Louis Welch is general manager of United Salons. During 2014, Welch worked for the company all year at a $10,200 monthly salary. He also earned a year-end bonus equal to 10% of his annual salary.
Welch’s federal income tax withheld during 2014 was $850 per month, plus $924 on his bonus check. State income tax withheld came to $70 per month, plus $40 on the bonus. FICA tax was withheld on the annual earnings. Welch authorized the following payroll deductions: Charity Fund contribution of 1% of total earnings and life insurance of $5 per month.
United incurred payroll tax expense on Welch for FICA tax. The company also paid state unemployment tax and federal unemployment tax. In addition, United provides Welch with health insurance at a cost of $150 per month. During 2014, United paid $4,000 into Welch’s retirement plan.
Requirements:
Make a journal entry to record United’s expense for Welch’s total earning for the year, his payroll deductions, and net pay. Debit Salaries Expense and Bonus Expense as appropriate. Credit liability accounts for the payroll deductions and Cash for net pay. An explanation is not required.
To record United's expense for Welch's total earnings for the year, his payroll deductions, and net pay, you will need to make the following journal entry:
Debit:
- Salaries Expense: $10,200 x 12 months = $122,400
- Bonus Expense: $10,200 x 10% = $1,020
Credit:
- Federal Income Tax Payable: $850 x 12 months + $924 = $11,724
- State Income Tax Payable: $70 x 12 months + $40 = $880
- FICA Tax Payable: Calculation required, see below
- Charity Fund Contribution Payable: $122,400 x 1% = $1,224
- Life Insurance Payable: $5 x 12 months = $60
- Cash: The remaining amount after all the deductions.
To calculate FICA Tax Payable:
- Social Security Tax: 6.2% of Welch's annual salary
- Medicare Tax: 1.45% of Welch's annual salary
So FICA Tax Payable = (6.2% + 1.45%) x Welch's annual salary
FICA Tax Payable = (0.0685) x $122,400
Now, you can complete the journal entry. Make sure to calculate Cash by subtracting all the credited amounts from the total earnings:
Debit:
- Salaries Expense: $122,400
- Bonus Expense: $1,020
Credit:
- Federal Income Tax Payable: $11,724
- State Income Tax Payable: $880
- FICA Tax Payable: Calculation above
- Charity Fund Contribution Payable: $1,224
- Life Insurance Payable: $60
- Cash: Total Earnings - (Federal Income Tax Payable + State Income Tax Payable + FICA Tax Payable + Charity Fund Contribution Payable + Life Insurance Payable)
Note: Be sure to consult with a professional accountant or bookkeeper to ensure the accuracy and compliance of your accounting records.