8.2 The payroll of Buddy, Inc. for May 31 is as follows: The total payroll was $150,000. None of the individual wages was greater than $132,900 (social security maximum threshold for 2019). Income taxes withheld from employees totaled $37,500 and union dues withheld was $4,000. Assume FICA tax is 7.65% on employee’s wages (6.2% Social Security & 1.45% Medicare tax). Calculate Unemployment tax – .6% FUTA and 5.4% SUTA taxes. No employees have reached the $7,000 maximum wage threshold.
A. Prepare the necessary journal entries for the wages paid on May 31
B. Prepare the employer payroll taxes.
Managing payroll is a crucial aspect of running a business, involving both the compensation of employees and the fulfillment of employer payroll tax obligations. In this essay, we will delve into the payroll of Buddy, Inc. for May 31, calculating employee wages and deductions, as well as preparing the necessary journal entries and detailing the employer payroll taxes involved.
Journal Entries for Employee Wages and Deductions To accurately reflect the financial transactions related to the payroll, Buddy, Inc. must make the appropriate journal entries. The company’s total payroll for May 31 was $150,000. However, none of the individual wages exceeded the Social Security maximum threshold for 2019, which was $132,900.
Recording Employee Wages: Debit: Salaries and Wages Expense – $150,000 Credit: Cash or Bank Account + $150,000
Income Taxes Withheld: Debit: Income Tax Payable + $37,500 Credit: Cash or Bank Account – $37,500
Union Dues Withheld: Debit: Union Dues Expense + $4,000 Credit: Cash or Bank Account – $4,000
Employer Payroll Taxes Employer payroll taxes encompass various obligations, including Social Security and Medicare taxes, Federal Unemployment Tax (FUTA), and State Unemployment Tax (SUTA). Let’s outline these employer payroll taxes in detail.
Social Security and Medicare Taxes: Social Security tax rate: 6.2% Medicare tax rate: 1.45%
Total Social Security and Medicare tax rate: 7.65%
To calculate the employer’s portion of these taxes: Employer’s Portion = Total Employee Wages * Total Social Security and Medicare Tax Rate
Federal Unemployment Tax (FUTA): FUTA tax rate: 0.6% Maximum wage threshold for FUTA: $7,000 per employee
To calculate the employer’s FUTA liability: FUTA Liability = Total Employee Wages * FUTA Tax Rate (up to the wage threshold)
State Unemployment Tax (SUTA): SUTA tax rate: 5.4%
To calculate the employer’s SUTA liability: SUTA Liability = Total Employee Wages * SUTA Tax Rate
In managing a company’s payroll, it’s essential to accurately calculate employee wages, deductions, and employer payroll taxes. The journal entries ensure proper documentation of financial transactions, while understanding the various payroll taxes helps businesses fulfill their legal obligations and financial responsibilities. By preparing the necessary journal entries and properly accounting for employer payroll taxes, Buddy, Inc. can ensure compliance while effectively managing its financial resources.
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