Introductory Accounting B B11-A291 / B11-A027 Mark Binder, CA Chapter 11 Learning Objectives 1. List the taxes and other items frequently withheld from employee’s wages 2. Make the calculation as necessary to prepare a payroll register and prepare the entry to record payroll liabilities 3. Prepare journal entries to record the payments to employees and explain the operation of a payroll bank account 4. Calculate the payroll costs levied on employers and prepare the entries to record the accrual and payment of these amounts 5. Calculate and record employee fringe benefit costs and show the effect of these items on the total cost of employing labour Employee’s Withholdings • Employers are required to withhold money from employees for: • Income Tax • Canada Pension Plan (CPP) • Employment Insurance Income Tax • Employers withhold income tax from employees. • The amount depends on the individuals tax situation. • Employee should fill out a TD1. • There are now two TD1 forms: • One for the Federal. • One for the Provincial. Employment Insurance • All employees must contribute to the Employment Insurance. • For our purposes the amount is 2.4% of insured wages. • Insurable wages are more than 15 hours per week and earning more than $142. • Employers match the employee withholdings at a rate of 1.4 for most industries. Employment Insurance • The maximum contribution in a year is $1,310.40 which is based on $39,000. • Employers have the responsibility to provide an Record of Employment (ROE) upon interruption of employment. • Keep payroll records which documents insurable earnings. Canada Pension Plan • Everyone, including self employed persons, outside of Quebec must contribute to the CPP. • Employees contribute 3.9% of their earnings. • Employers match these amounts dollar for dollar. Canada Pension Plan • Self employed individuals must pay both the employers and employees portion. • The contributon is based on 3.9% of pensionable earnings. • There is also a basic exemption of $3,500. • Maximum contribution is $1,329.90 based on $37,600 in pensionable earnings. Calculations • If an employee had gross wages of $1,000 paid biweekly the calculation for EI would be: $1,000 x 2.4% = $24. • The CPP calculation would be: [$1000 – ($3,500/26)] x 3.9% = $33.75. Calculations • Notice that the base of $3,500 is divided by the number of pay periods in the year and then subtracted from gross earnings. • The result is then multiplied by 3.9%. • Some systems do not contribute until a person has $3,500 in earnings. • Most systems stop contributions when maximums are reached. Calculations • In some cases calculations are necessary to be done e.g. commission sales people. • In most cases companies use payroll tables to determine the amount to be paid. • The book has reproduced the payroll tables for CPP, EI, and Tax on pages 567 and 568. • Note that to use the tax table you need to know the employees claim code which is determined on the TD1. Remittances • For most employers remittances are done once a month. • The deadline is the 15th day following the end of the month. • So, remittances for June will be due July 15th. Journal Entries for Payroll • Assume the following information: • The gross wages for employees for the month are $2,000 • EI withholdings are $200 • CPP withholdings are $300 • Tax withholdings are $500 Journal Entries for Payroll • The journal entry to record the payroll is: Dr: Salary expense $2,000 Cr: CPP Payable $200 Cr: EI Payable $300 Cr: Employee’s income tax payable $500 Cr: Payroll Payable $1,000 Payroll Journal Entries • Notice that all withheld amounts go to various payable accounts, including payroll. • Many companies have a special bank account only for payroll. • The net amount of pay is transferred to that account and the actual payroll cheques are then produced. Payroll Journal Entries • The other payroll payable amounts do not have to be paid until the 15th of the month so they are recorded temporarily to these payroll payable accounts. • It is also necessary to compute the employers portion prior to remittance to the government. Benefits Expense • The journal entry to record the employers portion is: Dr: Benefits expense $620 Cr: CPP Payable $200 Cr: EI Payable ($300 x 1.4) $420 Other Payroll • It is also possible to have other deductions which would require matching by the employer. • Examples include company pension plan, company health plan, etc. • Employers may also have to pay Workers Compensation Board payments. Other Payroll • In the case of Workers Compensation Board, no amount is paid by the employee. Overtime • The text uses an unusual calculation for overtime. • If an employee worked 45 hours in a week where standard hours are 40: – 40 regular hours – 5 overtime hours Overtime • If overtime is paid at time plus ½ we would calculate this as: • 40 hours x pay rate = regular pay • 5 overtime hours x pay rate x 11/2 = overtime pay. Overtime • In the book the calculation is: • 45 hours x regular pay = regular • 5 hours overtime x overtime premium (50% x pay rate = overtime.
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