TB Problem Qu. 11-185 (Algo) Recording employer payroll taxes
A company has 10 employees, each of whom earns $2,050 per month and has been employed since January 1. All wages for this period are subject to 6.2% FICA Social Security taxes and 1.45% FICA Medicare taxes. FUTA taxes are 0.6% and SUTA taxes are 5.4% of the first $7,000 paid to each employee.
Prepare the February 28 journal entry to record the February payroll taxes expense.
Note: Round your answers to 2 decimal places.
Answer (1)
Calculate total wages: T o t a l Wa g es = 10 × $2 , 050 = $20 , 500 .
Calculate individual taxes: FICA Social Security Tax = $1,271.00, FICA Medicare Tax = $297.25, FUTA Tax = $123.00, SUTA Tax = $1,107.00.
Sum the individual taxes to find the total payroll tax expense: T o t a lP a yro llT a x E x p e n se = $2 , 798.25 .
Record the journal entry with a debit to Payroll Tax Expense and credits to the respective payable accounts: $2 , 798.25 .
Explanation
Calculate Total Wages First, we need to calculate the total wages for all employees. Since there are 10 employees and each earns $2,050 per month, the total wages are: T o t a l Wa g es = 10 × $2 , 050 = $20 , 500
Calculate FICA Social Security Tax Next, we calculate the FICA Social Security tax. The tax rate is 6.2%, so the Social Security tax is: S oc ia lS ec u r i t y T a x = $20 , 500 × 0.062 = $1 , 271.00
Calculate FICA Medicare Tax Now, we calculate the FICA Medicare tax. The tax rate is 1.45%, so the Medicare tax is: M e d i c a re T a x = $20 , 500 × 0.0145 = $297.25
Calculate FUTA Tax Since each employee has been employed since January 1 and earns $2,050 per month, their cumulative earnings by the end of February are $2,050 \times 2 = $4,100. This is less than $7,000, so their full February wages are subject to FUTA and SUTA taxes.
Now, we calculate the FUTA tax. The tax rate is 0.6%, so the FUTA tax is: F U T A T a x = $20 , 500 × 0.006 = $123.00
Calculate SUTA Tax Next, we calculate the SUTA tax. The tax rate is 5.4%, so the SUTA tax is: S U T A T a x = $20 , 500 × 0.054 = $1 , 107.00
Calculate Total Payroll Tax Expense Now, we calculate the total payroll tax expense by summing up all the individual taxes: T o t a lP a yro llT a x E x p e n se = $1 , 271.00 + $297.25 + $123.00 + $1 , 107.00 = $2 , 798.25
Prepare Journal Entry Finally, we prepare the journal entry. We debit Payroll Tax Expense for the total amount and credit the various payable accounts.
Account
Debit
Credit
Payroll Tax Expense
$2,798.25
FICA Social Security Taxes Payable
$1,271.00
FICA Medicare Taxes Payable
$297.25
FUTA Taxes Payable
$123.00
SUTA Taxes Payable
$1,107.00
Final Answer The total payroll tax expense for February is $2,798.25.
Examples
Understanding and calculating payroll taxes is crucial for businesses to accurately budget and manage their finances. For instance, a small business owner can use these calculations to determine the true cost of hiring an employee, which includes not only the employee's salary but also the employer's share of taxes like FICA, FUTA, and SUTA. This knowledge helps in making informed decisions about staffing and financial planning, ensuring compliance with tax laws and avoiding potential penalties. Moreover, accurate payroll tax calculations are essential for forecasting expenses and setting appropriate pricing strategies for products or services.
