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It's a fact of businessif a company has employees, it has to account for payroll and fringe benefits. In this explanation of payroll accounting we'll introduce payroll, fringe benefits, and the payroll-related accounts that a typical company will report on its income statement and balance sheet. Payroll and benefits include items such as:

salaries wages bonuses & commissions to employees overtime pay payroll taxes and costs o Social Security o Medicare o federal income tax o state income tax o state unemployment tax o federal unemployment tax o worker compensation insurance employer paid benefits o holidays o vacations o sick days o insurance (health, dental, vision, life, disability) o retirement plans o profit-sharing plans

Many of these items are subject to state and federal laws; some involve labor contracts or company policies. NOTE: AccountingCoach.com focuses on financial statement reporting and not on income tax return reporting. You should consult with a tax professional or review the Internal Revenue Service publications to learn how employers and employees are required to report salaries, wages, and fringe benefits for income tax purposes. For the years 2011 and 2012 only, the employee's tax rate for Social Security was 4.2% instead of the usual 6.2%. (The employer's rate remained at 6.2% and the employee and employer Medicare tax rates remained at 1.45%.) Beginning in 2013 a Medicare surtax was introduced for certain employees (and self-employed individuals) who have reached a specified amount of earnings. The tax rates and wages bases for federal payroll taxes can be found at http://www.irs.gov/pub/irs-pdf/p15.pdf Matching Principle As we proceed with our explanation of payroll accounting, it will be helpful to recall the matching principleof accounting. This principle will guide us to better understand how payroll and fringe benefits are reported on financial statements. (We're assuming that a company follows the accrual method of accounting.) The matching principle requires a company to match expenses to the accounting period in which the relatedrevenues are reported. If a direct connection between revenues and an expense does not exist, then the expense should appear on the income statement for the accounting period in which it was incurred. Keep in mind that expenses are often incurred (or occur) in a different accounting period than when they are paid.

Let's use three payroll examples to illustrate this point: 1. A company employs a student to work a total of five daysfrom December 26 through December 30, 2012. On December 30 the student submits her time card. The company issues her payroll check on the next scheduled payday, January 5, 2013. Even though the check is dated January 5, 2013, the matching principle requires that the company report the expense and the liability in December 2012 when the work was performed (and the company incurred the liability). Because the student was only employed for the last five days of December, the company would not have any wage or fringe benefits expense for her during January. The paycheck issued on January 5 merely reduces the company's liabilities and cash. 2. Let's assume that a company gives its sales manager an annual bonus of 1% of sales, to be paid on January 15, 2013. The bonus amount is calculated by multiplying the sales from January 1 through December 31, 2012 times 1%. The matching principle requires that the company report 1% of sales as a Bonus Expense on its income statement (and a liability for the total amount owed must be reported on its balance sheet) in every accounting period in which sales occurred in 2012. If the company violates the matching principle by ignoring the bonus expense throughout the year 2012 (when sales actually occurred) and reports the entire bonus amount as an expense for just one day (January 15, 2013), every income statement pertinent to 2012 will report too much net income and the income statement that includes January 15, 2013 will report too little net income. The matching principle requires that the bonus expense pertinent to the 2012 sales be matched with the 2012 sales on the 2012 income statement. If the entries are recorded properly, the balance sheet dated December 31, 2012 will report a current liability for the total bonus amount owed to the sales manager. On January 15, 2013 (when the company pays the bonus) the company will not have an expense; rather, the payment will reduce the company's cash and reduce the current liability that was established when the bonus was recorded as an expense in 2012. 3. A company has a vacation plan that will provide two weeks of vacation in the year 2013 if the employee worked the entire year of 2012. In the year 2012 (when the employee is working) the company reports the vacation expense on its 2012 income statement. The company's December 31, 2012 balance sheet will report a current liability for the two weeks of vacation pay that was earned by each employee but not yet taken. In 2013 (when employees take the vacations that were earned and expensed in 2012), the company will reduce its cash and its vacation liability. As you learn about accounting for payroll and fringe benefits, keep the matching principle in mind. As the above examples show, the date on which a company pays wages or fringe benefits is not necessarily the date on which the company reports the expense on its financial statements.

alaries, Wages, & Overtime Pay In this section of payroll accounting we focus on the gross amounts earned by the employees of a company. Salaries Salaries are usually associated with "white-collar" workers such as office employees, managers, professionals, and executives. Salaried employees are often paid semi-monthly (e.g., on the 15th and last day of the month) or bi-weekly (e.g., every other Friday) and their salaries are often stated as a gross annual amount, such as "$48,000 per year." The "gross" amount refers to the pay an employee would receive before withholdings are made for such things as taxes, contributions to United Way, and savings plans. Since salaried employees earn a specified annual amount, it is likely that their gross pay for each pay period is the same recurring amount. For example, if a manager's salary is $48,000 per year and salaries are paid semi-monthly, the manager's gross pay will be $2,000 for each of the 24 pay periods. (If the

manager is paid bi-weekly, the gross pay would be $1,846.15 for each of the 26 pay periods.) A salaried employee's work period usually ends on payday; for example, a paycheck on January 31 usually covers the work period of January 1631. This is convenient for accounting purposes if the company prepares financial statements on a calendar month basis. Wages Wages are often associated with production employees (sometimes referred to as "blue-collar" workers), non-managers, and other employees whose pay is dependent on hours worked. The pay for these employees is generally stated as a gross, hourly rate, such as "$13.52 per hour." Again, the "gross" amount refers to the pay an employee would receive before withholdings are made for such things as taxes, contributions, and savings plans. Employees receiving wages are often paid weekly or biweekly. To determine the gross wages earned during a work period, the employer multiplies each employee's hourly rate times the number of work hours recorded for the employee during the work period. Due to the extra time needed to make calculations for each employee, hourly-paid employees typically receive their paychecks approximately five days after the work period has ended. When the hourly-paid employees have work periods that are weekly or biweekly, but the company's financial statements cover calendar months, the company will likely have to prepare an accrual-type adjusting entry at the end of the month. If hourly wages are a significant portion of a company's expenses, it is critical that the company report the correct amount of wages expense that pertains to the 30 or 31 days in the month, not the 28 days in a four-week work period. Bonuses & Commissions Paid to Employees Throughout our explanation, bonuses paid to employees and sales commissions paid to employees will be considered to be part of salaries. Overtime Pay Overtime refers to time worked in excess of 40 hours per week. Whether or not employees are paid for overtime depends on each employee's job responsibilities and rate of paysome employees are exempt from overtime pay and some are not. For example, executives are considered to be "exempt"; their employers are not required to pay them for their overtime hours because (1) their compensation is high, and (2) they can control their work hours. Executives do not need state or federal wage and hour laws to protect them from company abuse. On the other hand, a design technician earning an annual salary of $18,000 per year is probably not in control of her work hours. If she works for an executive who decides to work 60 hours per week, the design technician needs to be protected from having to work 60 hours per week for no more pay than she would receive for 40 hours of work. This employee is considered a "nonexempt" employeeshe is not exempt from being paid overtime compensation. Some unethical companies have been known to classify "hourly wage" employees as "salaried" in hopes of making them exempt from overtime pay federal and state laws exist to prevent such unfair treatment of employees. When processing payroll, don't assume that it's only the hourly paid employees who receive overtime paystate and federal laws require overtime payments to lower-paid salaried employees. It is also possible that some generous employers will give overtime pay to employees who are not required by law to receive it. Overtime Premium An overtime premium refers to the "half" portion of "time-and-a-half" or "time-and-one-half" overtime pay. For example, assume an employee in the production department is expected to work 40 hours per week at $10 per hour. If the employer requires the employee to work 42 hours in a given week, the extra two hours are paid at time-and-a-half and the employee earns a total of $430 for the week (40 hours $10 per hour, plus 2 overtime hours $15 per hour). It can also be computed as 42 hours at the straight-time rate of $10 per hour plus 2 hours times the overtime premium of $5 per hour. yroll Withholdings: Taxes & Benefits Paid by Employees

This section of payroll accounting focuses on the amounts withheld from employees' gross pay. (In Part 4 of payroll accounting we will discuss the payroll taxes that are not withheld from employees' gross pay.) The U. S. income tax systemas well as most state income tax systemsrequires employers to withhold payroll taxes from their employees' gross salaries and wages. The withholding of taxes and other deductions from employees' paychecks affects the employer in several ways: (1) it reduces the cash amount paid to employees, (2) it creates a current liability for the employer, and (3) it requires the employer to remit the withheld taxes to the federal and state government by specific deadlines. Failure to remit payroll taxes in a timely manner results in interest and penalties levied on the employer; flagrant violations trigger more severe consequences. Payroll withholdings include: 1. 2. 3. 4. 5. 6. Employee portion of Social Security tax Employee portion of Medicare tax Federal income tax State income tax Court-ordered withholdings Other withholdings

1. Employee portion of Social Security tax A key component of payroll accounting is the Social Security tax. (The Social Security tax along with the Medicare tax make up what is referred to as FICA.) Social Security tax is withheld from an employee's salary or wages and the employer is also required to pay a Social Security tax. In other words, the employer is responsible for remitting to the federal government both the employee and the employer portions of the Social Security tax. As a result, Social Security tax is both an employee withholding and an employer expense. (The official title for the system financed by the Social Security tax is Old Age, Survivors and Disability Insurance, or OASDI. As the name indicates, this system pays retirement, disability, family, and survivors' benefits.) In 2013, the amount of Social Security tax that an employer must withhold from an employee is 6.2% of the first $113,700 of the employee's annual wages and salary; any amount above $113,700 is not subject to Social Security tax withholdings. For example:

If an employee earns $40,000 in wages in 2013, the entire $40,000 is subject to withholdings at 6.2%, for a total annual withholding of $2,480. If an employee earns $200,000 in salary in 2013, only the first $113,700 of the salary is subject to the Social Security tax of 6.2%, for a total annual withholding of $7,049.40. (The amount of salary that is greater than $113,700 is not subject to Social Security tax withholdings, although it will be subject to the Medicare tax discussed in the next section.)

The amount withheldand the employer's portionare reported as a current liability until the amounts are remitted to the government by the employer. NOTE: The employee's tax rate for Social Security and the amount subject to the tax can be found athttp://www.irs.gov/pub/irs-pdf/p15.pdf. 2. Employee portion of Medicare tax Medicare tax is also withheld from an employee's salary or wages and the employer is also required to pay a Medicare tax. In other words, the employer is responsible for remitting to the federal government both the employee and the employer portions of the Medicare tax. As a result, Medicare tax is both an employee withholding and an employer expense. (The Medicare program helps pay for hospital care, nursing care, and doctor's fees for people age 65 and older as well as for some individuals receiving Social Security disability benefits.)

The combination of the Social Security tax and the Medicare tax is referred to as FICA (an acronym for Federal Insurance Contribution Act). An employer must withhold 1.45% of each employee's annual wages and salary for Medicare tax. Unlike the Social Security tax, this percentage is applied on every employee's total salary no matter how large the salary might bean employee's salary of $200,000 will require Medicare tax withholdings of $2,900 (the entire $200,000 times 1.45%). Also beginning in 2013 there is a Medicare surtax of 0.9% that is withheld from the employee on wages and salaries that are in excess of certain amounts. See IRS.gov for detail on this surtax. The employee's Medicare tax withholding plus the employer's Medicare tax are reported as a current liability until the amounts are remitted to the government by the employer. 3. Federal income tax Another part of payroll accounting involves the employees' federal income tax. An employer is required to withhold the federal income tax that an employee is expected to owe based on salaries or wages. The amount withheld, however, is rarely the exact amount of income tax that the employee will owe to the government. The employee's year-end income tax return will dictate the exact amount owed for the year, meaning the employee will either pay in a little more in taxes, or will receive a tax refund. The amount withheld for federal income tax is based on the employee's salary or wages as well as personal information that the employee is required to provide the employer on federal form W4 (including marital status and the number of dependents claimed as exemptions). In cases where an employee is paid low wages and/or has a large number of personal exemptions, it may not be necessary for the employer to withhold any federal income tax. Unlike FICA, there is no employer contribution for federal income tax. Amounts withheld from employees for federal income taxes are reported on the employer's balance sheet as a current liability. When the employer remits the amounts to the federal government, the current liability is reduced.

4. State income tax In most states payroll accounting will involve a state income tax. In those states an employer is required to withhold the state income tax that an employee is expected to owe based on salaries or wages. Like its federal counterpart, the amount withheld is rarely the exact amount of income tax that the employee will owe to the state government. (It should be noted here that some states do not levy a personal income tax.) The amount withheld for state income tax is based on the employee's salary or wages as well as personal information that the employee is required to provide the employer on a state version of federal form W4 (including marital status and the number of dependents claimed as exemptions). In cases where an employee is paid low wages and/or has a large number of personal exemptions, it may not be necessary for the employer to withhold any state income tax. Like the federal income tax (and unlike the FICA tax), there is no employer contribution for state income tax. Amounts withheld from employees for state income taxes are reported on the employer's balance sheet as a current liability. When the employer remits the amounts to the state government, the current liability is reduced. 5. Court-ordered withholdings Payroll accounting also involves withholdings for items other than payroll taxes. For example, courts of law may order employers to garnish (withhold money from) an employee's salary or wages for purposes such as paying child support or repaying debts.

The amounts withheld from employees for court-ordered withholdings are reported on the employer's balance sheet as a current liability. When the employer remits the amounts to the designated parties, the liability is reduced. Some court orders may include a small fee to be withheld from the employee in order to reimburse the employer for administrative expenses. For example, the court order might direct the employer to withhold $101 from the employee and to remit $100 to a designated agency. The $1 difference will be a credit to the company's administrative expenses or to a miscellaneous revenue account. 6. Other withholdings In addition to the mandatory withholdings that an employer makes for taxes and court orders, payroll accounting often includes amounts that employers may be willing to withhold at the direction of its employees. These voluntary withholdings can include such things as:

union dues charitable contributions insurance premiums 401(k) and 403(b) contributions U.S. savings bonds purchases payments owed to the company for the purchase of company merchandise

If the voluntary withholdings are to be remitted to places outside of the company (a local charity, for example), the amounts withheld are reported on the employer's balance sheet as a current liability. When the employer remits the withholdings, the current liability will be reduced. If the withholdings are for amounts that are due the company (such as employees' share of insurance premiums or amounts owed by employees for company merchandise), no remittance is required. Rather, the journal entry reflects a credit that reduces the company's insurance expense or reduces the company's receivables from employees. Sample journal entries are provided in Part 5 and Part 6. Net Pay Net pay is the amount that remains after withholdings are deducted from an employee's gross pay. Net pay is also referred to as "take home pay" or the amount that an employee "clears." From the company side of the transaction, it is the amount of cash the company will pay directly to the employees on payday. ayroll Taxes, Costs & Benefits Paid by Employers In addition to salaries and wages, the employer will incur some or all of the following payroll-related expenses: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Employer portion of Social Security tax Employer portion of Medicare tax State unemployment tax Federal unemployment tax Worker compensation insurance Employer portion of insurance (health, dental, vision, life, disability) Employer paid holidays, vacations, and sick days Employer contributions toward 401(k), savings plans, & profit-sharing plans Employer contributions to pension plans Post-retirement health insurance

1. Employer portion of Social Security tax Understanding the Social Security tax and the Medicare tax is critical for payroll accounting. In this section we discuss the employers' portion of the Social Security tax.

In addition to the amount withheld from its employees for Social Security taxes, the employer must contribute/remit an additional amount, which is an expense for the employer. In the year 2013, the employer's portion of the Social Security tax is 6.2% of the first $113,700 of an employee's annual wages and salary. For example, if an employee earns $40,000 of wages, the entire $40,000 is subject to the Social Security tax. This means that in addition to the withholding of $2,480, the employer must also pay $2,480. The combined amount to be remitted to the federal government for this one employee is $4,960 ($2,480 of withholding plus the employer's portion of $2,480). For an employee with an annual salary of $200,000 in the year 2013, only the first $113,700 is subject to the Social Security tax. This means that in addition to the withholding of $7,049.40, the employer must also pay $7,049.40. The combined amount to be remitted to the federal government for this one employee is $14,098.80 ($7,049.40 + $7,049.40). The employer's share of Social Security taxes is recorded as an expense and as an additional current liability until the amounts are remitted. 2. Employer portion of Medicare tax In addition to the employee's Medicare tax there is also an employer's Medicare tax. The employer's Medicare tax is considered to be an expense for the employer. For the year 2013, the employer's portion of the Medicare tax is the same rate as the employee's withholding1.45% of every dollar of each employee's annual wages and salary. Unlike the Social Security tax, there is no cap (ceiling or limit); if an employee earns a salary of $200,000, the employer must pay a Medicare tax of $2,900 in addition to the $2,900 that was withheld from the employee. The combined amount to be remitted to the federal government for this one employee is $5,800. The employer's share of Medicare taxes is recorded as an expense and as an additional current liability until the amounts are remitted. 3. State unemployment tax State governments administer unemployment services and determine the state unemployment tax rate for each employer. (Some not-for-profit organizationssuch as churches without schoolsmay not be required to pay state unemployment taxes. You should check with your state unemployment office to learn the specifics for your organization.) Generally, states require that the employers pay the entire unemployment tax. Often, employers that have built up a large reserve in the state's unemployment fund will have lower unemployment tax rates. Employers with a small reserve (or no reserve at all) will have higher unemployment tax rates. The state unemployment tax rate is applied to a wage base that is determined by each state. (The wage bases range from $7,000 to more than $30,000.) If a state's unemployment wage base is $14,000 then the state unemployment tax rate is applied only to the first $14,000 of each employee's annual salary and wages. If we also assume that an employer's state unemployment tax rate is 4%, then the employer's state unemployment tax cost will be a maximum of $560 per year for each employee ($14,000 x 4%). To illustrate, let's assume that a company has three employees. In 2013, Employee #1 earns $19,000, Employee #2 earns $40,000, and Employee #3 earns $4,000. If the 2013 state unemployment tax rate is 4% and the wage base is $14,000, the employer will pay a tax of $1,280 to the state government: Employee #1 Employee #2 $14,000 4% = $560 $14,000 4% = $560

Employee #3 Total for 2013

$4,000 4% = $160 $1,280

Even though the state unemployment tax is based on employee salaries and wages, the entire tax is paid by the employer. There is no withholding from an employee's salary or wages for the state unemployment tax. You should contact your state to get the rates that apply to your company.

4. Federal unemployment tax The federal government oversees the state unemployment programs and requires employers to pay a federal unemployment tax of 6.0% minus a credit if the employer has paid into a state unemployment fund. If an employer is allowed the maximum credit of 5.4%, then the federal unemployment tax rate will be 0.6%. This rate is then applied to each employee's first $7,000 of annual salaries and wages. Using the example of three employees with annual 2013 earnings of $19,000, $40,000, and $4,000; with a federal unemployment tax rate of 0.6%, the employer will pay a tax of $108 to the federal government: Employee #1 Employee #2 Employee #3 Total for 2013 $7,000 0.6% = $42 $7,000 0.6% = $42 $4,000 0.6% = $24 $108

Even though the federal unemployment tax is based on employee salaries and wages, the entire tax is paid by the employer. There is no withholding from an employee's salary or wages for the federal unemployment tax. You should contact your state to get the rates that apply to your company. 5. Worker compensation insurance Worker compensation insurance provides coverage for employees who are injured on the job. State law usually requires that employers carry this insurance. Worker compensation insurance rates are a function of at least three variables: (1) the type of business or industry, (2) the type of job being performed, and (3) the employer's history of claims. For example, statistics show that a production worker in a meat packing plant has a greater-thanaverage chance of suffering job-related cuts or back injuries. Because of this, worker compensation insurance rates for these employees can be as high as 15% of wages. On the other hand, the office staff of the meat packing plantprovided that they do not venture out into the production areamay have a rate that is less than 1% of salaries and wages. The worker compensation insurance rates are then applied to the wages and salaries of the employees to arrive at the worker compensation insurance premiums or costs. Although the insurance premiums are based on employee salaries and wages, the entire premium cost is likely to be paid by the employer and is considered an expense for the employer. (Contact your state's worker compensation office for the specifics in your state.) If the employer pays the premium in advance, a current asset such as Prepaid Insurance is used. The account balance will be reduced and Worker Compensation Insurance Expense will increase as the employees work.

If the employer does not pay the premiums in advance, the company must accrue the expense with an adjusting entry that increases Worker Compensation Insurance Expense along with increases in a current liability such as Worker Compensation Insurance Liability. In this situation the current liability will be reduced when the employer pays the worker compensation insurance premiums. Worker compensation insurance is a significant expense for the employer and therefore we consider it an important part of payroll accounting. 6. Employer portion of insurance (health, dental, vision, life, disability) In the past, many companies included group health, dental, vision, disability, and life insurance in the benefit package provided to employees. Over the past few decades, however, the cost of these group policies has risen significantly. Today the insurance premium for family coverage could be more than $10,000 per year per employee. As a result of these escalating costs, most companies now require employees to pay a portion of the premium cost; this amount is usually collected by means of employee-directed payroll withholding. The employers' net cost (or expense) is simply the total amount of premiums paid to the insurance company minus the portion of the cost the employer collects from its employees. 7. Employer paid holidays, vacations, and sick days Many companies pay their permanent employees for holidays such as New Year's Day, Memorial Day, July 4th, Labor Day, Thanksgiving, and Christmas. It is not unusual for employees to be paid for 10 holidays per year. It is also common for employees to earn one week of vacation after one year of service. Many employers give their employees two weeks of vacation after three years of service, with more weeks given after 10 years of service. Paid sick days are also a common benefit given to employees. If an employee is absent from work due to such things as illness or surgery, the company will pay the employee for the time missed. Employers generally set policies as to how sick days are to be used, and as to whether or not an employee is permitted to carry over unused sick days into subsequent years. The matching principle requires that the cost of compensated (or paid) absences (holidays, vacations, and sick days) be recognized as an expense during the time the employee is present and working. In other words, the cost is expensed when the benefit is being earned by the employee, not when the benefit is being used by the employee. (However, the Financial Accounting Standards Board generally allows for sick days and holidays not to be accrued.) To illustrate, assume that an employee works full-time for the entire year 2012 and as a result earns one week of vacation to be taken any time during the year 2013. During the year 2012 (when the employee is working), the employer records the vacation expense and the vacation liability. In 2013, when the employee takes the vacation earned in the previous year, the employer records the cash payment by crediting Cash and reduces the company liability by debiting Vacation Payable. 8. Employer contributions toward 401(k), savings plans, and profit-sharing plans If an employer is required to contribute company money into an employee's savings program or profitsharing plan, the contribution should appear as an expense in the period when the employee earned the company contribution. It is also likely that the company will have the expense and the liability before the company actually pays the amount. This situation requires the company to record an adjusting entry in order to match the expense to the proper accounting period. 9. Employer contributions to pension plans Some companies provide pensions for their employees. This means their employees will receive ongoing monthly payments after they retire from the company. The matching principle requires that the cost of the benefit should be recognized during the years that the employees are working (earning the benefit), and not when the employee is retired. Note: In effect, pensions (and other benefits) are part of the compensation package given to employees working at a company. While some parts of the compensation package are paid out during the time the

employee is working, other benefits are deferred until the employee is retired. The cost of the entire compensation package, however, must be expensed or assigned to products manufactured when the employee is working, so that the cost of the employee's work is matched with the revenue resulting from the employee's work. The concept is that in the years that the employee works, the company will charge Pension Expense and will credit either Pension Payable or Cash. For more specifics on pensions, you are referred to an Intermediate Accounting text or to the Financial Accounting Standards Board's website www.fasb.org. 10. Post-retirement health insurance Some companies continue to provide health insurance coverage to employees after they have retired. This retiree benefit is considered to be part of the compensation package earned by employees while they are working. Again, accrual accounting and the matching principle require that the cost of this future insurance coverage be expensed (or assigned to manufactured products) during the years the employees are working by debiting an expense and crediting a liability. During the employees' retirement years, the company's payment for insurance will reduce the company's liability and will reduce its cash. NOTE: In the following examples we assume that the employee's tax rate for Social Security is 6.2% and that the employer's tax rate is 6.2%. (During 2011 and 2012 only, the employee's rate was reduced to 4.2%.) Let's assume our company also has salaried employees who are paid semimonthly on the 15th and the last day of each month. The pay period for these employees is the half-month that ends on payday. There is one salaried employee in the warehouse department with a gross salary of $48,000 per year, or $2,000 per pay period. There are four salaried employees in the Selling & Administrative Department with combined salaries of $9,000 per pay period. Because the salaried employees are paid on the last day of the month and their pay period ends right on payday, there is no need to accrue for salaries at the end of December (or any other calendar month). The salaried payroll entry for the work period of December 1631 will be dated December 31 and will look like this: Salaried Payroll Entry #1: To record the salaries and withholdings for the work period of December 1631 that will be paid on December 31. Date Dec. 31 Account Name Salaries Expense: Delivery Dept Salaries Expense: Selling & Admin Dept FICA Tax Payable * Federal Inc Tax Withholdings Payable State Inc Tax Withholdings Payable 401(k) Payable Health Ins Expense: Delivery Health Ins. Expense: Selling & Admin United Way Payable Net Payroll Payable Debit 2,000.00 9,000.00 841.50 1,800.00 400.00 200.00 40.00 200.00 100.00 7,418.50 Credit

* $11,000 x 7.65% In addition to the salaries recorded above, the company has incurred additional expenses pertaining to the salaried payroll for this semi-monthly period of December 1631. These expenses must be included in the December financial statements, as shown in the next journal entry:

Salaried Payroll Entry #2: To record additional payroll-related expense for salaried employees for the work period of December 16-31. Date Dec. 31 Account Name FICA Expense: Delivery FICA Expense: Selling & Admin 401(k) Expense: Delivery 401(k) Expense: Selling & Admin FICA Tax Payable * 401(k) Payable Debit 153.00 688.50 20.00 80.00 841.50 100.00 Credit

* $11,000 x 7.65% On payday, December 31, the checks will be distributed to the salaried employees. The following entry will record the issuance of those payroll checks. Salaried Payroll Entry #3: To record the distribution of the salaried employees' payroll checks on Dec. 31. (These checks reflect the take-home pay for the salaries earned during the work period of Dec. 1631).

Date Dec. 31

Account Name Net Payroll Payable Cash

Debit 7,418.50

Credit

7,418.50

Some withholdings and the employer portion of FICA were remitted on payday; others are not due until a later date. Some withholdings, such as health insurance, were recorded as reductions of the company's expenses in Salaried Payroll Entry #1. We will assume the amounts in the following Payroll Entry #4 were remitted on payday. Salaried Payroll Entry #4: To record the remittance of some of the payroll withholdings and company matching pertaining to the salaried employees during the work period of Dec. 15-31. Date Dec. 31 Account Name FICA Tax Payable * Federal Inc Tax Withholdings Payable State Inc Tax Withholdings Payable 401(k) Payable United Way Payable Cash * $841.50 from Entry #1 + $841.50 from Entry #2 Debit 1,683.00 1,800.00 400.00 300.00 100.00 4,283.00 Credit

Payroll Tax
Section 2(45) "perquisite" means(i) any payment made to an employee by an employer in the form of cash or in any other form excluding basic salary, festival bonus, incentive bonus not exceeding ten percent of disclosed profit of relevant income year, arrear salary, advance salary, leave encashment or leave fare assistance and over time, and (ii) any benefit, whether convertible into money or not, provided to an employee by an employer, called by whatever name, other than contribution to a recognized provident fund, approved pension fund, approved gratuity fund and approved superannuation fund.;"
21. Salaries.(1) The following income of an assessee shall be classified and computed under the head "Salaries", namely:(a) any salary due from an employer to the assessee in the income year, whether paid or not; (b) any salary paid or allowed to him in the income year, by or on behalf of an employer though not due or before it became due to him; and (c) any arrears of salary paid or allowed to him in the income year by or on behalf of an employer, if not charged to income-tax for any earlier income year. (2) Where any amount of salary of an assessee is once included in his total income of an income year on the basis that it had become due or that it had been paid in advance in that year, that amount shall not again be included in his income of any other year. Rule 33A. House rent allowances received in cash Rule 33B. Rent free accommodation Rule 33C. Conveyance allowance receivable in cash with no conveyance facility Rule 33D. Conveyance provided for personal or private use Rule 33E. Additional conveyance allowance Rule 33F. Conveyance used partly for personal and partly for business purposes Rule 33G. Free or concessional passage for travel abroad or within Bangladesh Rule 33H. Entertainment allowance Rule 33I. Medical Expenses Rule 33J. Other benefits

108. Information regarding payment of salary.Every person responsible for making any payment constituting income classifiable under the head "Salaries" not being payment made by the Government, and the prescribed officer in cases where such payments are made by the Government, shall, before the first day of September each year, furnish to the Deputy Commissioner of Taxes, a statement prepared in the prescribed form and verified in the prescribed manner so as to give the following information, namely:(a) the name and address of every person to whom such payment has been made, or was due, during the preceding financial year if the payment exceeds such amount as may be prescribed; (b) the amount of payment so made, or due; (c) the amount deducted as tax from such payment; and (d) such other particulars as may be prescribed: Provided that the Deputy Commissioner of Taxes may extend the date for the delivery of the statement. 13. Time limit for payment of tax deducted at source. All sums deducted in accordance with the provisions of Chapter VII of the Ordinance shall be paid to the credit of the government within [three weeks] from the date of such deduction or collection by the person making the deduction or collection, as the case may be Provided that the Deputy Commissioner of Taxes may, in a special case and with the approval of the Inspecting Additional Commissioner of Taxes or the Inspecting joint Commissioner of taxes, permit an employer to pay the tax deducted from any

income chargeable under the head "Salaries" quarterly on September 15, December 15, March 15 and June 15.
14. Manner of payment of tax deducted at source.
[(1) The person responsible for making deduction or collection of tax under Chapter VII of the Ordinance shall pay the amount of tax so deducted or collected to the credit of the Government within the time specified in rule 13 by(a) remitting it through an income tax challan into the Bangladesh Bank or the Sonali Bank, as the case may be; or (b) transferring the amount electronically. ]Subs F. A. 2012 (2) Notwithstanding anything contained in sub-rule (1) or rule 13, the person responsible for making deduction, with respect to supply of goods or execution of contract under section 52, fees for professional or technical services under section 52A,[]Deleted F. A. 2008 house property under 53A [or commission or fees under section 53E] of the Ordinance, shall issue a cheque equivalent to the amount of tax deducted at source in favour of the concerned Deputy Commissioner of Taxes and hand over the same to the person from whom such tax has been deducted and such person shall deposit the cheque through income tax challan form to Bangladesh Bank or the sonali Bank, as the case may be, and on production of counter foil of the challan, he shall be entitled to get his remaining dues on the concerned account: Provided that where tax is deducted from payment made to a person who is not a resident in Bangladesh, the person making such deduction shall deposit the deducted amount through challan to the Bangladesh Bank or the Sonali Bank, as the case may be. 16. Deduction of tax from payment to contractors, etc., For the purposes of making a deduction of tax under section 52, persons responsible for making any payment (including a payment by way of an advance) to any other person (including a company, firm, association or Hindu undivided family) on account of the supply of goods, execution of a contract to or with the Government or any authority, corporation or body, including its units, the activities or the principal activities of which are authorized by any Act, Ordinance, order of instrument having the force of law in Bangladesh, or any company as defined in clause (20) of section 2 of the Ordinance, []Deleted F. A. 2000 or any banking company, or any insurance company or any co-operative bank established by or under any law for the time being in force or any Non-government Organization registered with N.G.O Affairs Bureau or any university or medical college or dental college or engineering college shall deduct an amount calculated on the payment made at the rates laid down in the Schedule below: Provided that the tax to be deducted or collected at the time of making payment shall be according to the rates applicable appropriate to the slab of total payments in case the payments are made in part in any financial year: Provided further that where the Board gives a certificate in writing on the application of any assessee or class of assesses that total income of such assessee or class of assesses who is a recipient of any payment will be less than the minimum liable to tax or will be liable to a rate of tax less than the rate specified in the rule, the person responsible for paying any amount on account of the supply of goods or execution of contract shall, unless such certificate os cancelled by the Board pay the amount without deduction or deduct the tax at a rate less than the rate specified in this rule: Provided further that where the Board gives a permission in writing on the application of any person responsible for paying any amount on account of the supply of goods or execution of contract under any foreign aided project in Bangladesh, full payment of the bill may be made on production of the copy of challan as proof of payment of tax deductible from such bill.
1. The Schedule

Sl. No. 1. 2. 3. 4. 5. 6. 7.

Amount of payments Where the payment does not exceed taka 2,00,000(two lakh) Where the payment exceeds taka 2,00,000 (two lakh) but does not exceed taka 5,00,000(five lakh) Where the payment exceeds taka 5,00,000 (five lakh) but does not exceed taka 15,00,000(fifteen lakh) Where the payment exceeds taka 15,00,000(fifteen lakh) but does not exceed taka 25,00,000(twenty lakh) Where the payment exceeds taka 25,00,000 (twenty five lakh)but does not exceed taka 3,00,00,000 (three crore) Where the payment exceeds taka 3,00,00,000 (three crore)

Rate of Deduction of tax at the time of making payments. Nil 1% 2.5% 3.5% 4% 5%

In case of oil supplied by oil marketing companies(a) Where the payment does not exceed taka 2,00,000 (two lakh)..........................................Nil (b) where the payment exceeds taka 2,00,000 (two lakh)....................................................0.75%

75A. Return of withholding tax.(1) Every person, being a company, shall file or cause to be filed, with the Deputy Commissioner of Taxes where he is being assessed, a return of withholding tax collected or deducted as per provisions of Chapter VII of this Ordinance. (2) The return under sub-section (1) shall be(a) furnished in the prescribed form setting forth therein such particulars and information as may be required thereby; (b) signed and verified by the principal officer thereof; (c) filed quarterly, unless the date is extended under sub-section (3), by the fifteenth day of October, January, April and July of the financial year for which the tax is deducted or collected; (d) accompanied by a statement of deduction or collection of tax along with copy of treasury challans or payment orders. (3) The last date for the submission of return as specified in sub-section (2) may be extended by the Deputy Commissioner of Taxes upto fifteen days from the date so specified.]Added F.A. 2011 [(4) Where the Deputy Commissioner of Taxes, after examining the return submitted under this section, finds any person, required by or under the provisions of chapter VII of this Ordinance to deduct, collect or pay to the credit of the Government tax, has failed so to deduct, collect or pay, shall deem such person an assessee in default under sub-section (1) of section 57.]Added F. A. 2012
24A. Return of withholding taxThe return of withholding tax required to be filed, by the assessee, being a company, under section 75A of the Ordinance shall be in the following form and shall be verified in the manner indicated therein: Form of return of withholding tax under the Income-tax Ordinance, 1984(Ord.XXXVI OF 1984) (Return under section 75A) FOR COMPANY TAXPAYERS ONLY 1. Name of the Company:................................................................

2. TIN/UTIN: 3. TCAN:
4. (a) Circle:..............(b) Taxes Zone:....................... 5. Deduction?Collection Period: (a) 1st quarter (July-September), Year................................... (b) 2st quarter (October-December), Year................................... (c) 3st quarter (January-March), Year................................... (d) 4st quarter (April-June), Year................................... 6. (a) Address:........................................ ............................................................... ............................................................. (b) Phone:........................ (c) Fax No:.......................... (d) e-mail:.................. (e) Web address: http://www........ 7. Contact person: (a) Name:....................... (b) Designation:...................... (c) Telephone:....................................... (d) Mobile:........................... (e) e-mail:.............................................. 8. Particulars of tax deducted of collected:

Type of payment SL. (1) 1 2 Salary a. Payment of contractors/supliers b. Indenting commission c. Shipping agency commission 3 a. Service of doctor (2)

Section of I.T.O. 1984 (3) 50 52 52 52 52A(1)

Payment during the quarter (4)

Rate of deduction/collection (5)

Amount of tax decuction/collection (6)

b. Royalty or technical know-how fee c. Fees for professionl & technicla services 4 a. Payment ofr private security service b. Payment of Stevedoring agencies c. Any other service 5 6 7 8 9 L/C commission Freight forward agency commission Payment to foreign technician serving in diamond cutting industry Payment of services from convention hall etc. Payment to resident person against service provided to foreign person

52A(2) 52A(c) 52AA 52AA 52AA 52I 52M 52O 52P 52Q 53R

9A. Deduction of tax from the service of international gateway service in respect of phone call 10 11 12 13 14 15 16 17 18 House/office rent Collection of tax from shipping business of a resident Receipt from export of manpower Collection of tax from export of knitwear and woven garments Collection of tax from member of stock exchanges Collection of tax from export of any good except certain items Receipt from public auction Courier business of a non-resident Payment to actor/actress

53A 53AA 53B 53BB 53BBB 53BBBB 53C 53CC 53D 53DDD 53E 53EE 53F 53G 53GG 53J 53K 53L 53M 54 55 56

18A. Deduction of tax at source from export cash subsidy 19 20 21 22 23 24 25 26 27 28 29 30 Payment as commission or discount for distribution of goods Payment to foreign buyer's agent Interest of savings and fixed deposit Insurance commission Payment to surveyor of general insurance Rental value of vacant land, plant or machinery Advertising bill of newspaper or marzine Sale of share at a premium Transfer of securities by sponsor shareholders Dividends Lottery Payment to non-resident

Verification I,........................................................Designation............................................................Solemnly declare that to the best of my knowledge and belief the information give in this return is correct and complete. Place:................................. Date:................................. Signature and seal

NB: 1. The return shall be accompanied by a statement of deduction or collection of tax along with copy of treasury challans or payment orders.

21. Statement of deduction of tax under the head "Salaries" where such deduction is not made by or on behalf of the Government. (1) In the case of income chargeable under the head "Salaries" where deduction is not made by or on behalf of the Government, the person making the deduction shall forthwith send to the Deputy Commissioner of Taxes within whose jurisdiction the deduction is made (or where there is more than one Deputy Commissioner of Taxes having jurisdiction in the same area, to the Deputy Commissioner of Taxes specified by the Commissioner) a statement in the following form: Statement of deduction of tax in income chargeable under the head "Salaries" for the month of...., ......... Name and address of the employer................................................... SI. Name of Designation No. the employee. 1 2. Cash allowances like house rent, conveyance, entertainment, etc. 6 Amount of Tax deducted during the month 10 up to the end of the month 11 Value of other perquisites and utilities provided by the employer 7 Amount liable to tax Investment, if any, made u/s 44(2)(b) of the Ordinance for tax credit 8 Remarks 2 3 Tax payer's Identification Number 4 Total amount of salary wages, bonus, annuities, pension, gratuities, fees, commission, bonus or profits is lieu of salary and wages including payments made at or in connection with the termination of employment and advance of salary, etc. (Give details) 5

8 Challan No. and date of deposit of the tax credit of the Government 12

13

3. I,.........................., being the person responsible for paying the above salaries, do hereby declare that the above list on complete and that the particulars given above are correct. 4. Signature................. Date........................