Payroll Accounting (Word Scrambles with Coaching)

Medicare tax is a component of FICA (Federal Insurance Contributions Act) that provides health insurance for people aged 65 and older. The Medicare tax is withheld from employees’ wages and matched by the employer.

Example: An employer must withhold 1.45% of each employee’s wages for Medicare tax and also pay a matching amount. If an employee earns $50,000, the Medicare tax would be $725 ($50,000 x 1.45%) each for the employee and employer, for a total of $1,450 that the employer must remit.

FICA taxes, which include Social Security and Medicare taxes, are paid by both the employee through payroll withholding and the employer through matching contributions.

Example: If an employee has $100 withheld for Social Security and Medicare taxes, the employer must also pay $100, for a total FICA contribution of $200.

State and federal unemployment taxes are generally paid only by the employer, not withheld from employees’ wages.

Example: If the employer’s state unemployment tax rate is 4.0% on the first $12,000 of each employee’s annual wages, an employer would pay $480 per year for each employee earning at least $12,000.

The federal unemployment tax is one type of payroll tax paid by employers. It is often a net rate of 0.6% after considering the state unemployment tax credit.

Example: With a federal unemployment tax rate of 0.6% on the first $7,000 of wages, an employer would pay $42 per year for an employee earning at least $7,000 annually.

An employee’s gross wages are calculated by multiplying the employee’s hourly pay rate by the number of hours worked in the pay period. An employee’s gross wages is the amount prior to deducting withholdings.

Example: An employee who works 40 hours at $15 per hour would have gross wages of $600 (40 x $15) for that week.

An independent contractor is a non-employee who performs services for a company. The fees paid to them are not subject to payroll withholding and payroll taxes.

Example: A freelance website designer is often an independent contractor who is paid a fee for a project. This person will receive the full amount without any payroll withholding, and the company will not owe payroll taxes.

Amounts withheld from employees’ wages (such as federal income tax, Social Security tax, Medicare tax, and health insurance premiums) are reported as current liabilities by the employer until the amounts are remitted to the appropriate entities.

Example: If an employer withholds $500 for federal income tax, it records a $500 credit to Federal Income Tax Payable, a current liability, until the amount is paid to the IRS.

When a work period overlaps two accounting periods, an adjusting entry is required to record the wages expense and liabilities incurred but not yet paid as of the end of the first accounting period.

Example: If a company’s year-end is December 31 but its last biweekly pay period ends on January 4, an adjusting entry dated December 31 is recorded to accrue the wages earned up to December 31.

Under accrual accounting, fringe benefits such as vacation time are expensed in the period when earned by employees through their service, not when the vacation days are taken.

Example: If an employee earns 8 hours of vacation pay per month, an adjusting entry is made each month to record vacation pay expense and vacation pay liability. When the employee takes a vacation, the vacation pay liability is reduced.

When companies accrue payroll-related expenses, such as wages, taxes and fringe benefits, the adjusting entry typically includes a credit to a liability account.

Example: The adjusting entry to accrue wages at the end of a period would credit Wages Payable or Accrued Wages Payable, a current liability account, in addition to debiting Wages Expense.