CONCEPT CHECK 10.6
6
Learning Objective
Compute an employer’s federal and
state unemployment tax liability.
190 Part 3 Accounting Applications
employee’s earnings record
Employer’s Quarterly Federal Tax
Return
Federal Insurance Contributions
Act (FICA)
Federal Unemployment Tax Act
(FUTA)
Form W-4
payroll register
percentage method
State Unemployment Tax Act
(SUTA)
wage-bracket method
withholding allowance
Chapter Terms for Review
Try Microsoft
®
Excel
Try working the following problems using the Microsoft Excel templates found on your
Student CD. Solutions for the problems are also shown on the CD.
1. Brighton Company pays its employees at the regular hourly rate for all hours worked
up to 40 hours per week. Hours in excess of 40 are paid at times the regular rate.
Set up the following spreadsheet in Excel and add formulas to calculate Overtime
Hours, Regular Pay, Overtime Pay, and Total Gross Pay for each employee in the
shaded cells.
Hint: Use the IF function to determine overtime hours.
1
1
2
Total Regular
Hours Hourly Overtime Regular Overtime Total
Employees Worked Rate Hours Pay Pay Gross Pay
Baker, Jason 42 $12.80
Castro, Jill 38 15.70
Dobson, Jack 40 12.00
Ellis, Jennifer 45 14.50
2. Set up the following worksheet and add formulas in the shaded cells to calculate the So-
cial Security, Medicare, Total Deductions, and Net Pay for each employee. Assume all
wages are taxable and use the following rates: Social Security = 6.2%, Medicare = 1.45%.
Social Income Total
Employees Wage s Security Medicare Tax Deductions Net Pay
Carter, Janes $460.35 $45.80
Edison, Alice 289.50 25.00
Garcia, Joseph 375.00 36.90
Kilmer, Martha 450.70 52.00
Chapter 10 Payroll Records 191
Summary of chapter learning objectives:
Learning Objective
10.1
Prepare a payroll register.
Example
Based on the data presented, complete the following payroll register. Fill
out the total wages section and then compute the federal income tax,
Social Security, Medicare, and other withholdings. Total all columns and
check. Use the percentage method for federal income tax.
10.2
Compute federal income tax withholding amounts.
10.3
Compute Social Security, Medicare, and other
withholdings.
1. G. Lee is paid $14.20 per hour. He worked 40 regular hours and 6
overtime hours during the week ending January 7. He is single and
claims one withholding allowance. He takes a weekly medical
deduction of $7.
2. E. Berg is paid $13 per hour. He worked 40 regular hours and 8
overtime hours during the week of January 7. He is married and
claims four withholding allowances. He takes a weekly medical
deduction of $15.
10.4
Complete an employee’s earnings record.
3. Complete the earnings record for D. Chan. Use 6.2% for Social
Security and 1.45% for Medicare taxes. Use the percentage method
for federal income tax withholding, on the monthly wages.
Name Social Security No.
Deductions
Medicare
Federal
Inc. Tax
Other
Deductions Total
Net
Pay
Period
Ending
Quarter
Total
Cumulative
Total
Total
Wages
Social
Security
Address
1/31
2/28
3/31
$3,100
3,000
3,450
$9,550
$3,100
6,100
$9,550
$18.00
18.00
18.00
$54.00
D. Chan
7821 Oak Ave.
125-11-3296
1 Married
No. of Allowances Marital Status
THE BOTTOM LINE
Marital Status
Regular Earnings
Deductions
Name
Rate
per Hour
Total
Wages
Social
Security
Net
Pay
Total
Fed.
Inc. Tax
Med.
Insurance
W/H Allow
Total Hours
Amt
Overtime Earnings
Hours
Worked
Rate
per Hour
Amt
Medi-
care
Lee,G.
Berg,E.
192 Part 3 Accounting Applications
THE BOTTOM LINE
Summary of chapter learning objectives:
Learning Objective
10.5
Compute an employer’s quarterly federal tax return.
Example
4. The Frazer Company had a total payroll of $279,440 for the first
quarter of the year. It withheld $29,700 for federal income tax. It made
monthly tax deposits of $24,100. Frazer is now filing its quarterly
Form 941. Complete the following to determine the amount of the
check that Frazer must send to the IRS for undeposited taxes due.
a. Social Security tax due for the quarter _____
b. Medicare tax due for the quarter _____
c. Total taxes due for the quarter _____
d. Total deposits for the quarter _____
e. Undeposited taxes due IRS _____
Answers: 1, 2 and 3. Lee: Regular Earnings $568.00; O/T Earnings $127.80; Total $695.80; Deductions: SS-$43.14;
MC-$10.09; FIT-$79.71; MI-$7.00. Total Deductions $139.94; Net pay $555.86 Berg: Regular Earnings $520.00;
O/T Earnings $156.00; Total $676.00; Deductions: SS-$41.91; MC-$9.80; FIT-$26.05; MI-$15.00. Total Deductions
$92.76; net Pay $583.24. 4. 1/31: $192.20; $44.95; $301.00; $556.15; $2,543.85 2/28: $186.00; $43.50; $286.00;
$533.50; $2,466.50 3/31: $213.90; $50.03; $353.50; $635.43; $2,814.57 5. a. $34,650.56 b. $8,103.76
c. $72,454.32 d. $72,300.00 e. $154.32 6. a. $15,990.00 b. $56.00 c. $378.00 d. $434.00
10.6
Compute an employer’s federal and state unemploy-
ment tax liability.
5. Miller Outfitters employed R. Rehnquist for the period from January 1
through March 31, 13 weeks, at a salary of $1,230 per week. At the
end of the quarter, how much in FUTA and SUTA taxes are owed to
the federal and state governments if the state had a 0.8% FUTA rate
and a 5.4% SUTA rate?
a. Total wages
b. FUTA tax
c. SUTA tax
d. Total federal and state unemployment taxes paid
Chapter 10 Payroll Records 193
SELF-CHECK
Review Problems for Chapter 10
1 Alex Muñoz is paid $15 per hour for the first 40 hours and times his regular rate for all hours worked over
40 per week.
a. Determine Alex’s gross pay for the week if he works 45 hours.
b. Calculate the amount to be deducted for Social Security and Medicare taxes for the week.
c. Determine the amount to be withheld for federal income tax, using the percentage method,
if Alex is single and claims one withholding allowance.
d. What is Alex’s net pay for the week, assuming that his only payroll deductions are for
Social Security, Medicare, and federal income tax?
2 Determine the amount to be withheld for federal income tax for each of the following, using both the
percentage and the wage-bracket methods.
a. A married employee, claiming two allowances, has weekly gross pay of $650.
b. A single employee, with one allowance, has weekly gross pay of $525.
3 Calculate the employer’s payroll taxes for each of the first three months of the year for three employees who
are paid as follows:
Albertson, K. $3,000 per month
Becket, W. $4,000 per month
Jones, C. $2,100 per month
Include FUTA (0.8%), SUTA (5.4%), Social Security (6.2%), and Medicare (1.45%) taxes. Be sure to consider the
maximum taxable amount for unemployment taxes ($7,000) per employee.
4 Determine the taxes to be reported on the quarterly 941 form for an employer who paid total gross wages of
$62,000 and withheld $7,800 for federal income tax.
Social Security
Medicare
Federal income tax
Total
5 Determine the amount to be withheld from the current period’s gross pay of $7,600 for Social Security and
Medicare for an employee whose cumulative wages were $92,300, not including pay for the current period.
Use the rates and taxable maximum given in the chapter.
6 Employees of Xper Co. are paid at their regular rate for the first 40 hours, at times their regular rate for
hours worked between 40 and 48, and double their regular rate for all hours worked over 48, per week.
Calculate each employee’s gross pay for the week.
John Kowalski, regular rate $12.16, worked 47 hours
Martha Madison, regular rate $9.50, worked 50 hours
Joy Weston, regular rate $10.80, worked 42 hours
1
1
2
1
1
2
Answers to the Self-Check can be found in Appendix B at the back of the text.