Payroll | Robert Steele | Skillshare
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43 Lessons (6h 31m)
    • 1. Payroll Overiew

    • 2. 10 Regular & Overtime Pay Calculation

    • 3. 12 Partnership Set Up New Partnership

    • 4. 20 Federal Income Tax FIT

    • 5. 20 Payroll Legislation

    • 6. 22 Payroll Periods and Time Frames

    • 7. 22 Partnership Withdraws

    • 8. 23 New Employee Tax Forms & Contractor vs Employee

    • 9. 23 Partnership Closing Process

    • 10. 25 Federal Income Tax FIT Percent Method

    • 11. 25 Partnership Partner Leaves Partnership Cash Equal to Capital Account

    • 12. 26 Partnership Partner Leaves Partnership Cash less then Capital Account

    • 13. 28 Partner Leaves Partnership Cash Greater then Capital Account

    • 14. 29 Add New Partnership Cash More Then Capital Account

    • 15. 29

    • 16. 29

    • 17. 30 Federal Income Contributions Act (FICA)

    • 18. 30 Social Security Tax Calculation

    • 19. 39 Add New Partner Cash Less Then Capital Account

    • 20. 40 Medicare Tax Calculation

    • 21. 50 Federal Unemployment Tax Act Calculation

    • 22. 55 Employer Taxes Calculation

    • 23. 60 Employer Responsibilities and Processes

    • 24. 60 Partnership Liquidation Partner Does Not Pays Partnership for Negative Capital Account

    • 25. 70 Payroll Expense Journal Entry

    • 26. 80 Payroll Tax Expense Journal Entry

    • 27. 90 Pay Payroll Tax Expense Journal Entry

    • 28. 100 Form 941

    • 29. 100 Payroll Controls and Documentation

    • 30. 110 Form 940

    • 31. 120 Form W 3 & W 2

    • 32. 130 Reconciling Year End Payroll Forms

    • 33. 315 Payroll Calculations

    • 34. 320 Overtime Calculation

    • 35. 330 Payroll Register

    • 36. 410 Fringe Benefits

    • 37. 415 Deductions From Gross Pay

    • 38. 510 Federal Income Tax (FIT)

    • 39. 520 Medicare Tax

    • 40. 605 Taxes Employer Employee

    • 41. 615 Federal & State Unemployment Tax

    • 42. 620 Form 941

    • 43. 625 Form 940


About This Class

This financial accounting and payroll class will cover payroll topics including payroll legislation, payroll calculations, and entering payroll journal entries.

Because payroll is becoming more complex and more of a specialized field it is difficult to find content that puts it all together in one spot like this course does.  

We will discuss payroll legislation, going over a wide variety of laws that influence payroll. Because payroll is such a broad topic and because it overlaps with other areas of business like human resources many laws influence the processing of payroll.  

We will concentrate on laws that deal with the calculation of payroll and payroll withholdings.  

The course will cover the generation of payroll registers and earnings reports, the primary tools to help us calculate payroll.  

We will discuss how to calculation payroll tax withholding like federal income tax (FIT), social security, and Medicare. We will calculate net pay from gross pay.  

This course will cover journal entries related to payroll; a topic often overlooked in may payroll classes. Payroll journal entries can be complicated. Learning payroll journal entries helps our understanding of both payroll and debits and credit.  

We will post payroll journal entries to the general ledger and analyses the effect on the financial accounts and accounting equation.  

This course will cover the processing of payroll tax forms like form 941, form 940, form W-2, form W-3, and form W-4.  

We also include a comprehensive a problem, allowing us to see the entire process in one problem.  

Who will we be learning from?  

You will be learning from somebody who has technical experience in accounting concepts and in accounting software like QuickBooks, as well as experience teaching and putting together curriculum.  

You will be learning from somebody who is a:  

•    CPA – Certified Public Accountant  

•    CGMA – Chartered Global Management Accountant  

•    Master of Science in Taxation  

•    CPS – Certifies Post-Secondary Instructor  

•    Curriculum Development Export  

As a practicing CPA the instructor has worked with many technical accounting issues and helped work through them and discuss them with clients of all levels.  

As a CPA and professor, the instructor has taught many accounting classes and worked with many students in the fields of accounting, business, and business applications.  

The instructor also has a lot of experience designing courses and learning how students learn best and how to help students achieve their objectives. Experience designing technical courses has also benefit in being able to design a course in a logical fashion and deal with problems related to technical topics and the use of software like QuickBooks Pro.


1. Payroll Overiew: if we are a business owner who would like to run our business better by better understanding how to process payroll or a business professional who would like to advance our career by understanding the payroll process or an accounting or business student who would like to learn the concepts of Pero and be able to work through problems much faster? This course is a course for us. What will we learn? Short answer. Pero will learn payroll legislation. Legislation that related to payroll were learned. The processing of payroll, how we go through the process and the steps of processing payroll, including payroll calculations, payroll registers, payroll earning reports. We will look at journal entries, the process of recording that information to our system or seeing how that information was recorded to our system. This being a component that is often overlooked in payroll classes, meaning many Pedro classes talk about the legislation and the calculation of payroll, but don't really get to the journal entry. And from an accounting standpoint, the journal entry is clearly very important, and it can help us to understand how to record journal entries and understand the process for payroll. In particular, we'll talk about payroll tax calculations. How we will calculate payroll taxes. Both employee and employer portions will talk about how to calculate the Net pay from the gross pay, the gross pay being what was earned, minus everything that's taken from the girls. Pay to get to net pay. We'll talk about payroll forms. What types of payroll forms will we need to work with and will fill out those various papal forms, including quarterly forms. 9 40 ones nearly forms 9 40 Form W two form W three and we'll talk. Who will we be learning from? We will be learning from a practicing certified public accountant, someone who has accounting, experience, business experience and experience teaching business and accounting classes as well as experience putting together curriculum, putting together courses, courses that are often of a complex nature and need to be learned in a linear format in a way that students can get from them what they want. We'll be learning from H a charter global management accountant, someone who has a master's of science and taxation, someone who is a certified to post secondary instructor and curriculum development experts , someone who has experienced putting together courses putting together Siris, of course, is in such a way that students can get from them what they need. Please join us for financial accounting. Payroll. It will be great. 2. 10 Regular & Overtime Pay Calculation: In this presentation, we will calculate regular and overtime pay for an hourly worker. We'll start off with the calculation of regular pay, which is pretty straightforward as long as we know what how many hours were worked and what the rate is. Note, however, that to know the hours worked for regular pay, we do need to know what the overtime rules are and how to calculate what is regular pay versus overtime pay. For example, with a new employees, it's subject to overtime, and they're an hourly worker. We typically have the federal rule that we have Teoh have anything over 40 hours in a work week would then be over time. So if somebody worked 43 hours in a work week, then 40 of them would be regular. Three of them would be over time. It's possible for states to have more stringent rules, such as daily requirements like eight hour day workday, anything over eight hours being over time as well. So in that case, would need to be able to calculate the daily wages and subject, see what would be over time. This does get a little bit more complicated, because if we're semi Muffy or bi weekly or monthly payers o R process our payroll in those time frames that rather than just weekly then we still we still need to go back on and check the weekly totals and make sure that, uh, we're in compliance with the overtime and paying the proper amount for overtime. And if we're subject and daily totals and then we need to go back and make sure that we're picking up any kind of over time, that would be calculated for for that as well. Once we know the hours, then it would be, in this case, 40 hours in the work week. Just multiply it times to pay rate, which would be whatever would be agreed upon in the terms of employment. In this case, 17 and 40 times 17 in this case would be 680 for regular pay. Then we've got the overtime pay now the overtime pay. We first need to know what the overtime pay rate will be. Typically, it's gonna be time and 1/2. It's often called time and 1/2. Let's try to break down what that actually means, though, and we'll see three different calculations we can use to do this. This is a very common calculation in daily life as well. So it's important toe. Just understand what this means. So if we if we had a regular pay of 17 time and 1/2 basically means we're gonna get a 50% raise, it's kind of equivalent to get in the rays of 50% or 0.5 for any hours better over time. That means that we got an $8.50 raise on this case, which is 17 times 170.5 or 50% means that we haven't $8.50 basically raised. If we add that to our original 17 that means that our overtime rate is $25.50. This is a similar calculation. If we were to calculate, say, a tip or something like that, it would be a, you know, 50% tip, but it would be 17 and then we have 50%. We're adding another 8 50 on it to it, and then we have to add the original amount to get to the total dollar that we're going to pay now. We could do this a little bit more quickly. We could say that the $17 is the original pay and just multiply it times 1.5 time and 1/2 time and 1/2 time, 100% and 1/2 another 50%. So that's really what we kind of mean. By time and 1/2. It's 1.5 150%. Which means that we're gonna multiply one which results in 17 and 50 which is the other component which will give us the 25 50 now one last week. So this would be the faster calculation. We want to calculate a tip. If we had a 20% tip or something instead of most trying times 200.2 or 20% then adding the original, we could just say times one point to him and give us the amount we need to actually pay. So then, if we do this again, we got the regular pay of 17 and we multiply it. Then 150% which is just 1.5 times. You know, we'll put to a percent move the decimal two places over. In other words, if you had 1.5 times 100. It would be 100 50 or move the decimal two places over 150%. Just another way to say that same thing. So that's what we mean when we multiply the overtime rate. Once we have that overtime rate, then it's pretty straightforward to do the overtime calculation. So again, this is kind of the way we might if we were just to kind of make up what is over time by without thinking about it too much, we probably come up with this longer calculation, and then we can trim it down to something like this, or just another represent imitation like this. Okay, so then we're gonna go to the payroll register and we'll actually calculate the overtime in this case. Notes. We've already filled out that regular pay, which was 40 hours at 17 which gives us the 680. Then we're saying there's three hours overtime. There's 43 total hours, 40 of them regular, three hours overtime and the overtime rate. Then we're saying it's gonna be that 25. So the total pay is going to be this 76 which would be the three hours times 25.5 rate, or 76.5 3. 12 Partnership Set Up New Partnership: in this presentation, we will set up a new partnership setting up the new capital accounts four partnership investments. So we're gonna have the information up here on the left. We're gonna enter this data into our trial balance. Note that the trap bounds has nothing in it. At this point in time, we're going to be starting the new partnership and putting the capital investments. Typically, the first step, Teoh putting the journal entries at least together for a partnership. So what? Usually, what happens when we first start the partnership? Is that the agreement amongst the partners as to what will be contributed to the partnership? Note that the partnership will typically need some kind of capital investment in order to first start the partnership the goal, then being to generate revenue in the partnership to then allocate to those partners. So we're gonna have a partnership of three partners which would be C, K and M here, and this is going to be their contribution. See, contributes solely cash, which will be the easiest type of thing, that doing the best thing to do if possible, because then we can contribute to cash into the partnership and then make any kind of investments from the partnership. That's typically better to do. In other words, probably not as efficient to say by the equipment. Um, if you don't have it already and then put that equipment into the partnership, it's probably best to put the money into the partnership, make the purchase from the partnership. If possible. The second individual, X k here, puts in cash and has an accounts payable that is gonna be incurred by the business. And this could happen because it could be the fact that one of the partners may already be in business in some way so that the partner may have accounts payable. And as they go into the business, they may allocate that to the business the business than assuming part of the liability eso it is. It is possible for the business to assume the liability that happens Also as well is if we put like equipment or building into the into the partnership, which has some kind of financing related to it alone related to it, then the partnership would assume the loan as well, and then EMS contribution is going to be equipment to the partnership, so It's also possible for us to put in something that is non cash into the equipment and eso is gonna put in the 15,000 of equipment. So let's go through these and we'll record these journal entries as we go into the partnership. So first is gonna be cash. So we're going to say that cash I's gonna increase by 10,000 and then we're going to increase the capital account by 10,000. So that's gonna be a debit to cash cash started at zero. It's gonna go up by 10,000 to 10,000. Then we have the capital account. So the capital count here starting at zero, it's gonna go up by 10,000 to 10,000. So we're left with then, of course, the partnership having cash of 10,000 and going all of it to the capital account to see the owner note. What didn't happen is nothing happened to net income, so no revenue went up. No expenses bring up no effect on net income here. Also note that we have to profit sharing agreement of 3 to 1, which you can see for see if we if we add those up, we've got three plus two plus one. It's six and the first person ISS 3/6. So that would be 50%. That, uh, has nothing to do with necessarily the amount invested. It could be possible that we used the amount invested to then discuss what the profit sharing will be, but they don't necessarily need to be linked. So when we talk about what they profit sharing will be when we get revenue, how are we going to split that revenue up? That negotiation could be totally different from the negotiation for the original investments into the partnership. And so these these investments aren't necessarily equal into the partnership. And they are not, um, they're not in accordance with, necessarily the profit sharing agreement. They are whatever the partners agreed to put in place. And you might ask, Well, why aren't they equal? Why don't you know? Why would a partner agree? You know, for one partner to put in less money in this case, and he's getting, ah, higher profit sharing. Why would that be? And there's there's a lot of different reasons why that could be I mean, it could be that c is going Teoh put a lot more time into the partnership. Maybe they're the principal person that had the principal idea of the partnership. Maybe they're the ones that you know. I'm gonna gonna execute that idea and be the major person you know, that that's moving forward. Therefore, they may put unless and still be allocated a significant portion of the profit sharing. So that's gonna be the first individual than the second individual were saying puts in the accounts payable. So we're gonna say we debit cash for the 14,000 and then we're gonna credit the accounts payable. We're gonna put the accounts payable on the books to the partnership. The partnership is now assuming the accounts payable, and then the difference the 14,000 minus the 2000 is 12,000. That's what the A capital accounts will increase by for the capital account goes up by that 12,000. So if we post this out, then we've got the cash. A 10,000. It's going up by that 14,000 to 24,000. Then we've got the accounts payable at zero. It's going up by 2000 to 2000 and the capital account at zero going up by 12,000 to 12,000 . So if we see all of our accounts here, we've got we've got the cash now minus the liabilities is the 22,000 ode to C and K 10,000 , 12,000 respectively. And eso it's it's It's interesting to think about the liability here as well again, you might have. Well, where do we get the liability? It's It was agreed upon by the partnership. So how would that happen? It could be that this individual was already doing business, possibly and in, uh in starting their business here with partnership transferring that payable to the partnership. What does that do? Well, before they transferred it K themselves, that partner was solely responsible for paying back that 2000 of debt. Now the partnership is responsible, and therefore the three of them have responsibility for paying off that debt. So really, it kind of deludes the amount of debt that's owed by one individual. Yet the joint agency we have the three individuals now kind of on the line to pay off that $2000 eso That's kind of and so that effects. Of course you know, the capital count contribution, I would typically go down. And so that's why we got the 14,000 decreasing by the 2004. That partner, and then finally, we've got EMS capital accounts. So ems gonna put equipment in no cash, just equipment. And so the equipment is on the books for zero, and we're gonna put it on there for 15,000 debuting it 15,000 equipments and acid account. We're gonna increase it by doing the same thing to it, and then we'll credit the capital account by 15,000. So if we post this out, then the equipment's gonna go from zero up. By this, 15,000 to 15,000 the capital account here is gonna go from zero up by 15,000 to 15,000. And then if we see all of this, we have our accounts here. Now the equipment is another one. That's a little interest. It's interesting to think about, because how are we going to get to this $15,000 number? We gave it to you in this problem, of course, but in practice it's really a number that's gonna be agreed upon by the partners, meaning the equipment could have been something that this individual purchased a long time ago, and so we can't really use the cost of it. They may have depreciated it and been recording appreciation and then have a book value of it. But we're not gonna take their book value of it necessarily. Meaning we're not gonna put it on the books for, you know, equipment less accumulated depreciation, which had been, you know, taken by the prior individual em. Here. What we're gonna do is agree on what price the partnership wants to put it on the books for and put it on the books as if they kind of bought the use piece of equipment at that point in time. And that's similar to a market transaction. So, no, we don't know what the prices of it weaken. Guess we can get the Kelley Blue book and what not and do the depreciation. But we don't know what it is unless we actually sold it, because it's a pretty unique type of things. Equipment, that's older equipment. You know, we don't know how much it will sell for until we actually sell it. So therefore, when we put it in the partnership where we are doing some type of negotiation of fair market, a free market type of transaction, that being US negotiating, what the equipment goes on, the books for meaning the other two partners are concerned about what it goes on the books for because you know it effects how much their capital account will be. Aims capital account in relation to the other two. So there is some kind of negotiation here. When we put the equipment on the books, what him and the others agree upon is what will put it on the books for. Of course, M would probably want to put it on the books at a higher amount and therefore have a higher capital account as they put on the books, the other two maybe negotiating for a lower amount so that their capital counselor are relatively, you know, higher and perspective so. But in any case, there's a bit of a negotiation process. We put it on the books for whatever is agreed upon. So at the end of the day, now we've got the cash and the equipment for the assets. We got the accumulated appreciation. If we take the assets minus the liabilities, that should and will equal what is in the capital accounts. The capital accounts represent the Net assets what is owed to the owner from the Net assets , and it's broken out by owner By Seek A and M. We really have kind of a post closing type. Try bounced looking like here. We haven't closed anything. Clearly it's It's the first opening trial balance, but in that it's similar to a post closing in that there's no revenue and expense accounts . There are no temporary accounts. There's no draws accounts. No time has passed, and therefore we only have balance sheet accounts. We don't have any performance numbers and in other words, because time hasn't passed, we haven't been able to perform. And so we just have the balance sheet numbers and we just show the assets and liabilities assets minus liabilities representing the capital accounts. Also, remember, those capital accounts don't reflect necessarily the profit sharing once we have profit sharing. Once we have net income, it will be allocated in accordance with the profit sharing agreement. 4. 20 Federal Income Tax FIT: In this presentation, we will calculate the federal income tax F i t. Using tax tables. This is gonna be our example set of data. We're looking at the payroll register, focusing in mainly on Bill Smith. Bill Smith, who is an employee, worked 40 hours at 17 rate for a regular pay of 683 hours. Overtime overtime rate. 25 54. Overtime pain 76 50 Total earnings, then 756 50. We're focusing here on the calculation of F i t. Federal income tax. Remember, that's not our federal income tax as the employers, but the employees. Federal Income tax, which is reported on the employees 10 40 at the end of the year, however, is something that we need to calculate throughout the year. Take out of their paycheck at the employer in accordance to comply with the law. So that's what we're doing here. We're gonna remove federal income tax in a new attempt. Teoh match How much is going to be taken out so that when they do that 10 40 at the end of the year, it will have already been removed, and so that's what we're going to first. We need to know what the f I t wages are, which could differ then total wages. So total wages is here. Was that 756 50? It's gonna be reduced by those things that are on the 10. 40 for example, typically, uh, reduced for growth pay or adjusted gross income, things like retirement plans and, um, the cafeteria plan. So we're gonna take those out of f i t. So that we can then calculate f i t using the tables. Also note that the federal income tax when we say federal income tax it's not the employers taxes that we pay on our tax return, meaning a corporation pays federal income tax. A partnership pasted on a flow through eso is the sole proprietor. However, those air on net income and we're paying the federal income tax for the employees that the employees in essence oh, and will ultimately report on their 10 40. So to get the federal income tax, wages were going to start with the 756 50 and then we'll subtract from what the cafeteria plan. So we first need to know that so we got to get the cafeteria plan on the retirement plan. So these these numbers, we gave these numbers here, and so that's gonna be the 7 56.5 minus 250 minus. The 35 would give us the 4 71 50 So we're looking for 71 50 is gonna be our actual f i t wages. And then we're not focused so much on the second employee. But if Pam had to 80 and 1 85 same type of thing, we're gonna say 3653.85 minus 280 minus the 1 85 gives us 3001. 88. 85 1 3088 85 So these are the numbers we're then gonna use to look up our tables. Now that we have these numbers, we can go to our tables and look this up and there's the totals here. So if we could our tables, they look like this and we're focusing in here on this first f I t wages and looking this number up in the table, it's important to note that we get the right table. We have to. If we go through the circular e to find this and you go into the iris dot gov website and find it the current circular, e whatever the current time period is, and then go to the brackets and find the correct tables, there's gonna be a ton of tables because we're gonna have to have a different table for pay periods. So we'll need to know when the paper it is ours, we're gonna say is weekly in this case. Could be bi weekly. Could be semi monthly. Could be monthly. Uh, just make sure not to mix up semi monthly and bi weekly there different eso you want to pick up the right the right table there and ah, then we need to know if the person is the single or married. So again there's gonna be two separate tables for each pay period based on single or married. And note. All this complexity is basically because of the complexity of calculating the tax. It's a it's a progressive tax system, so we have to somehow figure out how what the tax brackets do. And one way to do that is with the tables. Clearly, it's a lot easier to have software that will automatically look up this information for us . But it's still important toe kind of look this up and try to figure out why the tables are this way so that we can understand it. And if we do any tax planning, it's important for us to have some concept of what's going on here. So we're gonna look for this 1 41 within these two sets and then find the number of exemptions here, which for Bill is one. So we're going to say that it's going to be between the 4 70 the 480 right in between here , and that's gonna be the exemptions. One will get us to this 300 or this $35. So on this one paycheck, we're gonna withhold $35. Also note that if it was on the 4 70 like if noticed, four seventies here twice. So you might say, Well, should we pick the 34? The 35 typically will pick the higher number, and that's kind of like a conservative type estimate. We're wanna estimate on withholding too much than too little. We would rather have our employees get a bigger withholding or bigger return on their 10 40 at the end of the year than pain? Because that's probably more likely to cost problems so typically will withhold more than less, you might ask. Well, this is kind of complicated. What if I picked up the wrong number, which is possible? Like if if we're doing this by hand, If we picked up the wrong number, it would kind of watch itself out of the end? The f i t. It kind of works itself out in a way, because when we do the 10 40 we'll have the will have the total with holdings that will match up to what the actual tax calculation was based on our 10 40. And if we withheld too much, then we'll get more of a refund. If we withheld too little, then we'll owe money and, ah, so that's gonna we want it to be right on target because we want to give our employees as much money as they can in their paycheck or if we are. The employees were trying to calculate our payroll to get as much as we can in our paycheck and not owe any money at the end of the year. Getting a refund is not the objective. The objective is to not pay penalties and interest at the end of the year. And if we end up owing a lot of money, we could then end up paying interest in penalties. Um, otherwise we would It would be better for us to actually not pay until the end of the year , because then we get to hold onto our money longer and invested and possibly make money on it. So that's why that's why we have to do that with holdings. The iris wants their money sooner, and therefore we have to do these with holdings and get the money to them as the time passes. So this is gonna be the 35 then. And so we're gonna put that into our information here. So we have the f i t. And we're gonna withhold the $35 from the F I t on our table 5. 20 Payroll Legislation: In this presentation, we will discuss a roller legislation. We're gonna talk about Laws that are related to Payroll noted that this course will get into the calculation of payroll, the recording of the debits and credits the accounting related to payroll. But we do want to give some context as well and list out some of the laws related to payroll for a few different reasons. One. Some of them will have a direct impact on the journal entries that we will make to. We want to know the complexities of payroll outside of just recording the payroll so that we can see how the internal controls could be affected as well. We want to see how they could be related in terms of payroll and human resource is in order to have a better understanding of what's entailed within payroll. We won't go over all the laws in detail, but we'll give you an idea of the complexity of payroll and how it has changed over time. Once we get to recording the payroll, then, of course, we're gonna be focusing in on those types of legislations that have to do with mainly taxes that air requiring us to make a deduction in those types of laws will be similar on the federal level. State laws will typically have similar type of laws. And if we're in other countries other than the US, then we're typically gonna have similar type of withholding laws that can be applied in terms of taxation. So when we think about taxation, it's just really a question of Okay, what type of taxation is being used here when we try to think of how are we going to record the journal entry related to the processing of payroll? Once we know that we can then figure out how to apply and just we have to use the appropriate tax rates, of course, and then apply the circumstances and record the journal entry in accordance with the rules that we are in. As we list through some of these laws, remember that some of them are gonna have a direct impact on the recording of PayPal on some of them have overlap between human resource is in other areas. We've got the Equal Pay Act of 1963 which deals with women in the workforce and working towards having a more equal pay for the same work being provided. We've got the Civil Rights Act of 1964 which is going to prevent or reduce discrimination based on race, gender or national origin. We've got the Age Discrimination in Employment Act, which prevents or reduces the likelihood for mandatory retirement for workers over the age of 40 and we have the Occupational Safety and Health Act of 1970. We also have the Employee Retirement Income Security Act of 1974 which is gonna protect and safeguard the retirement fund accounts for employees. We've got Cobra of 1985 which allowed for health insurance continuation after termination so that someone doesn't get thrown off the health insurance. There's gotta be a requirement for that continuation of health insurance. We have the Immigration Reform and Control Act of 1986 which deals with employers having proof of employment eligibility within 20 days of employment. So it once again gets a little bit more responsibility to the employer to make sure that the there's proof of employment eligibility by the employee. We've got the Americans With Disabilities Act of 1990 and that's gonna protect the rights of disabled workers, the Civil Rights Act of 1991 that deals with infringements and monetary penalties for civil rights issues. One of the major pieces of legislation with regard to recording payroll taxes. Recording the Journal Entry Recording the taxes related to payroll is the 16th Amendment to the US Constitution of 1913 and this mandates that the employer be the one that collects payroll taxes from the employees. And this is a huge change, the huge change in focus in terms of whose responsibility it is in some sense to pay the payroll taxes. In other words, the assumption before this time would be that all individuals are going to have the responsibility of reporting their own payroll taxes, as we still do at the end of the year, with with our 10 40 we report the taxes and paying the payroll taxes. However, this mandates that the responsibility for withholding lies, at least in part on the employer, and that's a huge shift for the employer now has a responsibility, a huge responsibility. Teoh. Withhold the payroll taxes from the employees and then, of course, to process and give that information that that has been done and that's going to include a lot of added paperwork. And so wherever that is the keys. That's where this idea of withholding is in place. And that's where the complication in terms of recording will also be in place as well, because they're becomes confusion in terms of who's paying the payroll tax, who's actually getting a tax imposed on them. Is that the employee or the employer and who is responsible for pain, that taxes and whose pocket of those taxes coming out of it's a little bit confusing when the employer is the one that's taking the payroll taxes for the government out of the employee taxes and then paying them theoretically for, ah, the employees? When we get to the journal entries and recording journal entries, we'll see how that kind of muddies the water. And so anywhere that is the case of state taxes, they're gonna be similar that we have. These types of with holdings will have the similar responsibility that responsibility being on the company, any location where we're at were that is the case that responsibilities on the company to basically make sure that payroll taxes are withheld will have similar type of issues with regard to recording payroll and making those with holdings. We then had a lot of laws of the 19 thirties that that dealt with payroll or payroll related issues and including faker of 1935. And that's gonna be the federal Insurance Contributions Act. We'll talk more about faker because it's gonna be a major component in terms of taxes and payroll taxes. We've got the Fair Labor Standards Act of 1938. We've got Futa and Suta, federal employment tax and state unemployment. Now, the federal unemployment in state unemployment again are going to be things that the employer are gonna have to withhold. And so we'll deal with those when we do our calculation, note that we are including the state unemployment here, and we don't typically do that. You might be saying, Well, you know, we're not gonna do with each individual state or each location were usually dealing with the federal side, and then we can apply these principles as they relate to word of her location. We're in whether whatever state we're in, whatever country we're in in this case were including the state taxes because the Fed did something kind of sneaky here. They basically in some ways when they put in this law pretty much mandated that the states have to have some law by making the food tow law dependent on the state law on and therefore the state laws are often pretty standardized because of that. So this is one area where we could have difference in SUTA. But we're going to touch on the state law better. We also have the Fair Labor Standards Act of 1938 again, another law that was created in the Depression. So we know that a lot of a lot of legislation was created in the 19 thirties when we had a depression, and that would stimulate a lot of activity. Of course, in terms of trying to do something Teoh to make this circumstances in situations of people better. So we have the Fair Labor Standards Act, and that's going to include including things related to working conditions, working hours on overtime regulations, things that like break times and having proper types of break times and a minimum wage 6. 22 Payroll Periods and Time Frames: In this presentation, we will discuss payroll periods and time frames. When we consider payroll, we're gonna have different types of time friends, different times of times that people will be paid given different companies. So in other words, it's up to us to make the choice as to how often we pay our employees when art the employees going to be paid. This is a decision where once made, we then just apply the same principle. We're gonna be consistent with that one principle, whatever that pay period is. If we work within a particular company, then we're just gonna get used to the payroll cycle once implemented and work with it. If we work as a Pedro professional, however, then we may we working with different companies, and they may have different needs and maybe implementing different types of payroll periods . So it's important to understand payroll periods in general. So when we go from different types of payroll applications, different types of companies, we know that they're gonna have different types of payroll periods. And once we do work into the company, we will then of course, specialize in some way, knowing that the system that we are working in, so one would be to be paid monthly. So if we're paid monthly, and then we're gonna have every month of a payment and there's gonna be a 12 pay periods because, of course, there's 12 months. So monthly is gonna be an easier pay rates because there's, like, 12 pay periods. We can break it up fairly, fairly easily. However, most of the time employees would like to get paid more often than monthly, often times so we could have weekly, which is kind of the other extreme. And weekly is gonna be, of course, every week. And that would mean that there's gonna B 52 pay periods because there's 52 weeks in the year. Note that that number is unlike the months of 12 a number that possibly not everybody knows offhand. How many weeks air in the year, something for payroll probably worth memorizing. So how many weeks are in the year? 52 generally, and then we have the other two, which are usually the more confusing because oftentimes we get paid every other week, um, or so or bi weekly. So bi weekly means that we're gonna paid every other week. And so that's gonna be 26 pay periods. So you might say 26. That looks a little funny. Like where does that number come from? 26 pay periods. If we paid because you would think possibly that it would be 12 times to which would be 24 pay periods, because there's 12 months in the year. And, um, we're pain. Um, you would you would think about twice a month, right? So be about 24 but it's not. It's 26 that number comes from saying 52 weeks in a year divided by two. So 26. So what you really want to do is memorize these two or the way I do it. I memorized these two. And then when I get to bi weekly at say, Well, what what does that mean? That's in essence, gonna take the weekly amount and divided by two to get to the 26. Whereas if I pay semi monthly, you can think of something like on the 15th or the 30th and 31st so I pay in the middle of the month and the end of the month. In other words, then that's slightly different, then pain bi weekly. That means you're being paid twice a month, no matter what, which is gonna be 24 pay periods. So when we pay in other words, bi weekly every other week because there's different amounts of days in each month, then we could have some months that have three pay periods, possibly and that that would line up to having two more pay periods within the year, whereas semi monthly, we have a significant amount, really of less paper. So if we paid two times a month, no matter what in the middle of the month in the end of the month, then I would think of that as really two times a month is, of course, going to be 12 times two or 24. So the way I would remember this is, you know, monthly is, of course, 12 pay periods, and this is the important, by the way, because we will be using these paper. It's when we start to calculate things like hourly rate and payroll rates. So So I would think of this as monthly. Of course. Is 12 months pretty straightforward? No problem. Weekly. We have to start to memorize that there's 52 weeks in a year, 52 pay periods. If we pay weekly bi weekly, then means we're paying every other week. It doesn't necessarily mean we're paying twice a month. What it means is that we're taking the 52 divided by two to get to the 26 pay periods, whereas if we pay semi monthly, then we're paying two times a month, no matter what. So that means we're gonna take the 12 months Times two gives us the 24. So just this is where the problem usually lies. Are we doing bi weekly, semi monthly? They're not the same, just ah, and I would use the monthly and weekly as as the check to memorize the two numbers. I don't memorise thes two numbers, I say. Semi monthly is monthly times to I se bi weekly is 52 weeks divided by two. So once we have that some key numbers that you really want to memorize, then as we go through payroll, it's just numbers that you should kind of have in mind is one. There's 365 days in a year. Now again, note that you know there's a leap year and whatnot, but we're gonna go with 65 days in a year, and that's different than some of the rounding we've used in in. Like if we do some type of calculations for interest types of calculations, we may use some estimates. In other words, sometimes there's estimates that we could say 12 months times about 30 days in a month. Even it was 31. There's there's could be 30. There could be 28 but that would be about 3 60 But to be exact, to be more exact, there's 3 65 generally in a year, so we just want to know when doing payroll. We need to be more exact. So we typically would say We don't want to just know that number 3 65 days in a year. Bi weekly pay periods. 26 Again, We don't really need to just memorize that. We could take the 52 divided by two to get to the 26 ah weeks in a year should be weeks in weekend, eight weeks in here. It's gonna be 52 that's when you just want to memorize, so you just want you. Just gotta know that 52 weeks in a year might not be as common for for a lot of people to know how many weeks or in a year, but 50 to 52 weeks in here and in the semi monthly pay period is 24 again. I wouldn't just memorize that, but you need to be aware of that number. It's a payroll number. You gotta know semi monthly again. How would I get there? 12 months times to bi weekly 52 weeks, divided by two semi monthly, 12 months. Times 2 26 vs 24. 7. 22 Partnership Withdraws: in this presentation, we will take a look at partnership withdraws. We're gonna take the withdrawals from this trial. Bounced the data on the left side, the trial balance on the right side, where we currently have cash and equipment the assets in green accounts payable our liability in orange capital accounts, including the capital account, and withdraws what we will be focusing in on here and then the income statement accounts, revenue and expenses resulting in a net income of the revenue 10,000 minus expense 3000. And we have the debits are being non bracketed. The credits being bracketed. The bracketed numbers minus the non bracketed numbers gives us zero, meaning the debits equal the credits. So our goal here is to record the withdrawals and note that other withdraws don't necessarily have to match the profit sharing. That's the first thing that can be confusing with partnerships. When we look at these capital accounts, we often look at them and say, Hey, that the balance in the capital accounts and or the draws or the or the investments should match what the profit sharing is. And that's not the case. Note that the profit sharing is Onley representing for they profit. So we have, in this case three plus two plus one profit sharing. So the first partner that adds up to six has 3/6. That would be 0.5 or 50% to the first partner. That's how we'll allocate the income 50% of this 7000 going to in this case. See? But that's not how we're gonna allocate with holdings that with Holden's withdraws that withdraws are gonna be just in alignment. Teoh What is in the capital account? So there may be restrictions in the partnership agreement as to how much draws could be taken out in a certain year, they could be very detailed. We have a lot of flexibility in the partnership agreement, but on just a basic level, we know that the draws these capital accounts represent what are in the capital counter what is owed to the partnership of assets minus liabilities. So that's kind of the the value that is owed to each partner of the partnership so they could draw, in theory, up to the amount that they have in the partnership. Now again, the partners may put restrictions to that because clearly either partner doesn't want the other partners to pull out all the money from the partnership. If they did, cash would go way down and we couldn't pay all the partners their entire capital account unless we sold, say the equipment and that wouldn't that would take like, a liquidation process. But in theory, they can pull out what they want up to, basically the capital account. They couldn't make the capital account or they shouldn't make it go negative because that would mean that they drew out more than had been invested and allocated to them through the profit sharing through net income. And that would mean that they would over the partnership money. So what we're gonna do now, then it's just post. These drawings were going to say that that seed throughout 2000 K 1000 and M 1500 again, where do these numbers come from? Which is we made them up and they don't tie up to the profit sharing here. It's just kind of what each partner decided to do in accordance with the partnership agreement and should probably, you know, consult other partners in terms of how much should be pulled out by its partners of it so we can plan for the future to see how much we're gonna have in capital. We also could restrict the withdrawals or benefit those who don't withdraw as much by by having the income allocation be allocated mawr to those who have more capital invested in the business. So we're gonna say that. But withdrawals are gonna be here now. We typically have a different draws account, just as we would for a sole proprietor. So the capital accounts look a little bit more intimidating for a partnership simply because we have more off them. So we have three partners rather than one for a corporation. We're gonna have just retained earnings, and then the drawls type thing will be dividends, which will be all even for a corporation. Whereas they can be different for a partnership. So we're gonna record these draws to a separate withdrawals account rather than posting them to the capital account. And that's typically what we dio. We typically have the investments, go to the capital account, and the draws then have a separate account. Why? Because the investments we assume that they're only gonna happen a few times. Hopefully, the partners put in an investment at the beginning of the partnership, and then they make money and they draw out money later so that we expect draws to be a normal part of the business. The business should only earn money and give some of that to the owners in the format of draws so the owners can then take it for personal use. What we don't expect to happen or we hoping, isn't gonna happen is that the the owners keep on putting more money into the partnership. They should be taking money out of the partnership after it generates money for for personal use. So that's why we expect the draws to be more more of them and therefore constitute its own account here that we can track the draws as they happen and then close them out in a similar fashion, as we do to the income statement accounts at the end of the time period. So to record this, we're just going to say that withdrawals for seem are gonna be this 2000. The withdrawals are gonna be debited because it's kind of like a contra asset account or contra equity account meaning equity accounts typically have a credit balance that draws air gonna be something that brings down total equity. So we're going to the opposite thing to it. A debit. Then we're gonna credit the cash that's gonna be drawn out here for sees draws. And if we post this out, then the draws accounts gonna go from 0 to 2000 in the debit direction. The cash from 48,000 down by 2000 to 46,000. So now we've got ah, the draws account being recorded for C. We're gonna do the same thing for K here, So Okay, Has 1000 draws case draws gonna go up in the debit direction by that 1000. The other side of it, then cash is going down. We paid out cash tu que as draws. When we record this, we see that the Draws is gonna go up there. Here's draws its going up from zero by 2 2000 the cash he's going from 46,000 down by 1000 to 45,000. So if we see all the accounts here, here are all the accounts. Note that these transactions for the draws do not affect the income statement, meaning net income is not affected and that's kind of one of the key points here, which it's a temporary account. Money is leaving the partner partnership, but it's not for business expenses and therefore shouldn't be part of net income. It should be allocated directly to one partner know what would happen if we put it in, and if we put it in as an expense, say we just put it as an expense and it was a personal draw for the partner, then it would affect that the net income would still go down, but then all three partners would be affected in accordance with the profit sharing. Their capital accounts would go down by a proportion of the profit sharing. And what should happen, of course, is that whoever took the draw out should be reducing their capital account by the full amount that was drawn. It also could have tax effects to which we won't get into here. But if you know if we expensed, it would have lower net income in taxes would be less but in properly, so so we should be putting it up, up here in draws for that reason as well. And then we've got to EMS draws as well, which is gonna be a debit Teoh, other withdraws and a credit to cash once again. So that withdrawal is going from zero. So here's the draws 0 to 1500 here and then the cash is going to be starting at 45,000 going down by 1500 to 43,500. That leaves us then with the 43,500 we have all of the accounts here, we can see that the draws accounts are now matched up to the capital accounts. And again, the capital accounts look very intimidating. Now, the whole equity section because we have all the partner accounts, then we have the related draws accounts. All this means is that the seas capital, we basically Oh, the sea of the assets minus liabilities. Ah, $40,000 share of the partnership. Now that will go up once we allocate the net income here, which is 7000 to the partners. And then if we they took out see, took out $2000. So really, we only owe them 48,000. So that's that's gonna be the same for each partner. We're gonna say, Hey, this is there. This is the amount that is owed to them. This is the amount they drew out during this time period, whether it be month or year. And then if we net the two, that's their net capital count. As of this point in time, we will close out the draws just like we would in a sole proprietor to the capital accounts . They are temporary accounts. However, they're not part of net income. They're not part of the net income calculation. They're not in the income statement. So the net income, calculated as revenue minus expenses, gives us the net income that withdraws solely reduced the capital accounts for individuals , not for the net income which will be allocated to all of them. You know, all partners in accordance with their profit sharing agreement. 8. 23 New Employee Tax Forms & Contractor vs Employee: In this presentation, we will take a look at new employees, tax forms and the concept of a contractor versus an employee relationship. Whenever we have a new employee, that tax form typically that needs to be filled out by that employees will be a W four. The W four form looks like a straight Ford form. It is a straightforward form, but it is a bit more complex. It's very important win. Recording the information for the employees to get the proper withholding is also a form that the payroll department within a company can't really give as much guidance with as, ah ah, lot of employees would hope, because the payroll department can't typically give tax advice. So even though the employer, in other words, is required to withhold the employee taxes for federal income taxes, they're not able t give the kind of advice that ah would be considered tax advice because the reporting of the income taxes in terms of the 10 40 is really the responsibility of the employees. So, in other words, the reporting of the W four is going to deal with exemption amounts and how much is going to be withheld from an employee paychecks for federal income tax, their federal income tax and then the employees. That means it's gonna be related. Teoh the tax filing at the end of the year by the employees using the form 10 40. So they w four the with holdings and your reporting of the 10. 40 our employees reporting out the 10. 40 at the end of the year are gonna have a relationship to each other. We also have some other important data from the W four. So whenever considering the W four when entering data into our payroll system that w Form four is often the form that we're gonna use it if we're gonna enter data into our database system about a new employee, weaken typically get a lot of that information from the W four. Now that W four is a I arrest former federal form. You're going to get it. If you could find this copy to get a current iris W four form from iris dot gov type in W four, you could find current copy of W four form as well as instructions for the W four form and see how it all fits together and how it's gonna be worked out. Note. I also didn't include the worksheet that it will typically be here. That will help with the calculation for how many exemptions we have. So I'll talk about that more in a bit. This is just gonna be the reporting form. So the W four when we're entering data for a new employee This, of course, has the first name and middle initial. That last name is gonna have this Social Security number, which we're gonna need to put into our database system. It's gonna have the full address which we're gonna need to put into our system. It's gonna have the marital status. And again you might be thinkable. Why do I have a marital status and that is gonna feed into the calculation for the federal income taxes? You'll note that when you filed your form 10 40 which again is related to this form that you have to you have to say whether you're married or single or head of household or widowed. And that's in. The reason for that, of course, is that there's different tax rates. And so when we do that with holdings because of that complication we have Teoh, we have to know the marital status so it could be single, married or married, but without a higher sink, but without a higher single rate. And so this is gonna be the The reason for this third option is the fact that when we combine incomes together, um, it can confuse things, of course. So if we only had one employee making income, then that's usually what the tax system was first designed to do, meaning most houses used to be single income houses. And therefore, if you worked for a company anywhere the only wage earner for that company, then we could pretty accurately calculate your with holdings based on whether you're single or married. Ah, and then be it. But when you have multiple different types of of of wages that that are going into the TV home as well with different sources of income, then that really complicates the matter in terms of what the withholdings should be. So long story short, if we if we select the married but with a higher single rate, were basically saying, Yeah, we're married, but we want you to withhold at the higher single rate because If we were single, we would be paying a higher tax rate than if married, because we typically have double income if married and therefore lower rates. Why would we do that? Because the higher the with holdings we have the lower you know, the more likely we'll get a refund at the end of the or the more payment will be making towards the 10 40. And if we have someone else that is working within the household, another spouse working within the household, then we may have higher rates that we need to be calculating at because our income combined will be at a higher rate. So and then and then, of course we have. If your last name differs, then we have the total number of allowances that were claiming. Now this has a kind of a loose relationship to the number of exemptions your recording on the um on the 10 40 meaning if we're single, we have at least ourselves as an exemption. If we are married, we have ourselves in our spouse as an exemption for a married filing joint. If we are having dependence Children, for example, types of dependence and we would have ourselves, our our spouse and our child or Children as exemptions. Now, the allowances are not exactly the same as exemptions. Those are gonna be part of the calculation. And this would be the information if we looked at the at the more comprehensive tax of calculation for the W four to try to come up with. Ah, this this number number five, will take into consideration these exemptions in this calculation. But just note, there's a relationship there. Why are we doing this? Why do we need this? Because we're trying to figure out based on the complex individual tax system what the with holdings will be so that usually we want the withholdings to just barely b'more than what the tax obligation would be meaning? You know, the tax system is designed to hopefully try to make the employer take from the employees a little bit more than they're gonna actually Oh, for income taxes, which they will then realize once they do their income taxes with the 10. 40 at the end of the year, and therefore they're going to get a refund. Why would it be set up that way? Because then the government is most likely to get paid the government's most likely to get paid by the employer doing the calculation, withholding the proper amount, withholding a little bit more than is actually going to be owed. And therefore, at the end of the time period, the iris will give the difference back. They'd rather give the difference back then, have the employees owing money at the end of the year knowing that it's much harder to collect for the I. R s if they if the individual owes money at the end of the year and the iris would also have the money sooner rather than later. So for those couple of reasons that the system is designed for that format, so they're related and this is gonna be the the line that will help us to get those exemptions Now we also have this this line additional amount. If any you want with help from the paycheck, why would you want an additional with help from the paycheck? That's gonna be less income or less paycheck. And the reason is that that's basically saying, Hey, you know, if we do a tax estimate with our tax professional, um, they we might just come up with a number and say I want to ADM. Or why? Because possibly we have other income sources and that's gonna push us into a higher tax bracket and therefore are with holdings from this W four will not be sufficient to pay for our taxes. Or, um, we have a spouse which would be part of our other income, who has substantial income and therefore pushing us into a higher tax bracket and therefore the with holdings from this calculation will not be sufficient. We would need to increase it, and then we have seven. I claim exemption from withholding for 2008 and I certify that I meet both of following conditions So we could try to say, You know what? I don't I don't need withholding. You don't need to withhold from me. And you have to basically tell the employer importer having the responsibility to withhold needs to needs to have a reason not to withhold. And that would be last year I had a had a right to a refund for all federal income taxes withheld because I had no tax liability. So you're basically saying, hey, last year, you know I didn't haven't have any taxes. So and the iris is going to say, Well, if that's a condition, your taxes are probably pretty low. And maybe you don't have a responsibility to pay. If you're under a certain threshold, then you probably won't have any taxes because you won't be over the, um, the standard deduction. And if you weren't over last year than maybe you won't be this year so and the other this year, I expect a refund for all federal income taxes withheld because I expect to have no tax liability. So again, if your if your taxes that if your income is under a certain a certain level under, like under the standard deduction, then you're not gonna have any taxes typically. And you could basically claim that you could say, OK, I don't have any withholding under that specific scenario. And then, of course, we need the first date of employment and the employer identification number, as we need on every type of payroll tax form and the 1/4 name and address. So then we have this concept between the employee and a contractor, and this is a huge kind of concept because there's pros and cons to having a contractor relationship to an employee employer relationship. Eso if we If we're trying to find work, we need someone to do something for us, and we're trying to hire out someone to do someone for us are our choices are to hire them as an employee or hire them as a contractor. Now, at one point in time, this relationship might. That might have been more kind of foggy than it is now. At least from a legal standpoint. From reporting standpoint, we want to have a very definite line. Prior to this, we might have hired someone and said, Hey, we're gonna pay you so much at the end of the week and it is what it is. You know, I don't care what we call you if your employer employee or a contractor. But now that, of course, as an employee that the employer, the company employer, hasn't responsibilities to do things such as withhold and other responsibilities in terms of legal responsibilities over and four their employees more responsibilities than they would have over, say, a contractor, a contractor who basically is running their own business. So if someone that contractor. You're just paying them whatever they invoice you, in essence, whereas if they're an employee, then you have more legal responsibility. You have to withhold. You gotta report all of all the reporting. So, of course, one of the disadvantages when making this determination as to whether an employee of employee or a contractor. We also have businesses that might want to lean towards contractors sometimes because that would mean that they're not responsible for many of the legal responsibilities, such as reporting, withholding and a lot of the other type of requirements paying payroll taxes in some of that stuff that viewed so it could cut costs. Now the advantages of being an employee is, of course, you have a bit more control over, Ah, the behavior of the of the employees, and you're able to take care of more. In some cases, you're able to provide them with benefits. Some like 41 K plan, which could entice better people to to work there. So there's gonna be kind of like the pros and cons assume pros and cons between contractor and employed now went from the IRS standpoint. From a regulatory standpoint, uh, they're gonna have their own kind of, ah, critiques of of whether your contract or not, one more point before we go into those. Ah, if if you're an employee, obviously you get your income reported as a w two income telling the iris that you made money as a contractor, you get your income reported typically as a 10 99 if certain conditions are met. Meaning you're not like the contractor isn't. And employees. I mean, the contractor isn't a company and typically earns over a certain dollar amount, which is fairly low, like 5 to $600.600 or so dollars. Then you have to 10 99. And remember what 10 99 is to The contractor is similar to Adobe to your basically telling the contractor. Look, I paid you this amount this year, and I'm reporting to the ire s and therefore you Really? Yeah. I mean, you really ought have reported in some way on your form. 10 40. If you don't, you'll probably be notified by the IRS. Now the problem with a 10 99 again if there's no with holdings Theo Employers not responsible for with holdings. And also when you're a contractor. You may have job related expenses because you're your own business that are not going to be included on the 10 99. They're going to be something you have to deduct on the 10 40 in somewhere in the schedule C. So there's more responsibility if you're a 10 99. If you're a sole proprietor, if your contractor to report your own income to report your expenses on and make sure you get all that taken care of now, from the Iressa standpoint, they're kind of weary of, ah, of an employer reporting someone as a contractor rather than a um rather than an employee. I mean, from a From a regulatory standpoint, you may rather have someone reported as an employee from an IRA standpoint, because then you can hold the bigger, larger employer, the bigger company most likely responsible for collecting taxes from the contractor. So at, rather than having the smaller contract of a smaller business probably the sole proprietor responsible for reporting on the income and paying their own taxes, they probably rather and the larger company that they can put more restrictions on two be required to withhold the taxes. Therefore, they want toe. They probably are gonna lean towards the idea that if someone's an employee, if we want to make sure they're reported as an employee, So what does it mean to be an employee? It comes down Teoh. There's a bunch of different tests that you can you can have. But the more control the employer has over the employees work the behavioral control, financial control and the relationship between the party. If there's more control on the employer than you would typically say, Hey, that's more of a wage relationship, meaning If you had someone like a secretary that would, or an office worker that was going in every day and told, This is what you need to do. I need I need this done and had that done. It's 9 to 5 job. You need to be here from 95 what not then that's a pretty high level of control. It would be pretty difficult to say if someone's working a 9 to 5 job in a specific defined location and their jobs were being dictated on a daily bases, then pretty much unemployed be pretty difficult to argue that that one is that someone's a contractor. If, on the other hand, we had someone that you know needed to do a specific job, like paint the house or something like that or paint the office, then that would be more likely. That would say, Hey, this is the job we need done You know, you have your own tool, you know, And it would be the contractor's responsibility. Bring their own tools, you know, decide how to get the job done, work out the dates that will get the job done and in the goal there being in goal, they're getting the place painted. Now. Those are two pretty, pretty stark differences between a contractor and a ah, an employee. And there's a lot of gray area as to when someone is a contractor in an employee and different industries that could be industry specific. So there could be a lot of areas where there's debate as to whether we should be a contractor or an employee, and it's important t make sure to go over those rules. So, um, we don't get in trouble on on Ah, on on that. We don't want toe wouldn't want the IRS to come back and say that someone is reported as a contractor and they should have been an employee and then say that we need to report, you know, Social Security, Medicare. So it's really it's really important kind of distinction. The distinction between whether someone is an employee or a contractor. The employees have much more responsibility for reporting by the employer. The contractor still some responsibility to report the income given given in certain conditions but less responsibility in terms of many other types of regulations, including the conflict of withholding the taxes for the contractor. 9. 23 Partnership Closing Process: in this presentation, we will take a look at a closing process for a partnership. So we're gonna go through the closing process related to this trial balance for a partnership. Same four step process will go through with the closing process. There will be similarities and differences to any other type of business, meaning a sole proprietor. A partnership such as this or corporation have some similarities, including the closing out of temporary accounts to the income summary. Or the income statement accounts to the income summary, which will be the revenue and expenses accounts in this case and the closing account and the closing of all temporary accounts, which for a sole proprietor or partnership includes withdraws for a corporation includes the dividends accounts. So that's gonna be our first step. Our goal, remember, is to close out all temporary accounts, meaning all these income statement accounts need to be zero and then all the withdraws accounts. Also, temporary accounts need to be zero. We're gonna do that in a four step process. The end result then will be just balance sheet accounts or asset accounts, liability accounts and the remaining balances in the equity accounts. So we'll start off with our first of four journal entries, which would be the same under any type of business. Any entity, structure, partnership, sole proprietor or a corporation closing out revenue revenue has a credit balance. We're gonna do the opposite thing to it, to close it a debit. So we'll debit the revenue accounts and then we'll credit something will credit the income summary account. So that's that Temporary accounts temporary accounts on Lee used in the closing process. That means it has a zero balance before the closing process. Who will have a zero balance after the closing process. So it's got a credit to the income summary. If we post this out, then we've got the revenue is gonna go down. So it's a credit balance here. We're making it go down by doing the opposite thing to it. A debit to make it go to zero. And then the income summary was at zero. We're gonna post this toothy income summary making it go up in the credit direction to 10,000. So what we're left with then is we have the 10,000 in the income summary, which was in the revenue account. We in essence have moved that 10,000 from the revenue account to the income summary account . First of four steps achieving the first goal making revenue accounts zero next step will be to close out the expenses were gonna group all the expenses at one account here. We're just gonna say expenses. All expenses would then be closed out. In this process, they're all gonna have debit balances. We're gonna do the opposite thing to him to make them go down, credit the expenses and then put them into the income summary. So the debits in the income summary the credits to the expenses. So we have the expense here. We're making it go down by doing the opposite thing to it. And then we're gonna put it into that temporary account, as we did for the revenue into the income summary. If we post this, then we've got the income. Summary here is going to be posted to the income summary here, starting at 10,000. Credit were making it go down. Now, by the 3000 the expenses were allocating to it to remain to result in a balance of 7000 credit. Then we've got the expenses. 3000 it's We have a 3000 debit here. We're gonna credit it to make it go down to zero. So now we have 7000 in the income summary. That is gonna be what income was when we first started the problems. Income was 7000 which has now been removed from all the income accounts revenue minus expenses and is now in the income summary account. It's important to note the income summary and know what that process is because a lot of the book problems you'll see with relation to partnerships will start basically here. Say the income summary has 7000 in it, and then we're gonna allocate it out to the partners in accordance with their profit sharing agreement. So we need to know what the income summer it means when they say the income summer, it means net income is gonna be allocated. And a problem could also say that net income is whatever 7000 and it's gonna be allocated to the partnerships. And we need to We need to know that that's part of the closing process to do that. And so it's useful to do the full closing process. Note that we close out revenue and expenses to the income summary to give us the net income , and then we can take that which is in income some right now Net income income summary of 7000 in this case. Now we can take that allocated to the partners in order to allocate this 7000 from the income Some right to the capital accounts. We're gonna do that in accordance with the profit sharing agreement. So in other words, we're gonna reduce this capital accounts by 7000 back down to zero the income summary, then returning to zero as it should for a clearing account. Allocate the income to the capital accounts In accords with the profit sharing agreement, We're gonna say that profit sharing agreement here is gonna be three to one. So it's a 3 to 1 profit sharing meaning capital account for C three and then Kate to and then M one. So if we add that up three plus two plus one is going to be six time to figure out the ship profit sharing, it's gonna be a ratio which will be three over six or 50% for C, and then we'll take the to over six, which will be the 60.333 Which is why we use the ratios and can't use the straight percentage. And then we're gonna take 1/6, which will, uh, do that right. 1/6, which will be 1.666 which again, is not even so. That's why we can't really just use a percentage. So if we take that, then we're going to say that the income summer is gonna go down. We'll do the opposite thing to its 7000. Then we will allocate the's in accordance to their income summary, which will be 53 5033 and 1 1067 So to get those numbers again, we're just taken the 7000 for the 1st 1 We said it was point times 10.0.5 for 3005. For the 2nd 1 it was 7000 times. I think his 0.333 and we get the 2.33 and it may be off a little bit because of rounding. It would be more exact to take the 7000 uh, times we said the ratio off to over 62 divided by six, which would give us that 2333 And then we're gonna take the last one, which is 7000 times we can say one over six, which is the 166. So if we add these up, then of course, to 35 plus 2333 plus the 1167 adds up to the 7000 and we're in balance. If we post this out, we've got the income summary starting at 7000. We're gonna make it go down in the debit direction by 7002 0 So that has cleared back out. We've got the capital account, which is going to go to the capital account up top. We have 4th 40,000 It's gonna go up by the 3500 to 383,500. And in case capital starting at 50,000 going up 3 2033 to 3 52,033 in his capital, starting at 30,500 going up by 1000 won 67 to 6 31,067 So that's gonna leave us. With the revenue and expenses cleared out, the income summary now cleared out steps one through three of the closing process. Done. Step for all that remains. Step four is gonna have the withdraws that we need to close out to the capital accounts. We could do this in, like, three different steps. We could say. I'm gonna close. This draws out for sees, draws two streets. Capital case draws to Kase capital, and then EMS draws two m's capital. But we typically do this all in one journal entry just as this journal entry four of the four step process. So we're gonna close out over withdraws to all the capitals. Our goal to make the draw zero to reduce the capital by the draws. Now, what the draws mean is that this capital represents what is owed to the owner that draws represent what was taken out. So the difference between the two in this case, the 41,500 is going to be what is actually owed. So this temporary account, once we netted out, will give us the amount actually owed ingested the capital accounts. So to do that work it where it's going to take the capital accounts first and because these are gonna be debited, so well, debit, the capital accounts will credit the draws. It's kind of easy to think of the other way we need to get rid of the draws. So we're gonna credit the draws. And that means that the debits are gonna go to the capital accounts for the amount in the draws account. So we're gonna debit, sees capital account by the 2000. The amount in the draws. We're gonna debit case capital count by 1000 the amount in case draws and then EMS capital by 1500. The amount in EMS draws, and then we'll credit the draws themselves. So this draws for C has 2000 and it will credit it. 2000 draws for K has 1000. Will credit 1000 draws for em, have 1500 will credit 1500 and then we're gonna go ahead and post this. So here's sees Capital 2000. Here's sees capital. So we got the 43,500 and then minus the 2000 brings us to 41,500 Kase Capital's Got the 1000 We have T K K Capital here 52 3 33 minus T. 1000 brings us to 3 51,033 EMS Capital 1500 starting at 6 31,067 going down by 1500 to 30,006 once 67 then we'll post the draws. So here's the draws. So we have the draws at 2000 going down by 2002 0 the draws at 1000 going down by 1002 0 draws at 1500 going down by 1500 to 0. So here's what we're left with a post closing trial balance where we have the assets of cash and equipment minus the liabilities than equaling what's in the capital accounts. In other words, what should be left then is if we ate took the assets of 435 plus 8 80,000 minus 500. We get 1 23,000 which should some up Teoh the capital accounts of 41 5 51 3 33 and 30,000 won 67. So that's gonna be it. Note that it's really important, of course, for the partnership that we have to allocate this out to the Partners capital account so that we can track how much of the Net assets is owed to the partnership. In a sole proprietor, we would only have one capital accounts, and the closing process would be that much easier not having us to deal with that. That closing process, the post closing trial bounce like all post closing trial balance for any type of entity, whether it be so proprietor, partnership or corporation will not have the temporary accounts of the revenue and expenses , but only balance sheet account permanent accounts. 10. 25 Federal Income Tax FIT Percent Method: In this presentation, we will calculate federal income tax F i t using the percentage method. We currently have our payroll register here where we're focusing in on Pam, who's the bigger earner here and therefore the one that's gonna need to be calculated with the percentage method rather than just using the tables. She's gonna be married. Four allowances. She's got a salary pay, which is going to be this 6 3053 Its's a weekly pay. And that, of course, will be the total earnings are focused. Then here is on the f i t. Calculation. So we're looking for the F i t. Calculation. Therefore, we're gonna need to know what the F I T wages are, which could differ from this total wages. This is what she's getting paid will typically really reduced by those types of things that could be reduced in, say, are 10 40 adjusted gross income, things like a cafeteria plan or a retirement plan like a four, a one cave. So if we say here that the cafeteria retirement plan are these numbers, then we can say that her total earnings are going to be or the F I t earnings are gonna be this 6 3053 You sort of say 3653.85 minus. And then we have the cafeteria and retirement plan of 280 minus 1 85 and that will give us the 3000 won 88 85. That's 3000 won 88 85 that we're gonna basically be using here. We're focusing in on this on this number on Pam's wages, because that's the one we're gonna be focused in on for the f i t. So here we are at the circular e the circular ikan be found on iris dot gov the iris website. I rest stock of the circular e To get the most current tables, we need to go down to the tables to calculate the payroll withholdings. These are not gonna be the normal just tables that we can look up. They're gonna be the percentage calculations typically used if the wages are too high. For example, if we went and found this number in the tables, we'd say all the tables aren't big enough to find that number, and therefore typically, that's when we would have to go to this method. The percentage method, in essence, calculating what the wages are gonna be Now, this is an important method to do it. It's useful to do because we get a better understanding of what the progressive tax system is, what these tears doing? How complex is it to calculate these taxes and why is it that format? So to do this first, we gotta look at the table in the circular e to see what the allowance is. So if we need to know what pay period were using, we're currently in weekly, and then we're gonna say, OK, that's 779. 80 is how many money per allowance that we get. So 79 80. Once we have that, we can then take our federal income tax pay. This is how much we started with from our table. That's how much we earn after the retirement plan and cafeteria. Then we're going to calculate the allowances, which is gonna be the 79 80 that we just looked at times the number of allowances which for her is four, which is going to give us 79 80 times four or 319 and 20 cents. Then we're gonna take the F I T wages minus the 3 1920 for the allowances to give us this 8 2069 65 This, then, is the number we're gonna use for our percentage tables. So now we're back to the circular Eem, and we're still in the percentage areas. This isn't like the tables where we would just look up the number, noticed what we're gonna have our our calculations will have to dio We've got to find the right bracket that this is in, and then we'll have to calculate the top tier and add it to the tier below. So let's see if we can kind of break this down and why this happens. This is closer to us actually having to calculate what the taxes on a progressive system. And remember, It doesn't mean if we're say in this tax bracket that all of our money is taxed at 22%. It means that some of its tax of 10% some of its tax that 12% some of its tax at 22. So it's just it's the top portion that's taxed at 22%. So we need to go through this whole thing and say, Well, this much is taxed at 10% and this much is tax zero. This much is taxed at 12. And to do that we can short cut it a little bit by saying, for example, we are in this bracket and that's gonna be between 1007 11 and one and 3 3095 That's the number were using because this falls in between there. And so we can basically say that this number up to the bottom level of 1007 11 has already been calculated. We can calculate that on the table table can give us that because that's a set point in time. It knows exactly where that is. It can't give us the number of tax at the highest bracket because it's somewhere between here. So we'll have to figure out what that is, because it's we don't the table don because he doesn't know exactly what that how much is gonna be taxed at 22%. But it knows exactly how much is taxed at 10%. How much is taxed at 12% so we can take that floor number and the table can just give us this 1 71 36 which is, in essence, the amount tax that either 0 10 or 12%. So we have we have that. And then we just need to figure out how much is gonna be taxed at the 22%. To do that, we're gonna take our number 8 2069 minus the floor number. Typically the bottom number which they give us over here, excess over 11 1711. The difference then will be taxed at the 22% the highest tax bracket. And then we add to it the 1 71 36 which is the table already calculating the tax on the 1007 11 the floor, which is the 10% and 12% brackets that we don't need to recalculate because the table can give us those. So it looks basically like this. We've got the federal income tax here, and then this. This is our tax are taxable wages. And then we've got the lower limit on the table. This number, this number and that will give us the amount to be taxed at the highest bracket. So we subtract these out. That's the amount of the highest rate, which is 22%. So the amount tax of the highest rates times 22 gives us $254.90. Then we add to it the 1 71 given to us by the table, which is in essence, the tax on the lower portion. And if we add those together, we get for 26 24 26 26 which is gonna be our withholding amount. So this is basically the full break out that will take from the table. It's nice to have a format like this. You can kind of, ah, think through it. If if you do it a few times, if you have some of these calculations and you and you set the table up, then you can go through and just fill out the format of the calculation and fill out what's the appropriate amount? What's the appropriate table that you're looking at? Just make sure you're picking up the correct table ours with for weekly. If you're bi weekly, Semi ah weekly or semi monthly, uh, or monthly another table and make sure we're picking up the single versus the married side of it. So then we can basically use all that in order to fill out our number here in our f i t federal income tax withholdings. 11. 25 Partnership Partner Leaves Partnership Cash Equal to Capital Account: in this presentation, we will take a look at a partnership situation where a partner is going to leave the partnership be paid by the partnership at the point of leaving with an amount that will be equal to that capital account for that partner. So here's gonna be our information. We've got the trial balance here, the assets in green liabilities in orange than the capital accounts. It's nice to be able to see the trial bounce. It's just a very short trial balance here to give us an example of this process. Note, however, that when we look at the trial bounce, we want to make sure that we have a post closing drop balance, meaning we have no revenue and expense Accounts of those have been closed out to the capital accounts, thereby giving us the proper amounts in the capital account. So we basically have in our counting equation here where we have assets minus the liabilities equals the capital accounts. And we're going to say that I m here is the one who is going to leave. So we're gonna leave the partnership and M is going to be the one leaving. This will be the ideal situation in which we're gonna actually pay em the exact amount of the capital, which makes it nice and easy for us. On the accounting side of things, not probably the way things typically will happen in real life. It will typically be. It's something paid out, probably more or less. Why? Because typically will have things like, um, fixed assets on the books that will not be on a fair market value method. And therefore, that's one reason that we haven't We might have a negotiations between the partners as to what would be a good payout for a partner to leave the partnership, and it may or may not be equal to the capital count. We may have to revalue, in other words, the asset liabilities of the company and and think about what the actual value of that partner share is. So if it what if it was a perfect world and the assets were equal to the liabilities and that was with a fair market values and and there were no other factors involved, then we might say, OK, we're gonna pay off the exact amount that the capital account is on the books for and again , if everything was was perfectly market value, then that might be a reasonable case, but they're typically would be revaluation. So how would we do this, then? We're gonna debit the capital account because it's on the books for 1 51 200 This partner is leaving the partnership, so we will debit it to make that account to go down. Then we will credit the cash account, uh, to MIT to pay off the cash. Cash has a debit balance. We will do the opposite thing to it. A credit to make it go down. Posting this out, then Cash starts at 550,000. It's gonna go down by the 1 51 200 We're gonna pay out to the partner leaving, leaving us with 398,800. Then the capital account here, it's gonna be EMS capital starting at 1 51 200 Going to go down in the debit direction 1 51 200 20 And that, of course, will leave us with just the two remaining partners Here Are accounting equation still in balance or about our trial balance still in balance? In other words, assets minus liabilities still equaling the equity. Also note that net income is not affected here. So there's Although Cash went out, it's not gonna be like an expense to the partnership. In other words, the partnership paid cash to the partner for the partner to leave. But that cash is not, of course, and expense is not gonna be reducing net income. 12. 26 Partnership Partner Leaves Partnership Cash less then Capital Account: in this presentation, we will take a look at a situation where a partner leaves the partnership and receives cash less than the amount in the capital account. Here's the trial balance we will be using. We have the assets and green the liabilities and orange. And in the equity accounts, we have note no revenue and expenses. In essence, this being a post closing trial balance and therefore, we can just say that we have the assets minus the liabilities equaling the equity reflected by the capital accounts. Here, we're gonna have a partner leaving. So AM is gonna be the partner leaving and we're gonna receive Emmett's gonna receive cash less than the amount in the partnership Capital account. Why might this be? You may ask. Well, it could be that we have to revalue its really kind of a negotiation process for the partner leaving even though there's money in the capital account. So it could very well be, for example, that the capital account where the equity section doesn't represent the fair market value of the partnership for example, equipment or something, maybe on the books, and have a higher value than we think it could actually be sold for, and therefore, the value of the capital account may not reflect assets minus liabilities on the partnership. But maybe different Do two things being on the on the balance sheet at costs rather than at fair market value. There also could be things like goodwill or something like that. That may not be there. And they're also maybe considerations such as the fact that I am is leading leaving suddenly. And in order to do that, maybe gonna receive less on the on the leaving due to that factor. So our journal entry then is gonna be first, we're gonna say that cash is received. Now, the cash we're going to say I mean, the cash is paid so they can Cash is going to be paid for 100,000 to M, although in has a 1 51 200 capital accounts, so cash is going to go down. Cash has 550 it's gonna go down by that 100,000. Then we're going to say that INS capital account is gonna go down by the 1 51 These are the two things we know that have to happen. So EMS capital account go down by the 1 51 because that's what it's on the books four and EMS leaving. Therefore, it has to be back down to zero, and then cash is gonna go down by the 100,000. So there's a difference. Then, of course, of the 51,200 what are we going to do with AB? No, it's not gonna be revenue or expense. It's not gonna be on the income statement. In essence, the other two partners we're going to have to deal with that. So be, then it's gonna have ah, capital increase of the 6 14,090 29 l is gonna have a capital account increase of 36 5 71 Note. Of course, the break out here is not an even break out because we're saying that the original profit sharing and it's gonna be a bit tricky was three to five. That's gonna be our profit sharing between M. B and L. And so 56789 10 That adds up to 10. So, for example, then the ill had prior to M leaving 5/10 or 50% interest or profit sharing within the partnership. The problem is that if m leaves, then we can't use this same ratio because it's not gonna add up to 100%. We have to allocate that that loss or that gain, it should be off the 51,200 to the other partners were gonna increase their capital account by that amount. But we're only left with, ah, these two left over. So we can re say we can re calculate this as to five. Those are the only two partner percentage is left over, which is gonna add up to seven. So that means that we have to over seven and 5/7 for our partnership percentages. So if we were then to take the 51 which is the the 121,200 minus d 100 we can then say, Well, let's do the math on the whole thing was, Couldn't say 1 21 200 uh, 1 51 51 200 minus 100,000 Means we have the 51 200 that we have to allocate to be, and l we will do so by to seventh to be, so I can say times two divided by seven. And that's how much we're gonna allocate to be. We've rounded here, of course. And we could do the same thing for l. We can say that. Same 1 51 200 minus the 100,000 gives us the 51,200 times five, this five here divided by seven. And then I'll give us the 36 5 71 And that'll be the proper allocation then. So that will be analogue cation that works. It adds up to 100. That's what we need. In order for the 100,000 credit this 100,000 plus the 36 5 71 plus 2 14 6 29 to equal the 1 51 200 So if we post this out, then we've got cash was at 1 51 or 550,000 minus 100,000 to 450,000. We've got EMS capital account. Here's EMS Capital. At 1 51 200 we took it all the way down to zero because m, it's leaving, and then the other two are getting kind of a bonus. They're getting a gain because really, they am sold. The capital account pretty much left for less than the actual earnings in the capital account, which will increase B and L's capital. So and we had that 1 24 200 going up by the 14 6 29 to a capital bounce of 1 38 8 29 And then we've got Els Capital starting at 2 64 600 going up by 36 5 71 in the credit direction to 3011 71. So here's our end result. We have m is gone. Cash goes down by the 100,000 were still in balance because we allocated that difference to be an l note. No effect on the income statement, no effect on revenue and expenses. Although it's kind of like, you know, this is kind of like it's a gain to be an L because they basically I got a increase in their capital account state. They gonna It shows here that they're owed kind of more money by the partnership due to selling or buying out the partner here for less than the amount in the capital account. But that's not the same of the partnership earning revenue by generating revenue from normal sales and normal operations. So rather than putting this down on on the income statement and then closing it out to be NL's capital accounts, we would typically not recorded on the income statement because it's not showing performance of partnership activities, It's showing the buying and selling of partnership equity partnership interest. 13. 28 Partner Leaves Partnership Cash Greater then Capital Account: in this presentation, we will take a look at a situation where a partner leaves a partnership and it has paid something greater than the capital account. Here is gonna be our chart of accounts. Here are trial balance. Where we have the cash has the only asset we've got the liabilities and orange. We've got the capital accounts and then we have no revenue and expenses. Remember, that's important, Not toe have the revenue expenses in essence being a post closing trial balance so that the capital counts then represent the true capital accounts as of a point in time after having all temporary counts closed out to them. In other words, the assets minus liabilities will equal the equity section broken out between the owners, the partners. So we're gonna say that M is gonna leave the partnership here. It's gonna get paid in this case in this time more than the capital account. And you might say, Well, why would that happen if the assets minus liabilities equals the capital accounts and the capital account for him is 1 51 200 why would they get paid more than that? And it could be that that There's some things on the trial balance that aren't at fair market value. So especially things like equipment, possibly intangible things. Possibly like goodwill in the partnership that's not represented on the tribe bounce, especially something like goodwill. It might be thought that the the partnership actually has higher value than what's being reflected, possibly because the equipment is valued more possibly because there's some intangible to the partnerships, such as good will that is not being reflected. So in that sense, there's and there's kind of like a negotiation process between the partners to decide what would be the appropriate amount to pay a partner who leaves the partnership. So in this case, we're going to say that the partnership is actually worth more and M is gonna received 200,000 cash. So the partnership is gonna pay the partner M who's leaving 200,000 decreasing the cache of the partnership. And we know that EMS gonna be off the books and ends on the books for a capital count of 1 51 200 So we're gonna bring that down to zero, and then we have a difference of, um of whatever that difference is what we get. It's fully calculator out here. We've got the 200,000 minus 1 51 200 of the 48,800. Now that's gonna have to be allocated between the two remaining partners, D and L. And it's gonna be reducing their capital accounts, which isn't really good for them. Of course, it's reflecting the partnership, owing them less money. Now, if the three partners have an equal sharing, we could just flip that equally. But we're going to say here that the Partnership original agreement was a three 25 split. And so we know that, you know, if we add that up 56789 10 that that's up to 10. So then we would take a ratio of 3 to 10 to 10 5 to 10 to break out between M. B and L, respectively. We can't however, used the same. I mean, the two partners remaining are being l. So we can't use however, the 2/10 and five tense of that 48,000 to allocate because that that doesn't add up to 100% . So this this interest is gone. What we could do is say Okay, we're left with two and five, which add up to seven and then take 2/7 and 5/7 so that should work. So what we're gonna do is we're going to say that we have the difference of 200,000 minus 1 51 200 equals 48,800. And then we're gonna multiply that times two over, divided by seven. And that will be the 13 9 42 or 43 about. It's gonna be a debit reducing the capital accounts. And then the 2nd 1 Of course, we could say it's just whatever needs to be remained. But we can also say 200,000 minus 1 to 1 248,800 that same amount Times five over seven. And then I'll give us the 38 34 8 57 So 34 8 57 So that's what we have. And if we were to add this up, then the debits 1 51 200 plus the 13 9 42 plus 34 8 57 add up to the 200,000 posting this out. We see that the cash is going to go down by 200,000 to 350,000. We see that the capital account for em is going to go down to zero at 1 51 200 going down by 1 51 202 0 and then these capital account is going to go from 1 24 200 down by 13 9 43 to 110,000 to 57 and then Els Capital Count is at 2 64 600 goes down by 34 8 57 Teoh 227 229 7 43 So if we look at our totals here, we see that the cash is going down. We see that the capital account is going down to zero. The difference then being allocated to the two remaining partners between the cash received and the capital that's being taken off the books. Reducing the partnership agreement. These two partners, the remaining partners capital accounts because we paid out more than the capital account for the partner leaving note. What we're not doing is having like a gain or loss here on the sale that then closes out as we close out net income because it's not really part of net income. Thes two partners are kind of making a sale of the partnership in a way because this partner is is leaving for less than the partnership. So they kind of have a loss basically on the sale of the partners of the Partnership Percentage Partnership share. But it's not revenue or expense to the partnership because the partnership is not is not generating or losing revenue. So although it does affect the capital accounts, reducing the capital council this in this instance it's not part of net income. 14. 29 Add New Partnership Cash More Then Capital Account: So when the sexual discussed partnerships and adding a new partner objectives, we will be able to describe the process of adding a new partner to a partnership, create the journal entries to record the entry of a new partner to a partnership, define the effect of the journal entry to add a new partner on the trial balance accounts as well as explained the effect on capital accounts of adding a new partner to a partnership. That variation of the same problems. Same exact things could be very similar, except for now we're gonna bring a new partner, are on the books same 25% interest that the partnership has agreed. The partnership and the new partner have agreed on this and a market environment. But the new partner is gonna be on the books and give the partnership the 270,000. So now the agreement is that the partnership will give a 25% interest in the partnership in exchange for the new partner are giving the partnership 270,000. So let's see what the journal trip would look like. Same process. I'm gonna talk about that. The journal entry until we hit kind of a problem and then go through our worksheet to see if we can figure out and fix the problem. So first of all, of course, the question that we always have is the cash affected in this journal entry of bringing the new partner in. And of course, yes, The cash is gonna be effective. We're going to receive 270,000 in the partnership. Therefore, cash is a debit balance. We're gonna make cash go up by doing the same thing to it, which in this case, would be another debit. So we know that's going to be part of the journal trip. We can put that Lay that out in the front, right up front. We also know that the new partner is gonna be entering the partnerships of up new partner put in 270,000. You would think that, of course, we would credit the new partner for the investment. Just like when we create a new investment or in time and investment happens, you would think we would credit ours capital account, which we will. However, we will not credit necessarily for 2 70 In this case, we're gonna credit for 2025 Why, that's that's gonna be the question. Well, why are we going to that? How are we gonna come up with that? Let's do our worksheet in order to answer that question. So what we have here is our 30 2050. We won't go over calculating those ratios again. That's of course, the 3 to 5 ratio. And we have our capital counts balances, which will be just these balances here. So we've laid these balances out in terms of a table. Now for the three existing partners before the new partner enters note, the capital account balance of 5 40 is equal to the book value of the company being the assets minus liabilities assets minus liabilities 5 40 That's the book value of the company that is allocated to the partners in this US way and note again that the the reason we can do this is because we have closed out the revenue and expenses so there's a post closing trial balances basically balance sheet accounts that we're looking at. So then the new partner comes on the books, and it's going to give the partnership 270,000. Therefore, the book value that cash is going to go up the ass, kicking you up by 2 70 and the assets minus liabilities then will be at 810,000. That means that our new capital accounts at the end of the day after the transaction has happened, needs to be at 810,000. We said that the new partner was going to get a 25% interest of that. Therefore, if we take that 810 times 25% of F the agreement that we have, the new part is gonna be on the books for the 202,000. So that's where this number is coming from. So now we that the new partner gave the partnership to 70 were put in the new partner on the books at 2025 and you might be asking, Well, why with the new partner agree to these terms, why would the new partner I mean, if the assets minus the liabilities equals the Valium in the company and the new partner is only going to receive 2025 of value in the company? Why would the new partner then give the company or the partnership about 270,000? And the reason for that might be well, there could be some intangible assets on the books. Or maybe the books are not valued exactly at fair market value, as is perceived by the individuals in the transaction. So maybe the current partnership has a good name and has good intangible assets being good will or something like that that will will generate future revenue and therefore the new partner partner are may be willing to pay more than what is being allocated to them through the agreement. So once again, this these things will rarely match they could match. That would be a very easy journal entry to make. But more often than not, they won't. And the agreement will be something that will have to differ in this way. Now, of course, the difference being that the debits are greater than the credits, we're gonna have to add some credits here. How are we gonna add the credits? Who's gonna receive the credits? Well, this time, M B and L are going to receive an increase in their capital accounts because of a received more cash than their allocating to the new partner. So that means that we have this 67 5 difference. So if we look at the calculation here, what is happening is that way we the new partners, is receiving 270,000 in cash and they're giving our A 2025 Therefore, we have this 67 5 that we need to allocate to M B and L in accordance with their profit sharing ratios. So we get the 67 5 most times times 0.3 30% vac uses the 20,002 right there and then we're gonna do the same thing here. So we've got the 67 5 times Bees Capital account point to profit sharing gives us the 13 5 there, and we'll do this one more time. And we have l. So we've got the 67 5 times 0.5 for l, and that would be the 33 7 50 Therefore, this 67 5 will be allocated to M B and L at 20,000 to 50 13 5 and 33 7 50 respectively. If we take a look at the transaction then our tribe balance over here. We need to then increase the about account balances. Like so. So we will go up. Obviously are is going to be on the books for the amount allocated to our that to 70. Uh, that I'm sorry they to go to five. That we're putting our in the books four. And then we are going to increase the capital account balance from 1 51 2 plus the 20,000 in this case to the 1 71 4 50 were increasing the capital account balances in terms of a journal entry. Then to increase the credit balance we have will then credit, which, of course, is also the plug that we need in order to make this reconcile. So there's the 20 to 50 that 13 5 to 33 7 52 m BNL, respectively, which will increase their capital consulate, see what that would look like in terms of the trial balance. So here's that same journal entry. Here's that same worksheets. Let's see if it does what we expected to do when we posted toe our worksheet here. What do we expect it to do? We expect our M B and L's capital accounts to be to a to 51 71 for 53 1 37 7 and 2 98 3 50 after we post a journal entry, respectively. So here's the cash. Cash is going up. Cash is a debit balance we're making to go up in the debit direction. So it goes from 5 52 8 20 Then we post ours capital council. Here's the new partner going from zero, of course, up in the credit direction by 202 500. The company now, in essence, kind of like those are the two of 2 500 then EMS Capital count is going to go up in the credit directions with credit were doing the same thing to it. Increasing the capital count from 5 51 200 up by 20,000 to 50 to 1 71 4 50 Then we've got these capital account here, so be has a credit balance off. 1 24 2 We're doing the same thing to it. Being a credit of 13 5 increase in the capital account to the 1 37 700 then Els Capital account balance has a credit balance. We're going to do the same thing to it. Increasing that capital count bounce from to 64 6 by 33 7 52 the nine other to 98 3 50 Now , of course, the assets cash mind state liabilities accounts payable will equal our new capital account balances, which will then add up to the 810. So we are now able to describe the process of adding a new partner to the partnership, create the journal entries to record the entry of a new partner to a partnership, defined the effect of journal entry to add a new partner on the trial balance accounts and explain the effect on the capital accounts of adding a new partner to a partnership. 15. 29: Hello. When the lecture, we're gonna talk about partnerships and we're gonna talk about the selling of a partnership interest. We will be able to describe the process of selling a partnership interest, create the journal entry to record the sale of a partnership interests define the effect of journal entry to still a partnership interest on the trial balance accounts and explain the effect on the capital counts of selling a partnership interest. So we're gonna do this by looking at a problem. We're gonna look through the problem, post the transaction, see what happens to the capital counts in terms of both a trial balance as well as a format of just a worksheet type of format. This is gonna be our simplified accounts that we will be looking at Onley cash that we're gonna meet Onley Asset. That we will have will be cash Onley, liability accounts payable, and then we will have our capital counts. This is where we will be focusing on and then we have the income statement down here. Note that nothing is in the income statement. The income statement have been closed out. You can think of this as a post closing trial balance or just basically the balance sheet accounts being represented here. We also have the accounting equation, assets, Equal liabilities and Owner's Equity. Also note that we have the debits represented with non bracketed or positive numbers and credits represented with bracketed or negative numbers. This gives us an easy balancing process in that we see that zero down here represents the fact that the assets minus the liabilities equals zero. Therefore, the assets equal liabilities, and we can shorten our debit and credit columns and have a quick worksheet to see what the transactions will dio to our trial Balance accounts in this way. Clearly, net income is zero at this point because the revenue and expense accounts have been closed out to the capital account balances. So what we have are the three partners, M B and l represented it here, and these capital accounts are going to share their profit and loss at a 3 to 5 ratio. We're going to say that be it will be selling their capital count interest to in. So here's B here's capital count interest. Here's in. That's, um, who were going to Selby's going to sell their capital count interest to after the transaction was approved by the other two partners. Four. Cash, 120,000. Now, one of the tricky things when we think about selling a partnership interest is that the Who are the two parties in the agreement is the first question we need to ask. In this case, the partnership is actually not in the transaction. The transaction is between B ah and the new partner end, meaning that there is $120,000 exchanging hands here, going from one account to another. But it's not going to the partnership account. Therefore, the partnership is getting nothing. So when we ask our question in terms of is cash affected in terms of the partnership in this case, no, it's not affected the agreement. The deal is between B and N. B says, Hey, you know what? I have a partnership interest. It has a book value of 1 24 to What does that mean? Well, the assets amount to 550 minus liabilities of 10 mean that we have 5 40 broken out book value of the company and be owns or is owed 1 24 2 That's the value of the company that is owned or the partnership that is owned by B. At this time, be says to end Hey, I'll sell you this partnership interest worth of book value of 2124 to 4. You giving me cash of 120,000 partnership. Not going to receive anything. However, the other two partners do have to agree to this that the other two partners are not forced to take on in as a new partner just because B wants to sell the partnership interest. The other two partners do have to agree to the terms. And if they do agree, then being Incan have this transaction and make this transaction happen. So first, let's talk about what this ratio means. The 3 to 5. So when we think about a partnership interest, if there's two partners, the most common part ship interest would be what, a 50 50 or 60 40 Something like that. We will often represent the partnership interest in the ratio format like a 3 to 5 for various reasons when it's a little bit shorter and to if, if the ratio is not even, then it's more specific to have a ratio rather than represented as percentages. So if we were to look at this, then EMS capital count is gonna be 30% calculated as three divided by three plus two plus five is 10 so three over 10. So that's how you calculate that 100.3. Move the decimal place to places over 30%. Then we have, of course, be so if we take a look at B, we do the same thing be as the two. So we're gonna take the two divided by three plus two plus five or 10. And that gives us the point to move the decimal two places over 20% 20%. And yes, we'll do this one more time for L. El has a partnership interest of five. So we're gonna take the five out of the three plus two plus 5 10 and that gives us the 100.5 or 50% if we add up the 30 the 20 of the 50 we add up to, of course, the 100%. So whenever you see, the ratio is breaking out. If you see any racial broken out like it's three colon to Colin five You Adam up three plus 2.5 is 10 3/10 to over 10 5/10 and that will give you your ratio. Break out now. If we look at the Capitol counts, then we have 1 51 to 1 24 2 to 64 6 Adds up to 510. Note that those are just the same capital account balances that would be represented on the trial balance. So here they are on the trial balance from M B and L. You could have problems that would represent this in terms of a table Could, after all, is represented in terms of a trial balance. I really like seeing it in terms of travels because as accountants and bookkeepers were often going to be using trial balances and it could help to see it in that format. But it's also very helpful to see it in terms of a table on note that the assets minus the liabilities equals these capital account balances. Also note that these capital account balances are not necessarily in proportion of 30 2050 of the 5 40 a lot of people will think that that should be the case, not the case. Normally the 30 2050 represents How we allocate in that income doesn't have anything to do with the actual ratio of account balances in the capital accounts between the partnerships . Reason being is because these accounts Onley represent to income and loss allocations, General, and depending on the terms of the partnership agreement, and that means that we could have invested different amounts and partners could have drawn out different amounts. So these these capital counts basically represent the amount that a partner could theoretically could draw out of the company. All right, so then if we if we go on here, we're gonna look at our journal entry to record this transaction. So what is happening is that bees gonna leave the partnership. So if we think through this, we're gonna think that it will Is cash affected? In this case, we're saying no cashes and affected is not affected. Even though cash did exchange hands, however, the cash didn't go to war from the partnership. The cash went from in the new partner to be personally not be as part of the partnership, but bees pocket. Therefore, no cash went to the partnership. What did happen is bees giving up their capital account. So bees on the books, bees gone, bees leaving bees leaving town. He's not gonna be here anymore. We need to say, Hey, bees on the books at 1 24 to be is gone. Now, their partnership interest needs to be zero. Therefore, the capital account balance has a credit balance. We need to make it go down. We're going to the opposite thing to it, Which in this case, would be a debit. So we know we're gonna debit this capital count, which will bring it down to zero. Then we have to credit something. What are we gonna credit? Were crediting the new person coming on the books. The new person in so in will be credited for the 1 24 2 in. It's gonna be on the books zero up to buy 1 24 2 to 1 24 to. So it's a pretty straightforward journal entry. The question, though, that people are gonna have is is there going to say? Well, wait a second. What about the 120 up here? If n paid 120 shooting their capital account and go up by 120 wise that going up by 1 24 to And the reason is because remember, the agreement was between n and be so in said, Hey, I'm gonna give you my share of the partnership interest the partnership. My share of the 550 minus the 10 is 1 24 2 and I will sell that to you in for $120,000. So you might be asking why would be sell their partnership interest, which has a book value of the 510 assets minus 2 10 of 1 24 2 and only receive 120,000. And there could be multiple reasons for that. Maybe that maybe the VAT the value of the assets are not fair market value, as is negotiated between the two partners. Maybe be needs to leave quickly and needs to make the transaction happen. Very rarely will those two things match. So just be aware that if the sale is between an existing partner and a new partner, then we didn't need to take the current partner off the books at whatever they're on the books for and then put the new partner on the books for whatever the old partner was on the books for. No cash is affected in the partnership because the cash went into the pocket of the partner , not of the bank account of the partnership. 16. 29: Hello. When the lecture, we're gonna talk about partnerships and we're gonna talk about the selling of a partnership interest. We will be able to describe the process of selling a partnership interest, create the journal entry to record the sale of a partnership interests define the effect of journal entry to still a partnership interest on the trial balance accounts and explain the effect on the capital counts of selling a partnership interest. So if we were to look at this in terms of a slightly different way, we can look at what if b cells the capital interested a partnership for cash? So now be saying, Hey, I'm gonna take off. I need to leave and I want to sell my partnership interest to the partnership. So now the other two partners, M and B are going to basically by out. I mean, him and l are basic gonna buy out B in this case, so that's gonna be the arrangement of the agreement. B is gonna gonna sell the capital accounts to the partners for cash of 200,000. So is cash gonna be affected? Yeah, So we're gonna think about this first, I want to think about it Types, the part of the journal tree that we can do, then we'll run into a problem and then we'll some calculations Teoh A just for that problem . So first win, say is cash affected and we're gonna say, Yeah, cash is going to go down because the partnership is paying be four. B's interest of partnership is saying, Hey, baby, we're gonna give you 200,000 for your capital, your capital account interest. Therefore, we're gonna take cash down. Cash is dead, bouncing into the opposite thing to it, which is a credit by the amount paid. And then we know that be needs to be off the books. These on the books for 1 24 to these no longer with us, therefore be should not have any amount in their capital accounts. Therefore, that's a credit. We need to make it go down by doing the opposite thing to it, which would be a debit of the 1 24 to. So now Ah, the partnership pay 200 b is going to be off the books at 1 24 2 We have a difference here , so we have a difference and that's gonna be a debit, that Deb, it's gonna have to be divided in some way between him and L. Now you might be saying Well, once again. Well, if B ah has a 1 24 to interest in the partnership, why is it that the partners would pay 200,000 to pay off the capital account balance? And again, there could be multiple reasons? It could be that there's some kind of goodwill in the partnership that's not being reported in the book, some type of intangible assets. It could be that they really want toe, let let be go, and they're willing to pay more in order to do that. So there could be multiple reasons for that. But once again, that's an agreement between the partnership in this case and be so those things will very rarely match. Now we need to figure out how to allocate that difference, how to allocate that plug. So we have RMB and L, which is a 30 2050 ratio that we discussed before between the 3 to 5 30% 20% 50%. Here's the same capital council. Here's the capital counts here. Here's the capital counts represented in terms for table book value. The company 540. That's equal into the assets cash list, the liabilities representing accounts payable in this case and then the new income and loss ratio. So now we have to say we'll be is gone. Therefore, we can't allocate between him and L between a 30 50 because it needs to add up to 100 or one. So we need to come up with a new ratio. So if we look at this, we have. If we had a 3 to 5 ratio and now the two is gone, we can think of it as a 35 ratio. So if we think about our new ratio, then we could think that we have a three out of, um ah, 3.5 is eight divided by eight. So our new ratio would be 0.375 or 37.5% for em. And then if we think about l. L had five over the 3.5 or eight, so we can say that we have a 0.65 or 62.5. So our new ratio that we're gonna allocate Ah, this amount by this difference by will be the 37 5 of 37.5 and the 20 on the 62.5. So now we're gonna allocate this difference. So that difference being the 200,000 cash received minus the capital account to take him off the books 1 24 to and that's the 75 8 And we're gonna allocate times the 80.375 to em. And that's gonna give us the 28 4 25 and then we'll do the same thing over here. Of course, the difference will be the other, but we'll do the calculation just for the fun of it. 75 feet times the 0.625 That gives us the 47 3 75 And of course, the 28 4 25 plus 2 47 3 75 equals 75 800. So we're gonna allocate the plug the 75 800 in ah, the in 28 4 25 and 47 3 75 m and l, respectively. If we look at the journal entry, then it would look like this. We're going to debit ends capital count 28 4 25 and debit Els capital count of 47 3 75 And we'll see what the effect on the trial balance will be this time. All right, so here's the same journal treat we have and this is our chart of accounts. And of course, here is that table that we're looking at Let's see what would happen if we posted this transaction. What would happen to the capital counts? Doesn't do what we expect it to do. What we expected to dio we expect the Indian capital counts to B M 1 22 7 75 b is going to be gone. L is gonna be up to 72 to 17 to 25 to give us a total capital count or book value of 3 40 All right, so bees capital count, we're gonna debit for the 1 24 2 So here's B has a credit. Were doing the opposite thing to a definite making it to go down to zero cash. Cash is going to go down. So cash has a debit balance. We're doing the opposite thing to it, crediting it cash in the partnership will go down to 3 50 M has a credit balance in the capital count. We're doing the opposite thing to it. Debit in the capital account, making it go down Teoh 1 27 75 l has a critic in the capital Count. Like all capital Council hint that goes down because we're doing the opposite thing to it, which is a debit to to 17 to 75. So know that the new capital accounts is still equal. The book value the company, so the assets of 3 50,000 minus the libraries of 10,000 still add up Teoh, the M and L's capital counts at this time. 17. 30 Federal Income Contributions Act (FICA): In this presentation, we will discuss the Federal Income Contributions Act. Or pica, if I was gonna be a big component and something that we will return Teoh when we do the payroll calculations and the recording of the A Role journal entries that does another law that happened in the 19 thirties, during the Great Depression, and we had a lot of legislation aimed at making things better or, ah, lot of different aims. But in this case, we've got the Social Security Act and the Social Security Act or the Federal Income Contribution Act. Otherwise, no one asked Pica, can also be confusing because it really has two major components to it. So when we think of Fike, we're thinking of the one component old age Survivors and Disabilities Insurance, or O A. S. D. I. And Medicare. So keep that in mind whenever you see the term Fike out. Ah, lot of times people will apply it to one or the other. Typically Teoh social security of their old age survivor survivors and disabilities insurance. But it really is comprising of both of these components. Both of these components fall under the subcategory law of fickle, which is the Federal Income Contributions Act or otherwise known as Social Security Act of 1935. Fike is gonna be really interesting for multiple different reasons. One. It's gonna be part of our payroll process, major part that will have to be putting in for payroll taxes. Two. It's a big part of the government spending, and so it's gonna be interesting from just a political standpoint will always be talking about fi ca and the fight that type of payments we may be wondering, Well, how is that the case when we're gonna stay, that the employers paying it or the employees paying it will discuss more about how that payment process works? But it's important to note from a political standpoint that the money is going to the government and it's gonna be paid out at some point. And that pain out process is a big part of government spending. It's also really interesting because, really, the thought process of what the especially the old age survivors and disabilities insurance is has tended to change over time, meaning When it was first in put in the place into 19 thirties, we had more of a safety net type of idea of what this would be meaning we have. Some people that were living might live past their life expectancy. And when that is the case, it's very difficult for an individual possibly to find employment at that point in time. I mean, if your life, if you expect not to live past Ah and in that time, somewhere around the sixties, if you're probably not gonna go past 65 then because people typically don't live much longer than that, then it would be very difficult if you didn't plan for that expectancy to live past a normal life than to go back to work at that point in time. So it leaves people in a very, ah vulnerable type of position at that point. And therefore there was a safety net the idea of a safety net program which would be set up in order to provide for those individuals, Um, later. And now, of course, as people have started to live longer, it's almost converting a bit to be thought of as more of a type of retirement type of ah retirement type of plan to kind of supplement income in retirement years. So there's a really a bit of a debate. Just from a political standpoint, terms of what we want fight gonna be, is it? Is it a safety net that's helping people after the point in time that that the expected life would be a safety net? Or is it's going to be some form of retirement plan that's required in a federal type of retirement plan. How that's gonna work from a payroll standpoint is that we typically have, um, they kind of like a matching like you might think of some 41 K type plans. But the the employer is gonna be forced to put in part of the taxes based on the employee wages, and the employees will have Teoh withhold as well. So when we talk about the cycle, taxes were talking about taxes that are both employer taxes and employee taxes. And that really is where things get confusing from the standpoint of recording the journal entry. Because the employer, as we noted from the the Constitution, made a change where, of course, the court, the employer is required to withhold taxes that the employee pays, so in this case, the employers withholding taxes from the employees, and they're having to pay taxes above that as well for this employee tax for the payroll tax. And then, of course, at the end of um so what they're gonna do, of course, is there gonna take that they're going to give it to the government, which should put it into a separate fund and not not dip into that fund. And then payments will happen at the at the point in time at the end of ah, persons towards the end of persons life at some age retirement age, which could be extended by law around 65. And then they will receive payments and payments that were well received back will be based in part on how much they put into the Social Security or Old Age Survivors and Disabilities Insurance Fund. Meaning there They had money taken out of their account into and put into a, um, a fund. And then, of course, they're going to get paid back. Now notes that what's not the case here is it's not the case where the government is holding on and has this money available and waiting is investing. It kind of like a 41 k plan in order to wait for retirement to pay it back out. What's really happening is the current funds going in are paying of the current retirees going out. So it's not. It's not a system where they were paying it in there, holding onto it, and then they're gonna pay it back out. At the end of our retirement ages, we might think of like a normal kind of 41 K plan. It's more the case where, um, the current generation is paying into Social Security, which is being paid out. Teoh, the current group of of retirees. And that's just the way it was set up. That's the way it was planned for. But when there's differences, of course, in the population, then those differences can cause shortages or over urges within the fund. So that's gonna be an interesting topic. We will focus here on what's the law for the With holdings. How do we make the with holdings Haddaway recorded with holdings how to re report the withholdings? Teoh our employees, the Medicare portion is gonna be is still somewhat of a safety net program. It's gonna be some. It's gonna be similar in the format in that the employer and the employee are going to both be pain it, so some of it will come out of the paycheck. The employer will take it out of the employee paycheck, and the employer will be responsible for their portion as well that they will then pay in and then at some time later on in life. If people qualify for Medicare, they could get then the Medicare payments. Now the Medicare payments currently are a lot less. Ah, and the percentage is gonna be a lot less that it's gonna be paid in to Medicare, and it's not. Ah, and it is something that, upon receiving benefits from Medicare, there's gonna be some kind of restrictions. You got to qualify basically for Medicare, and therefore it probably still falls into Mom or definite kind of safety net type of program. Whereas Social Security or the old age survivors and disability insurance, I could be thought of by some to be more of a converting more toe like a retirement or something. The supplement income in the later years, rather than just a pure safety net type program 18. 30 Social Security Tax Calculation: in this presentation, we will take a look at the Social Security tax calculation we have here. The payroll register, which we will use to calculate thes Social Security taxes we have are two employees and the marital status, the number of of allowances, the hourly rate and salary. And then we have the regular pay and the overtime pay and then the total earning. So here's the main component we want to focus in on here we have the total earnings we're gonna calculate the O A S D I based on earnings. However, the total earning, which is just gonna be the regular pay plus the OT pay may differ from the O A. S T. I or Social Security wages. Remember to the different names that we can call the O. A. S. T. I or Social Security. It's a fight get tax. But the two factor taxes, Social Security and Medicare. We're focusing in on Social Security, which can also be called the old age Survivors and disability insurance or O a s t I. So when speaking of it, we're probably gonna end up calling it Social Security. Easiest thing to say when abbreviating it we may. I use the O A. S D I four tables as we're doing here. So the point is that we could have a different OSD I wage based on a couple factors. One if someone hit the cap. So if we had someone that hit the cap, then they're osd I wages will differ. And if there's something that's gonna be deductible for always D I calculations such as a cafeteria plan than to it could differ. So if we look at the payroll register, we can't really tell if someone hit the cap. Clearly, this are nowhere near the cap here of 1 28 400 this example. This will go up from year to year, and but this doesn't give us total earnings. This only gives us the earnings for this pay period, so it doesn't really tell us much about whether or not someone has going over the cap. What we got to do then is go to the earnings records so of the earnings records for our two employees, and this gives us the year to date earnings for the total earnings and the OSD I so they could again defer the total earnings could differ from the OSD eye. We can see here that the osd I is close to the cap for the second employee nowhere near the camp for the first employee. So if we do the subtraction problem, if we take the cap of ah 1 28 400 minus 1 25 5 35 we get 8 2065 that we need in order to get up to this cap. So if this 8 2065 then is lower than the actual wages were going to use this number so that we don't go over the cap for OSD I So that means for uh oh yes, d I wages were going to have the five or 6 15 which is going to be the wages here less that the, uh, sorry. The total wages here less the cafeteria plan. So this one there's a cafeteria plan that is bringing this down, which is a health insurance plan of 756.5, minus five or 6.5 or $250. So this difference is just due to that. The second difference, however, is due to the fact that this person hit the cap so we can't go over the 1 28 400 this person hit the cap at that point in time. And therefore we're gonna have ah lesser of Social Security wages than total wages. And going forward, we're gonna have zero Social Security wages and therefore zero Social Security for this particular employee. Then if we do the calculation for Social Security, it looks something like this. We're gonna start off with total here just so we can see, um, the fact that we could use the total and calculate based on this, And then we'll go back and calculate for each individual. And they will give us an idea that this flat tax and how this flat tax works as being opposed Teoh a progressive tax for the federal income tax or F i t. Tax. So we're first going to calculate so security based on this number here. So we're gonna have the 3 3071 50 total wages for all of our employees. All two of them. We're gonna most by that time, 6.2% or 0.62 in the decimal format to give us $209.30 if we do that again for the employer portion. Same calculation 3 3071 50 times that 6.2% gives us the 20903 So note that were, in essence, doing this two times. One for the employees. This coming out of the employees paycheck. Two for the employer that's coming out of the employers checkbook. And if we add those up, really, the total is 4 18 07 between the employer and employee who will be pain when we consider that paid role register. We're gonna be concentrating, of course, on the employee tax to get to the net check. So if we calculate this out again now we're gonna take the individual employees wages and add them up, and we'll get to the same totals down here. But we'll do that in a different format by calculating the Social Security tax for each employee. So five or 6 50 times 6.2% in other words, is 31 40. This 8 2065 times 6.2% gives 177 63 for a total of that 20 9/3. If we do the same thing for an employer portion, then once again the five or 6 50 times the 6.2 gives another 31 40. The 8 2065 times the 6.2% gives the 1 77 63 And if we add those up, we get that 20903 19. 39 Add New Partner Cash Less Then Capital Account: So when the sexual discussed partnerships and adding a new partner objectives, we will be able to describe the process of adding a new partner to a partnership, create the journal entries to record the entry of a new partner to a partnership, define the effect of the journal entry to add a new partner on the trial balance accounts as well as explained the effect on capital accounts of adding a new partner to a partnership. All right, so we're gonna take a look at this through a problem. We're gonna have a trial balance here. A simplified traveled to the beginning balance on Indian balance. We're gonna have the only asset being cash here. We've got the accounts payable being the only liability. We will be focusing down here in the capital accounts. As we add a new partner to the partnership. We have the income statement down at the bottom with the revenue and the expenses. Note. There is no revenue and expenses at this time because when we put the new partnership in there, we want to think about that. Basically a post closing child bounds that has had the income statement closed out to the capital accounts also note that we have debits represented by non bracket numbers or positive numbers and credits represented by bracketed numbers or negative numbers, and very before we are able to have the debits minus the credits equals zero. So we're able to simplify and have less space to see our balancing process here. Clearly, there's no income net income on this report because we have closed out the income statement to the capital accounts. We also have our assets equaling are liabilities and our equity. It's important to note that when we think about the partnership and added a new partnership that we consider the fact that the equity accounts are equal to the assets minus the liabilities so that 550,000 minus the 10,000 will equal the capital accounts here. So the capital accounts represent, of course, the book value the net value the assets minus liabilities off the company. We will be adding a new partner to the partnership. It will be, ah, a new partner will be are here. So we have the n, B and L partner share income and loss at a 3 to 5 ratio. We're gonna first discuss what that means, what is a 3 to 5 ratio? And then we're gonna add the new partnership. The new partnership partner is gonna be on the books or into the company at a 25% interest . That interest is what is agreed on between the partner, the new partner and the existing partners. So they come to an agreement of a 25% interest in exchange for 140,000 vet. The new partner will be giving to the partnership so the partnerships can receive 140,000. The partnership is then going to give a 25% interest to the new partner, new partner being our existing partners, being M B and l. So first, let's think about what this means. What does it mean to have a 3 to 5 ratio? That's the current ratio before the new partner comes in. So before our comes in, we've got our three partners with a 3 to 5 ratio on the income and lost split. Now, when we think about splitting income and loss, if there's two partners, obviously the easy split would be a 50 50 or 60 40 or some kind of flat ratio for thinking about Ah, it's. It's easier to think about ratios sometimes then percentages, however, because ratios can can be more specific in some cases if it's not an even percentage number . Therefore, if we see something like this, what says to colon? I mean three colon to colon five. Then we could calculate this. Something like this ends calculation would then be the three divided by. And then there's three plus two plus five is 10 divided by 10 or 100.3 or remove the decimal places to poise is over 30% and then we have the same for B. So be has two out of the three plus two plus five. So we're going to say the two out of 10 and that is the to move the decimal place over the 20%. And then, of course, l The final one will do it out here and we'll say five out of the three plus two plus 5 10 if we move the place decimal place over 50%. So we're having a 3 30 2050 This happened to be even so we could have expressed it as 30 2050 ratio, which of course, adds up to 100 but it sometimes it won't be. Even so. Sometimes it's easier to represent, or it's more precise to represent as a ratio. So if you see something represented in that format, then that's how you basically break up. You're gonna add up. Three plus two plus five is 10 so it's three out of a 10 210 5 out of 10. That's how you come up with your percent. It's also bit smaller, or ah, you know, takes up less space to present it in this format as well. Then if we look at the Capitol counts, we see the capital accounts here. These air just the accounts that are given in the tribal belt. So obviously, here is the EMS capital count 1 51 2 Here's Bees Capital account 1 24 2 and here's Els to 64 6 Now. One thing to note that the capital counts do not match necessarily this ratio. This ratio is having to do with the incoming lost distribution. How do we allocate income? A loss? Beef between 30 partners does not have to do with the capital accounts. There's a couple of reasons for that one. They could have put in different amounts when they first entered the partnership. They can also draw out different amounts, but in relation to this profit to these ratios. Therefore, it's very gonna be very rare that the capital accounts are going to coincide with the profit and loss ratios. Just keep that in mind the profit and loss ratio these ratios have to do with how they are going to allocate the income and loss that has generated through the partnership, too. Each individual partner does not govern necessarily the amount of money that is drawn out of the partnership and does not govern the ratio that the capital council must remain in for the partnership. So now that we have that taking a look at, we can start to work on our journal entries. So that journal entry we can start thinking about the journal entry, and then once we run into a problem, we're going to do some calculations. So let's think about the journal entry first, go through a normal steps and then see where the problem happens and do some calculations to figure this out. So we got the new partnership is gonna come on the books for 140,000. Therefore, we ask our normal question. Is cash going to be affected in this transaction? Yeah. The partnerships going to receive 140,000. Therefore, cash is going to go up. Cash has a debit balance represented by the fact that it does not have brackets. It's gonna go up by doing the same thing to it, which in this case, would be another debit. So the journal entry is going to start off with a debit to cash. We're gonna debit cash that's gonna increase the cash accounts and we know that much. And we know that the new partner is going to come on the books. He's partner are in this case and they're the new partner. So we would think that obviously, the nuke, if they put in 140,000 we would have to credit ours Capital account for our coming on to the partnership. And that is true. We are gonna credit the captain account. However, we're not gonna credit it for 140,000 necessarily in this case, we're gonna credit for 1 70 That's kind of the part of the problems that will explain why we got that 1 70 And then we've got this difference that we're gonna have to deal with as well. So here's the issue. Why? Why? If they gave 1 40 might we credit 1 70 while the new partner is not gonna be on the books exactly for what was given. We agreed that we were going to give a 25% interest of the partnership four cache of 1 40 So we need to define what a 25% of the partnership is. And the way we do that is we take the book value the partnership, which is the assets minus liabilities, which, of course, also equals the capital accounts. So assets minus liabilities 550,000 minus the 550,000 equals the Equity Council. Here's the equity accounts. If we list those equity accounts here, here they are. We add up to 540,000 assets minus liabilities book by the company theoretic value that the partners would receive if they liquidated punk company and walked away with the cash again . That's just a book value, however, probably very accurate in this case because all we have his cash on the book. But if we had other things on the book like equipment, it's it's not likely that we will sell the equipment for the exact book value. So this is the book value of the partnership. Theoretical asked, Minus liabilities. And then the new partners coming on look, books for 140. So now, of course, cash is gonna go up by 140. Therefore, assets minus liabilities is going to be what it was 540 plus the new 1 40 that the new partners coming on the books for. And therefore we now have a book value of assets minus liabilities or a capital account balance that needs to be allocated of 680. And we decided that we were gonna give a 25% interest of the book value of partnership for $140,000. Therefore, we're gonna take 25% of the 6 80 That's how much we're gonna allocate to our and of course , the 680,000 times 25% will give us the 1 70 that we talked about over here. So here's the 1 70 That's what the new partner is gonna be on the books for, Even though the partner only gave us 140 and what you might be thinking now as well, why would the existing partners agreed to this? That doesn't make any sense. If the book value the partnership assets minus liabilities is worth 170 why would we allow our to be included in the partnership when they only give us 140? And the reason for that That could be different reasons for but it might be that are is coming on the books with some intangible assets. Or maybe our has some particular rain name recognition which will generate future revenues that are not foreseen in this calculation. And therefore the existing partners, in order to get our on board, are willing to give up a 1 70% interest even though they're only receiving 1 40 So these two things will not always match. Most of times they will not match. And now we're faced with another problem here, which is that the debits do not equal the credits. We're gonna need some more debits of the 1 70 minus that 1 40 which it will be 30. And how are we going to allocate that out? Well, we're gonna have to reduce the other company, the other owners, the other owners, capital accounts, the other partners, capital accounts, I should say. So we're gonna have a debit them. So that 30,000. So now the question is, Well, how much are we gonna debit M B and L in order to over the 30,000 that we need. And we will do that in accordance with their profit sharing. So know what we have here. We've got this 30,000. We look at that calculation. What we're saying is the new partner was put on the books for I take it, we can look at either way we could say that new partner was on the books for 140. That's how much they paid. And we put him on the books for 170. Therefore, we have a difference of this 30,000. We're gonna break that difference out between 30% to em. So times 300.3 gives us nine thousands. That's where this 9000 is. If we take this 30. Okay, we take the 30,000 times the point to 20%. We get the 6000. And then, of course, if we take the 30,000 times the 60000.5, that will give us the 15. The nine plus the six plus 2 15 add up to the 30,000. Therefore, we will then break out this 30,000 debit over here that is needed between m b and L in accordance with the 96 and 15 breakout. Therefore, we have this, uh well, this will be the Indian capital accounts, so we'll have this breakout debit of 9002 m debit of 6000 to be and debit of 15 to l. So that's going to reduce their capital accounts. They're not necessarily happy about this, of course, because now that reduces the book value of the company that is basically owed to them. Let's take a look at what this would look like if we posted this to a travel. We're gonna post this journal entry. So here's that. Here's what the journalist she would look like. And we're posting it in accordance with our worksheet here. Let's post this out. Talk through and see if it does what we expected to do. What we expected to do. We expect it to create an Indian capital account after we post this journal entry of our 1 70 then m 1 42 to be 1 18 to and l 2 49 6 thereby giving us a capital count of 6 80 which is equivalent to the book value of the company assets minus liabilities. So here's cash were debit and cash, and we're gonna debit cash. Cash is a debit balance. We're gonna make it go up by doing the same thing to it. Therefore, cash went up to the 6 90,000 and then we put our on the books. So here's are on the books were credit over the 170,000. So we're gonna put that down here from zero up in the credit direction to 170,000 new partner on the books for 1 70 Then we're breaking out that 30,000 in the 96 and 15 to M l N N B and L, respectively. So we got the 9000 here. Note that we have a credit balance in the capital account. We're reducing it by doing the opposite thing to it. Therefore in is gonna have to eat or reduce their capital count to 1 42 2 So it was going to receive the 1 51 that was the value and it went down. So then be he's gonna get the 6000. So be has a credit balance of 1 24 2 We're bringing the balance and down by the 6000 to 1 18 to and then l here has it, has it debit 15. So they had a to 46 6 credit minus the 15 brings the balance down. Now you'll note that are ending trial balance here. Now it ties out to our capital account balances over in our worksheet. So a problem could ask this in either of two ways, as an accountant or bookkeeper, we're often looking at the trial balance, and we may want to see stuff, of course, in terms of journal entries, and we also may very well see this insane information in terms of a table. It's good to be able to understand both ways of seeing this. Also note that once again, still, the book values going to be the 9 60 minus the 10 will add up Teoh, the capital counterbalances So now we're looking. 20. 40 Medicare Tax Calculation: in this presentation, we will take a look at the calculation for Medicare tax. Here we are, on the payroll register we have are two employees, Bill and Pam. We have over here the regular pay, the overtime pay and in the total earnings. When looking at the calculation for Medicare, we're gonna be looking at the earnings four Medicare, which could differ from the earnings for the total earnings. So remember, when we look at the total earnings, that's, of course, that regular pay and the OT pay when we started calculate the payroll taxes, Then we may have to adjust the earnings. For example, F I t is gonna be reduced, possibly by things like a 41 K plan or retirement plan and a cafeteria plan. The O A. S T. I. Or Social Security is gonna have a cap, which is the major component, as well as possibly being reduced by something like a cafeteria plan. The H I, which is part of fight gown, is going to be different than the O. A. S t i. Or the Medicare will differ from the O a S t I. And in this case, there's no caps That's the major difference between the two types of wages in for the fight kout taxes. So, for the h I wage, we're gonna reduce it just by the cafeteria plan. The difference, then, between the Medicare wages here and the total earnings up here will be the cafeteria plan. So in this example, then the 7 56.5 total earnings minus the five or 6.5 Medicare earnings is 250. That then would be the cafeteria plan here, like the health insurance type plan. So that's gonna be the major difference that could be there between total earnings and the H. I or Medicare earnings. Note that that's different from the O A S t I. Which has this cap, which is a major component of the O. A. S t. I or Social Security. Now we'll do the calculation. We're gonna start with the total here and calculate the total for the employer and employee portions of H. I or Medicare. And then we'll go back and calculate each individual component on and see that they will line up the same way. So first we're gonna take the total If we take the total h I 3009 10 35 times the rate 1.45% or 0.145 We get to $56.70 if we do that for again. For the, uh, the employer portion H I wages times 3.1 point 45 or 450.145 gives the 56 17. Then if we add those two up, we come up with the 1 13 40 So this is the employer and employee portion. We can come up with those same numbers. If we do this by an employee by employee basis, Bill and Pam, Bill and Pam, respectively. So we'll take the five or 6 50 times of 1.545 or 0.145 gives us the $10.97. 3004 03 85 times. The 1.45% gives us 50 to 98 that totals out to the 63 95 then the same thing For the employer portion, the five or 6 50 times the 1.45 gives us the 10 97 again. The 3004 03 85 times one point over for 1.45 gives the 50 to 98 the some of those being the 63 95. 21. 50 Federal Unemployment Tax Act Calculation: in this presentation, we will take a look at the calculation for federal unemployment tax or food toe. We're here on our payroll register where we have our two employees. We have the regular pay, we have the total earnings, and now we're looking for the food to earnings. And we want to make sure that we know the difference between the total earnings and the different types of earnings that we could have, or the different adjustments to earnings in order to use them to calculate our taxes. For example, the F I T may differ. If there's a cafeteria plan, for example, the O A. S D. I. Or Social Security has this cap on it. So if anybody is over that amount, then it will differ from the total earnings. And the Medicare and Social Security could differ. If there's something like a cafeteria plan on it as well. If I t could differ. If there's a retirement plan, a swell, it's a cafeteria. The food toe wages will differ when we have this cap of 7000. It's important to note that that 7000 is very low, so this is kind of unusual tax in that case because it's a flat tax. But up to this very low cap, which most people will hit sometime, probably in the first quarter. So most employees will get to this cap at some point. So we need to be very careful when we did a payroll that when an employee gets to that cap , we don't go over it. Now, if we look at these two wages, we can see 7 56 and 6 3053 for this current time period. We can't tell from those numbers whether or not they've hit the cap, though, because we're in week 10 and we need to know cumulative wages, not just for this time period for this test of the cap. So to do that, we'd have to go to the earnings records. So in the earnings records, we can look at these first employees and we can look at the photo wages here at 6008 08 for our first employees. And if we do our subtraction problem, then we're looking here for doing 7000 minus 6808.5. That's $191. So that means if that 1 91 is less than the wages they would have gotten this time, period. Then we're gonna go with the lesser amount. The second employee here is clearly already over the 7000. So we're not gonna have anything included here for the photo wages. So we go back to our food of wages. Then we have 1 91 on Lee, even though the earnings were 7 56 50 And there's gonna be no food toe wages for our second employee. For Pam, that would give us a total of 1 91 The food attacks then will be 1 91.5 times 0.6 Now, remember, 0.6 is gonna be quite low. We've got 1 91 25 times 0.6 or 6%. Move the decimal, two places to the left. So that gives us about 1.15 And that's gonna be the total 1.15 Remember that this rate is pretty much the effective rate for most circumstances because most circumstances will have a state which will have a suit attacks which will lower the food attacks down to this percentage. So for practical purposes, this is typically the percent we will use if you see the food. 2% however, listed out or read the food 2% of looking up, then oftentimes you'll get the full food 2% minus of a deduction for Suta, which will then result in this number here. So just be careful when you're looking up the rates for food. 22. 55 Employer Taxes Calculation: In this presentation, we will take a look at the employer taxes calculation. It's important to keep the difference and distinction between the employer taxes and the employee taxes win. Considering payroll taxes, this can be difficult because they are related. In some ways, there's some taxes that will look much of the same and because the employer really is the one responsible for actually making the employee pay the employee taxes, meaning the employers really the one that that is physically conducting the logistics of writing the check or making the payments for the taxes to the Fed and the state. But they're coming out of the employee paycheck. So the employers still making the payment or physically making the payment. But it's being paid by the employee e. In the case of employee taxes, as opposed to the employer taxes, where they're where they're not coming out of the paycheck, these air the taxes that are gonna be paid for payroll on the basis of payroll earnings, but paid out of the employers ah, wages or the employees earning is that wage of the employers earnings for profits. So we have here than the O. A S T I the h i, the food A and the Suta. These two look familiar when thinking about the employees side because they will be there as well. The O A S T I being Social Security, the h I being Medicare, these are gonna be the employer portion of them. However, so these are not the same amounts. These are not. Will there be the same amount? But they're not the same in that. They're gonna be twice the amount we're gonna have to pay it from the employer. And this amount isn't coming from the employee check. It will be coming out of the employer checking account. Then we have foot up, which is an employer only tax. So only the employer is paying food to federal unemployment tax, and then we have the state tax. We're not focusing in on the state taxes here mainly, but because Suta and food are so related, we typically will see Suta here as well. So Fouda is an employer tax. Suta is necessary to pay if we're gonna get that lower rate for food. Toe suit has typically somewhat more standardized from state to state than others. Taxes Because of the link between Fruita and suit. A book could still vary from place to place and business to business. So if we go through these in a little bit more in depth, we're just gonna do the same calculation for OSD I Social Security. It'll look the exact same as when we look at the calculation for the employees portion. In other words, we have the employee wages. We're just gonna take those wages times the rate 6.2% difference here being, however, that this is gonna be twice That is gonna be the same amount. But we're really doubling up the amount that it's coming out of the employee. Check this part not coming out of the employees check. And that's the other thing to remember. This component will not be paid out of the paycheck but will be paid by the employer. So we're gonna take this 6 4002.50 times 6.2 or 0.62 which would be to 51 88. Then we'll take this 44 28,024 times the 6.2% which would give us the 2 47 29 Then we'll take the 5004 09 50 times, a 6.2% to get the 335 39. Finally, the 35,000 times the 6.2% giving the 1 2070 a total. Then if we some of these up of 1 3031 55 and then we have the h I. Same idea. This is Medicare, and it's the employer portion. So although the calculation will look much the same of this portion of it will not be coming out of employee wages but out of employer earnings. So we've got the 4060 to 50 times the 1.45% or the 0.145 giving the 58 91. Then we have the 4 4024 times the 1.45% or 0.145 giving 64 15 and then we have the 5004 09 50 times the 1.45% or 0.145 giving the 78 44 then the 35,000 times the same, giving us 507 50 adding those up for a total of 708 99. Then we have the food. The food will be an employee, er, only tax. That's probably one we don't have as familiar in our mind. So the federal unemployment tax act, because it's not coming out of a paycheck for one so we don't may have not have as much personal experience. And two, it's a lot smaller, so it's probably not as noticeable as, well. It's gonna be that 0.6% or 0.6 much smaller. It is coming out of the employee earnings, not the employees out wages. Note that, of course, this 6.6% is linked to the suit attacks, so this, for all practical purposes at this point, will typically be the rate used. But when seeing the rate, it will typically be higher and then reduced. If we pay. Suta, which just about every state has implemented and therefore win, will use the lower rate for food off 0.6%. So the 4060 to 50 times 500.6% and remember what 0.6% is well, the one calculation and the calculators toe 4062.5 times 0.6 So 0.6 That's what we got there then The 4 4024 times 40240.6% or points OO six is 26 54 of the 5004 09 50 times, 2.6% or 0.6 giving us the 30 to 46 in the 7000 times 70000.6% or 0.6 providing $42. If we add these up, then we get to the total of 125 38. Then we have these suit, um, and again, this is a state tax, so it's going to be an employer portion to it. And it may just be an employer portion mirroring the Fouda or depending on the state, and may have an employee portion. It also may have a similar cap to it, or a different cap, depending on the state requirements. But many times it will follow the same format as food toe, and they're gonna be related. Remember, because we have to have some minimum standard for Suta if we want to pay the lower rate for food. So here we're just gonna take the 4060 to 50 times to eat 5.4% or 0.45 which is 219 38. The 4 4024 times toe point off the tense of 5.4% providing the to 38 90 the 5004 09 50 times to 5.4% or to 92 11 and 1000 times the 5.4% or 4 32 adding these up some into 1 1080 to 38. 23. 60 Employer Responsibilities and Processes: In this presentation, we will discuss imploded responsibilities and processes related to payroll. One of the things that the employer will need to do and we'll need to do whether they are a corporation or a partnership or even a sole proprietor is to get an employer identification number from the IRS that done with the former SS for So this is gonna be out just a reporting type of document that we will need to have. We'll need to use this employer identification number when we process our tax documentation . And, of course, any type of regulate ation body is gonna know us from a number. And in terms of processing payroll for the federal payroll, we need to have a separate number that being the employer identification number now, this number is gonna be important because it's it's It's more standardized in terms of just employment, meaning any type of organisation can get the money i n number. Even if we're a sole proprietor. Ah, partnership or a corporation. So that corporation, as we know, is a separate legal entity, and it's gonna have its own its own, um, corporate number when reporting income taxes. But the formats of a of a company such as a partnership typically have different types of reporting requirements in terms of the number one reporting income taxes and a sole proprietor possibly could be in a situation where they're using a cell security numbers. So we have a different type of format for reporting on a number basis to the I. R S for income taxes. So the the employer identification number can be used then to give the iris more of a standardised process when we're talking about payroll, no matter the type of entity that we will be using. The employer identification number can also be useful for sole proprietors if they want Teoh process 10 99 type forms and not have to use their cell security number in certain types of documentation as well. So even if we don't have any employees, in essence, it for a sole proprietor were kind of our own employees in some ways. And we may want to have some other number representing our business other than Social Security number, and that could be these. The employer identification number, the process for for applying for the SS fourth fairly straightforward, you can do it online and online application as well, or go to irs dot gov. I r s dot gov. And if you go to forms and go to the SS four, you'll find the application form and you can just go through the steps for the application form. It's a one page form. Ah, pretty quick form to fill out and get going Notice. Some of the key components will be the type of entity here where we have the sole proprietor, the partnership, that corporation. So we have all the all the different types of entities that we can have here applying for, ah employer identification number using the same form. That's part of the purpose here. And then we've got also the reason for applying. If it is it a new business, or did we have new hires? Possibly, um, that are better taking with me, and we're starting to have employees and therefore need an employer identification number. Once we have that, then we're gonna report that on our federal forms, that being the 9 40 the 9 41 payroll processes could change and differ. When we're talking about that, large companies and small companies, obviously the larger company is. The more complexities we have, the more legislative requirements We typically have oftentimes have to meet more legal requirements, and we need more internal controls to safeguard ourselves, as are our company grows. One problem with large companies is is we obviously have more employees. We have more time to track. We wanna have some system that can possibly be more Elektronik and served as having more accountability, even if we don't have the direct supervision as easily to track more people. So we're gonna have probably some Elektronik type of devices to clock in and clock out within larger companies, devices that employees can can use to log in and log out. Those methods are gonna need some type of good security system, including security secure. Log in so that we could make sure and safeguard against the proper logging and logging out we could safeguard against. We might have some type requirements to make sure that the person logging in is the actual individuals. Whether people can't log in for one individual and start start their time clocks that might have some individual identification methods, we could try to limit the Loggins by location as well, so make sure that it's not an online logging weaken. Try to limit the log into a specific location. We might have the time clocks that have to be punched in at a Smith specific location when we're talking about people in different locations. We could clearly have some type of online type process as well for people to log in over the Web, tohave the log in access and report their time. And then supervisors be able to collect that time over a Web based system. As we do that, we want to make sure we run into problems with cyber security to make sure that all of our information is secure as we're at, we're processing the payroll information we want to have, ah, more complexity in terms of the database system. Teoh to limit the types of people that have access to two different things. To be able to separate duties between individuals who are logging in ah and approving time in recording time in the payroll process. Therefore, to have that separation of duties, we we will typically have multiple types of divisions within payroll s the payroll department gets larger as we have different payroll. We're gonna have different divisions and different segmentation is that you will have access to within the payroll system to allow for the separation of duty to allow to reduce the likelihood of fraud or theft. Now, in order to deal with this type of complexity, payroll will often be outsourced. So payroll is becoming more and more something that many companies will specialize on. Companies like 80 p or paychecks. These air just gonna be a few ah type of companies that will specialize typically in just payroll, and they will provide. A lot of these types of resource is now. There's a lot of pros and cons, Teoh outsourcing or insourcing of doing you're doing your payroll within house or outside. One of the pros of outsourcing to 1/3 party, like 80 p or paychecks is that they specialize in payroll, and therefore they have the knowledge needed in order to process payroll and typically have hopefully, the ability Teoh keep up to date with new laws and regulations, as well as dealing with places in different parts of the company country, different parts of the world, some things we need to be careful of of course is that because we have ADP and Paychex processing, we still need to put it into our accounting records in some way or another, and so that could defer the way we do that could differ depending on, uh, what we want to set up, how we how we were going to set this thing up. So in somewhere another, the outside individual, I's gonna have to get that information and put we're gonna have to integrate that into our system so that our financial statements represent and reflect what has been recorded by payroll and pay checks. The other problem, of course, is that it is bringing in a now outside source that we are becoming dependent on. We're depending on payroll in paychecks in order to process a key component rather than having the full control over that processing. Ah, in house 24. 60 Partnership Liquidation Partner Does Not Pays Partnership for Negative Capital Account: In this presentation, we will take a look at a partnership liquidation, in which case one partner will result in a negative capital account within the liquidation process and will not be paying the partnership for that negative capital and will have to deal with how to allocate that negative capital account to the remaining partners. We're going to start off with our profit sharing, which will be a 3 to 1 split. So if we take a look at our calculator, remember that that means three plus two plus one for our three partners of Casey and M, respectively. That adds up to six, of course. So if we take each of these divided by the total 1st 13 divided by six, we get 50% or 500.5 2nd 1 we're going to take two divided by six, which will be 0.3333 on forever and 1/6 will be the 0.166 on forever. And those are gonna be our percentages here. So 50% for the case capital 33.33 and then 16.67 These two are rounded. That's why we have to use ratio format. That's why this format is good to use rather than just using percentages, which cannot be as precise in some cases. So then we're gonna get to this later, this 66 this 33. Well, that'll show up later in the problem. So here we're gonna have the beginning numbers. We have kind of like our trial balance, but in table format, we will work through this problem in table format and then work through it again in trial balance format journal entry format. Closing the books out in both ways. Ah, using it this way is often how it's presented in textbook problems and ah, and in practice, and it's good to see it in tables. It's It's really good, however, also to see the same thing in terms of the trial balance, because that's what we would have to actually record when we, you know, make thes type of transactions to liquidate the partnership. And it's really helpful to know debits and credits and get a good idea of what the capital counts are what they mean, how they react to journal entries and what not through the closing process. So although the closing process doesn't happen all the time. It's really good practice, especially partnership, because we really get to see how the capital accounts behave through this process and that that understanding goes through all different areas of partnerships. So we have cash, we've got inventory, we've got accounts payable. We've got the capital accounts often times when you see book problems like squeeze the information together and just say, Here's total assets toward liabilities. We're gonna try to break out a couple accounts just to give a little bit more conceptual contacts here in actual accounts here. Not just give you the generic name, although we won't have a lot of accounts that will work with here. But you could see what would happen if we have a lot of accounts. So we've got the assets, cash and inventory. We've got the liabilities of accounts table, and then we've got the capital accounts of how much is owed, in essence to the owners at this point in time. And of course, the assets should equal liabilities plus equity or the 1 82 5 plus the 530 equals 7 12 500 that should equal the liabilities of the 240,000 plus that 93,000 plus the +2125 and the 1 67 So that's a 7 12 5 as well. Remember the order that we need to do once we go through here, we want to first sell the assets, which in this case is just inventory, then pay off the liabilities and then will be left with just cash and capital and can then pay off the capital with the cash. That's gonna be the order so that we don't we limit to the problems we can run into, such as not having enough cash to pay off the capital accounts and resulting in an argument between partners inevitably. So that could happen anyways. As we'll see here, we'll see a negative account what we're gonna do everything we can to not end up with a negative capital account within the liquidation process so that we can, you know, pay off the partners and try to keep everybody as happy as possible through the liquidation process, which probably isn't the most happy of times. So then, if we go through this, we're going to say we're going to sell the assets. Here we have inventory is our only asset. So we're going to say that we sell it for 320. That's all we could get for it. We was on the books for 530,000 so we sold it at a loss. We're gonna take the entire inventory off the books because we sold all the inventory in that result in a loss which will then have to allocate to K, C and M in accordance with their profit sharing. So that calculation then would be we're going to say we have 530,000 minus 320,000 gives us 210,000 times 0.5 50% will give us the amount that will allocate two K for the 50% if we had the same thing. 210,000 times. Point 33333 Here. That's about the amount that will allocate here, but it's not exact because 0.33 is an exact. So if we were to make an exact 1/3 the ratio is exact and that would be 210 times, 1/3 times, one divided by three. I wouldn't give us the 70,000. So the rest why? The ratio is more exact. And then, of course, if we did a similar 210,000 times 0.1 666666 on forever were close to what will get here for em. So that's gonna be our calculations. 10 5000 of this loss is allocated to K, C and M. So then, of course, this side equals this side of our transaction in an accounting equation type of standpoint . Then we're gonna bring down the balances we had, what, 182,500 plus 320,000 of cash brings us to 502,500. We had 530,000 inventory minus 530,000 for the sale of all. Our inventory gives us zero. Nothing happens to accounts payable. We just bring it down. Then we've got the capital accounts. We've got the 93,000 starting for case capital were reducing it by 105 which is bigger than the capital account, resulting in a negative 12,000. That's the problem, K then O's as money the partner owes the partnership money and in the liquidation process, that could be a problem. Because, you know, obviously that all the partners probably just wanted, you know, liquidate thing. Get whatever they can and leave. And they're probably not looking to pay the partnership at that point in time. So we're gonna have to go to K and see if we could get paid. But see then has 212,500 minus 70,000. Gives us 1 40 to 5, and then M has won 67,000 miles. 35,000 equals 1 32,000 Now we have this problem of the 12,000 and from the accounting standpoint, we of course, would have to say, you know, we sold the inventory and you had a positive capital count. We allocated the loss. We sold it for as much as we could. We had a loss, and we allocated the loss in accordance with profit sharing that brought you to a $12,000 loss. And to be proper, to be fair, to do this the proper way, you should pay the partnership $12,000 now, in a liquidation process, maybe not everyone's happy. Maybe you know we can't get the 12th house and from K to pay the partnership, which would then go to the other two partners. We're not gonna get an illegal standpoints of, you know, repercussions and on CNN's part and what not, But it might be the case that, you know, we're just saying, Hey, we just need to close this thing out and it's better for everybody, that is, just to just move on with it. So if K is not gonna pay the partnership as they kind of shooed here, then we'll have to just allocate that to see an M and move forward. So to do that, we're just going to say the allocation of of the deficit balance is gonna be that 12,000 and we're gonna allocated to see an M. But we have a problem with the allocation percentages now because before it was 33 16 and 50 but we're not gonna allocate that K because he's gone or, you know, better gone who she's gone. And so what we're gonna have to do then is figure out a new ratio. One way we can do that is we can say OK, well, the three up here is gone, but the two and the one are still here, meaning the two IFC and one is M. So we could just use the same thing and say It's a 21 split now by saying two plus one is three. Something we'd say OK, two divided by three. Give us 0.66666666 and then one divided by three gives us 30.333 and that will add up to 100. So that's what we can use. We can use this 66 33. And if we do that, then the 66 times 12 percent, 66%. Or do this a little bit more Precisely clearly, we're saying 12,000 times 0.6663 Got three in there somehow. Okay? And that's close. If we had the ratio, which was 12,000 times, let's say to and uh ah, three gives us 8000 Exactly. And the same happens here, right? If we had 12 1000 times 0.333 close. But if we said 12,000 times the ratio of one divided by ah three, it gives us the 4000 and that will be more exact ratios or more exact. That's why we have this format rather than just percentages. So then we're gonna bring down the balance. So we've got 502 500 still in cash. Inventory is gone, Payables. Nothing happened. So to 40. Bring that down, then case capital goes down to zero. That's the point. It was a negative balance. We need to bring it to zero. Sees capital is gonna be 1 42,500 minus 2 8000 bringing us to 1 34,500 aims Capitals at 1 32,000 minus 2 4000 bringing the balance to 1 28,000 Then we have to pay off the liabilities. That's the next step we want to do before we can. Then just pay off the owners, the partners so that liabilities are on the books for 240. So we're gonna pay out of cash 240 lowering the liabilities by 240 If we then add that up or subtract that out. We had cash of 50 2500 minus of 240 bringing us to 262,500. We've got accounts payable of 240,000. We paid it off 240,000 bringing the balance down to zero. Capital account, zero for K sees capital count remains the same. We just bring it down. 1 34,500 Same with em at 1 28,000 Then we can finally pay. The owners were left with just cash were left with just capital accounts. The two capital accounts should be equal to the cash because this is, in essence, the accounting equation we're working with on this table format. Therefore, we'll just pay the cash and then pay it out to seize capital in accordance with what is owed and EMS capital in accordance with what is owed. Note. What is owed here is not necessarily almost never matching up to the percentage is up here . In other words, if we took the total 1 34 5 plus the 1 28,000 it adds up to the cashier to 52. Now, if we multiply that times point 666 it's not gonna eagle the balance here, so just don't don't make that mistake or think you're wrong that, Ah, this balance should always match up. This is only the profit sharing doesn't and things that throw it off. We're going to be investments and draws, which don't necessarily follow that same profit sharing percentage. So now we're at zeros and we've zeroed everything out and everything's good. So we're going to the same thing now with journal entries. So here's our trial balance. We've got the assets and green, the liabilities and orange that capital accounts and then the revenue and expenses. Note. There are no revenue expenses, meaning this is in essence, a post closing trial balance. And that means that the assets minus the liabilities just equal the capital accounts. That's where we want to start. That's where we want to be before we go through the process of Samos the table pain, you know, paying off for receiving money for the inventory and then dealing with any kind of low capital accounts we have, which will have here, which will be case capital can if we can and they will pay off the liabilities and then we will pay the partners. So that's how we're gonna do this first thing, sell the inventory. We're going to sell it for 320,000 just as we did with Table, which is nearing the table here and the inventories on the books for 530. So we're gonna take it off the books for 530 and then the difference between 533 120 will be the 210 and that's gonna go to gain or loss loss. In this case, the cash received less than the inventory on the books for resulting in the loss in the example up top in the table. We just allocated that loss to the Capital Council directly. Rather than do that here, we're gonna do a two step process because this journal entry probably makes more sense to most people when they just see a sale. Right, This sale makes sense. We sold the inventory, got less cashed in the inventories on the books, for we have a loss. And once we record that loss, then we'll go in and do kind of like a closing journal entry to close out the loss to the capital accounts. So the cashier is here on the journal entry here it is. On the trial balance of that one of the 2500. We're gonna make it go up by 320,000 to a balance of 502,500. Then we have the inventory here on the journal entry. Here it is on the trial balance, starting at 530,000. It's gonna go down by 530,000 with a credit to zero, and then we've got the gain of the loss. Ah, loss. In this case? No, it's an income statement. Accounts gonna be down here on the income statement and it's gonna be bringing down then net income. So it's kind of like an expense going up cause it's a loss. It's in the debit direction, resulting in a debited net income revenue minus expenses, a loss which will then have to allocate to the capital accounts. That's what we'll do now. Remember that we need to get all the everything below the capital accounts, all temporary accounts, all revenue and expense accounts and draws, which is a captive count. But we need to get all those gone before we do the closing process. and now we've got one here. So we've gotta close it out with that kind of like another closing process, and then we can go to the next step of our, um, are allocation. So to do that, we've got the 210. We're going to close that out to see a Casey and EMS Capital Accounts 105 going to K. And remember, these calculations are just gonna be in accordance with profit sharing. So we have the 2 10 loss 2 10 loss times 100.5 is the 105 And then we've got the to 10 lost times this 0.3333333 which is really 1/3. So it's about it's 70,000 will be and then 210 times 0.17 which again is a little, uh, off because of rounding. So we have to use the ratios to be more exact. So we got the 105 We've got the 70 and we've got the 35 4 m. If we add those up, then that's gonna be a credit to the gain loss on sale of the 210. So the 105 plus the 70 plus 35 gives us the 210 posting this out, then we're gonna be reducing the capital accounts. Okays capital account without 95,000. We're debuting it, reducing it by the loss that was incurred by the partnership bringing the balance down to a negative in essence, because remember this brackets mean credit. And so we brought all the way to zero and then put it into the negative, going all the way to 12,000 on basically the negative side of things. And that's the problem. So that means anytime you see a negative capital account kind of a words in sight because it means that the partner would then oh, the company are the partnership in this case. And so we'll have to deal with that. And then we've got sees Capital Counter. You get the 70,000 here, de, but it's gonna be the 212,500 minus 2 70,000 bringing us to a balance of 142,500. Then we got the 35,000 for M 35 that's going to go here. So 1 67,000 minus the 35,000 bringing the balance down to 1 32,000 And then finally, the gain, of course. Or the loss is gonna go away. 210 minus 2 10 bringing us to zero. So now we have no no accounts below capital 1,000,000. Revenue expenses are zeroed out. Temporary accounts are all gone. We have a post closing trial balance once again. But now we have this problem with this. 12,000. This 12,000 represents that Keough's the company money and in a liquidation process once again, you know, the partners may not be all in the happiest position here with the partnership closing. So So we're gonna ask a was a You know, we sold the inventory for a zoo, much as we could. 320,000 We had a loss, and we allocated that loss out, and it flipped your capital account to a negative 12,000. Meaning you owe the partnership 12,000 within this liquidation process. Hopefully, Okay, we'll say, OK, that's the way it goes. And, you know, in a partnership, you know, we sold it for a loss. All pay the partnership 12,000 so we can finish the liquidation process. That's what should happen. But if that doesn't happen because it just just wages have a new unrest in the partnership in some way. Then I won't get into the legal terminology. What's the recourse on that for seeing em? That could depend on different factors, including the partnership agreements and what not? But at some point, we'll have to move forward. And if it was decided to move forward, then we gotta say, Okay, you know, whatever, we're gonna move forward with this 12,000. We gotta allocate that 12,000 lost then or this negative capital account to the other partners. So to do that, we're going Teoh allocate to see and um, em this 12,000. How do we do that, though, before we can't just use the 50 33 17 percentages because one partner is gone now. So the two partners leftover are gonna have to split something that adds up to 100 between the two of them. So, originally we had a 3 to 1 split between, um, Casey and m. So remember we had three divided by 3 to 1 at six, divided by six That's what it's 50% came from. The three is gone. Now we're just left with two and one, so we could just say OK, now we're left with C and M, which had had a two. Plus, uh, that's a one if they had a two plus of one or three. So we can say between CNN, we're gonna say three's the bottom number, the denominator. So we'll say that that we have Teoh over over three or 30.666 times the 12,000 is gonna be that 8000 and then we have the 1/3 is the 0.333 times 2 12,000 So we'll have to use. That's how we'll get to these another percentage or one way we can get to this 10.66 or 66.664 point 66 and 33.33%. And so us ends capital will be 4000. Those to add up to the 12,000 that we are removing. So in other words, we're getting rid of this 12,000 we credited to make it go away because there's a debit balance. Then we have to debit. The other two who are, in essence, eating the loss they're going have to reduce their capital accounts. They're not gonna be happy about it, cause it means the partnership owes them less money in accordance with the new percentages we have of sees 8000 and M 4000. So if we post this, then we're going to say that case capital account is going to go away, which is what we want. So it's back to zero. That's good. And then we're gonna allocate the other two. So here's the 8000 going to seize capital starting at 1 42,500 is gonna go down by the 8000 so they're gonna get less money because Cabe wouldn't pay the partnership to 134,500 then ends. Capital is going to go from 1 32,000 down by 4000 to 128,000. So if we see this, then here we are no effect on net income. Now we have the two partners remaining that have a positive capital account and we have a liability and cash. So now the next thing we're gonna pay off the liability, Which is the accounts payable, and we're going to out and we're going to pay it, of course, with cash. So this will be the two accounts affected. So accounts payable. Is that 240,000? It's gonna go down by 240,000. We're gonna pay the whole thing off, and then the credits gonna go to cash. So cash is a debit balance. We're going to the opposite thing to it. Credit. If we post this, then we're gonna post this accounts payable it started. 240,000 were making it go down by 240,000 to 0, and in cash starts at 1050 2000 it's gonna go down by 240,000 to 262,500. So then, if we see what we have left, then nothing's in and revenue All we have are cash and the two capital accounts of the two remaining partners who had a positive capital account. So the Knicks stepped in is easy. We're just gonna pay all the cash and we'll pay it out to the capital counts that are remaining and Of course, it's gonna be in balance because we have the accounting equation. Cash is an asset, and all we have it left his equity. So the assets must equal equity, given there's no liabilities as they do so that 1 34 500 plus the 1 28,000 then equals the 262,500 once again note that these two amounts here don't line up necessarily almost never to the profit sharing, which is currently 66.66% in 33.33 thes are not going to be 66 33% of the total of the company because this is just profit sharing. Doesn't involved other things like investments, necessarily or draws. It could if the partnership decided to do that t try to line everything up with with those percentages. But that's not typical. Or that's not necessary within a partnership. So almost never rule these line up to these percentages. So then, if we close this out, we're just going to say, sees Capital has 134,500 in it. We're gonna make it go down by doing a debit to it by the 1 34 500 ends capital. Also going down by the 1 28,000 what is in M's capital account. And then we'll credit the cash for the 262,500. Then if we post this out, we're going to say that sees capital started at 1 34,500 It's gonna go down by 1 34,500 to 0. Aims Capital started at 1 28,000 is gonna go down by 128,002 0 and in cash, it started at 162,500. It's gonna go down by 162,500 to zero. And that means that we are now at all zeros on on the partnership. And we have fully liquidated the partnership. So just remember those steps it's gonna be first we pay off. Uh, we get all the cash we can, selling all their assets, which in this case was only inventory. Then we're going to pay off the liabilities, and we also need to deal with any negative capital accounts. So before we pay any partners. We got to deal with that negative capital account in some way, and then we want Teoh finally pay off the partnership with whatever cash is remaining. Bottom line is that paying the partnerships paying the partners should be the last step within the liquidation process. Just to avoid this problem with the negative capital counts as much as possible doesn't get rid of it totally. But we don't want to make that problem our fault way. We want to avoid that problem as much as possible by going through the order of operations in the steps within the liquidation process and make it go as smoothly as we can. 25. 70 Payroll Expense Journal Entry: in his presentation, we will take a look at the payroll expense journal entry. In this presentation, we will take a look at the payroll expense journal entry. I'm looking at the payroll expense journal entry. We're gonna pull this information from the payroll register and the papal register will show the regular pay for our employees. We have four employees, These representing the data for the four employees totaling up to the total here for each of these columns, including the regular pay, the O A. S. D I or Social Security, the H I or Medicare, the F I T or federal income tax, the group insurance, the union dues, the 401 K or retirement plan. And finally, the net paid. So in essence, what we have here is what the earnings were. We're gonna be considering this in total. So we're gonna make this journal entry not per employee, but for total here. And we'll have the total earnings. Unless all the stuff that was taken out before we paid our employees less diesel security less the Medicare list. F I t lets the group insurance less the union dues. Let's the 401 K plan giving us net pay here 28 7 28 6 30 28 to 66 11. We're gonna use this information in order to create our journal entry. And to do that, if you think about the journal entry just in terms of the most basic type journal entry for payroll. If we Onley were pain, say this check amount and didn't have all these deductions or pain, let's say this check and mount and we didn't have to deal with all these with holdings. It would be just like paying any other expense would be very simple. So you probably want to start. We would start there and think from their meaning. Is cash affected? Yeah. Cash is going down or paying cash. Cash is a debit balance. We're gonna make go down by doing the opposite thing, which is a credit, and then the other side would typically be wages expense. So that would be our normal journal entry if we didn't have to deal with all the other payroll stuff we got to deal with. And then we have this All those other payroll stuff we've got to deal with with means we got to take out all this information from the paycheck and then the they're only gonna get this net pay. So to do that, what we're gonna do is create these liability accounts because we don't get to keep this money. Even though we're only paying them 28 to 66 they've earned 48 7 19 And whatever we don't pay them is a liability to us in something. We will then have to pay someone, typically the government. So we're gonna put these liabilities account, then one for O A S T I. Which is Social Security, one for H I, which is Medicare. These two are employer portions. That's why we don't see these. Here s so they're not gonna be on our on our register, and they're not going to be coming out of the paycheck. They will be in the paper roll entry for employer taxes, But we do have f i t federal income tax Ah, the group insurance, the union dues in the retirement. So that's what we'll pull out. And those of the accounts we will use very useful when doing a payroll journal entry, just like any journal entry. But especially for payroll to see the chart of accounts. And then we can see what accounts were we're gonna be using in order to record these liabilities, for example, the account might just have payroll taxes payable and group all these together or it might break them out in this way. It's nice to break them out because then we can see exactly what the liabilities are. Four and then make sure we're paying the right people. Eso That's what we're gonna have here. We're gonna build this journal entry then and we'll start off with our We got a payroll register. We said that the beginning number is gonna be that 48 18 96. And that's gonna be the salaries and wages and that's coming from here. Then we're gonna put all of these were just basically lining these right up from our register to our journal entries, starting with the O A S D i ORF ica away. SD I That will be a liability. Liabilities have credit balances. We're gonna make it go up by doing the same thing to it. Another credit. So that's that 3031 3031 than the H I here. 708 of liability. So it's a fight. Attacks h. I were increasing the liability with a credit. Then we got the f i t. That we're gonna have to pay 5 8099 13 It's gonna be a credit to F i t. 5 8099 13 Then we're gonna have the group insurance, 5500 that we will be removing collectively for the four employees. Then we've got the union dues. We're gonna take those out, too, So we're gonna take out the union dues will have to pay those to the union. So that's gonna be a credit until we do so to the liability increasing the liability. Then we've got the 401 k or retirement plan. We're gonna be increasing the 401 k retirement plan, that being in some way road back to the employers or to fund the retirement plan. And then finally, we're gonna have the net pay, which will be the 28 to 66 11 and that will be taken from the net. Pay here and you can also think of it. It's kind of like the plug formula that you need to make this work, meaning the debits minus the credits. If we add up the credits up until here, Calculator went away up until there and then subtracted out. We're going to say the credits before that of 3031.55 plus 708.99 plus 8599.13 plus 5500.1 plus 16 plus 2774.2 gives us the 20,000 before this 28 of the credits and in the debits are only 48 8 96 So if we subtract that out, then minus the 48 8 96 we have the difference of 28 to 66. 12. It's around indifference eso because this came from Excel. So it's off by Penny. But that's okay. We're gonna be OK with that. So that's gonna be our journal entry. And this will be that check that is actually paid. Of course it is consisting of four checks being paid. We took the total here to enter this data into our register or enter our general journal now it's post this to a worksheet and see what it would look like. Here's our trial balance. It's in balance. We can tell because the debit sequel, the credits or the positive numbers minus the negative numbers equals zero. We currently have net income of 500,000 which is this income? No expenses. So we're just gonna post this out. Then here's the salaries and wages expense. Here's the salaries and wages Expenses going from zero up 58 48,096 to 8 48,096 Here's the Fike a 40 a S d I hear the O A S t I going from zero up by 3031. 55 to 3031 55. Then we've got the 224 the h I hear the H II going up by 708 to 99 to 708 to 99. Then we've got the f i T. It's a liability. So here's the liability for F i t. Here. It's at zero. It's going up by 5 8099 13 to 8599 13. Then we've got the 2 45 the union dues payable Going up from zero up by are actually the group insurance our group insurance going up from zero up by 5501 penny to 5500 pay a penny . Then we've got the union dues. It's going to go from zero up by 16 to 16. Finally, the retirement plan going from zero up by 2007. 74. 22 77 2004. 20. And if we see all this own than the cash, of course, up top is going from 600,000 down by the 28 to 66 that check the net check. 25 71 7 33 18 9 Now, if we see all this together, this is gonna be the difference that we made note here that these, of course, are all the liabilities that we are later going to have to pay. So we only took this much out of the checking account. We had an expense of this amount. And the difference then, is all these liabilities that we will then have to pay at some point in the future. Note how this this journal entry mirrors the register mirrors the calculation. It mirrors what you probably see on your pay stub in terms of your salaries minus which is the debit minus all the credits that were taken out of the paycheck. Also note that the effect on net income is on Lee the 8 48,096 and not including all these liability accounts down here. These air liability accounts that this is the only expense account and note that were changing net income, not by the net check not by the cash, but by what was earned. So we changed it by what was earned. 48 8 96 was earned, even though 28 to 66 was all that is paid at this point on an accrual basis. Then we recognize what was earned 48. So net income went down by the 48 8 99 500,000 before 4 51 104 Now 500,000 minus the 48 8 96 Another confusing point that we want to make sure we understand here is that this typically the salaries and wages here will include all of the salaries and wages that were earned and, well, we will have a payroll tax expense as well. But it's not gonna include all of these payroll taxes that we're currently going to pay, which is confusing their liability accounts that were gonna pay. But we're not recording that payroll tax expense related to them. Why? Because these aren't our payroll taxes as the company. They're not our stuff that were pain from our checking account. In theory, they are coming out of the employees. Check these Air employees with checks, so the real expenses the employees earnings, this is the employees earnings. It just so happens that we're paying some of those employees earnings not to the employees but on behalf of the employees to the government. But then there is gonna be a payroll tax expense. But that's what we'll do in a separate presentation, and we'll look at the journal entry for our taxes, which will include our portion and our portion. I'm thinking of us as the employer, our portion of the O. A S T. I, and the Medicare, and then the food attacks, which we're gonna be employer taxes 26. 80 Payroll Tax Expense Journal Entry: In this presentation, we will take a look at the payroll tax expense journal entry focusing in on the employer portion of payroll taxes. To do this, we will have a worksheet for the payroll. Tax expenses will be using numbers from a registered type worksheet, but note that the payroll taxes for the employer portion are typically thought of as it worksheet outside of the register. In that, in other words, the register is going to give us that information to get Teoh net income from regular pay. And that is gonna be that type of worksheet, which will help with the journal entry to record the payroll taxes for the employees portion that they owe but not the employer. Taxes or the employer. Taxes will typically have a separate worksheet where we will calculate the employer portion , which will be similar in some cases, and defer and others. So let's take a look at the register. We're gonna have the normal pay that total pay. We've got four employees here represented by these four totals. We're looking at the total for the employees, and we're gonna be recording this information as a net some rather than four different journal entries for each employee. Then we have what was taken out. O A S T i of the wages for the employees, the H I, Medicare, Social Security, Medicare F I t federal income tax group insurance union dues for a one K net pay. That's what was taken out on the employee journal entry. Now we're looking at the employees, er, tax journal entry, where we will also have again O a S t I our portion of Social Security which will match the employee portion and no, when I say our abortion were and we're going from the perspective that we are the employer here. So where the employee error? This is the employer portion our portion here, which will match the employee portion. Same for the h i or the Medicare. This is gonna be the employer portion that is due which will match the employee portion. So those two there's gonna be an employee and employer er portion note that this is coming out of the paycheck, whereas this will be the same amount, but not coming out of the paycheck, and it will be coming out of the employer checking account. And then we've got food A and Suta food is gonna be an employer only tax. So this amount we don't see appear were probably less familiar with it. It's not coming out of net pay. We don't see it on our pay stub. When we get the catfish ins for our net pay, it will be coming out of the employer side. And then Suta will differ from state to state. But they're related. Will typically have. It will have an employer portion to it, and it may have an employee portion depending on the state. State laws could differ from state the state. So this is the one we're gonna use in order to create our journal entry here. If we go Teoh this worksheet and start to build our journal entry based on a trial balance , what's gonna happen is we're not gonna pay cash. Our first question is cash affected? Not yet. We haven't yet paid it. Were incurring this expense as payroll is being processed. So we will have a payable account. I mean, an expense account for the payroll tax is payable and the other side of it will be that liabilities what we owe. So we're gonna Oh, away ste I h I food test suit that we have not yet paid them because we haven't. We haven't gotten to pain them yet, so cash is not affected. We have a payable. We are incurring an expense. So here's the expense. This is gonna be a debit balance. Expenses are going to go up in the deputy direction. So the first thing we can see is that expense. Now, this is summing up these four. I'll get to this total at the end, I will summon up again, but just note that it will be an expense here, increasing this amount. Also note that this is the payroll tax expense which will be part of the payroll process but is different than the salaries and wages expense. And this salaries and wages expense includes the payroll taxes that are going to be paid by the employee. In other words, this number that we're calculating for payroll taxes on lee is the employer portion of payroll taxes does not include the employee portion. Then we're going to put a credit for everything that we're gonna Oh, those will be liability accounts. So we've got accounts to 15 which is the O A S T. I. Or Social Security, which will go up then we have the h. I or Medicare that we're gonna increase the liability for. Then we have the photo federal unemployment tax, which we're gonna increase our liability form. These coming directly from our worksheet here to increase the liabilities. Then we're gonna have the SUTA, which will increase for the liabilities. We'll take a look now at the General Ledger, so we're going to see this data now posted to the General Ledger. So here's our journal entry. And if we look at the Geo, we can see a little bit of detail, and it's interesting to see some of the detail to some of these accounts. So if we were to look at the payroll expenses, we see that the payroll expense started at zero, and then we're gonna debit it. So we're taking this debit down here, 7 4033 48 it's gonna increase it to that balance of 7 4033 48 And then we've got the 2 15 which is O A S D I, which we are crediting 3031 55. Here's the O A S D I. Before this journal entry, it was at 3031. 55. We are increasing it by 1 3033 55 in the credit direction to 6000 63 10. Note that these two represent the employee portion. The portion were not put in here on this journal entry and then the employer portion. So we owe a total of the 6063 after the employee and employer portion. But we're focusing here on the employer tax calculation or the employer journal entry. Then we've got the h I 708 same situations. Medicare. So it was at 708 99. We increased it by 708 99 in the credit direction to 1004 17 98. So these two represent once again the employee portion and the employer portion. Then we've got the photo which is going to go from zero up in the credit direction by 1 25 38 to 1 during 25 38. And then finally Suta, which is going to go from zero up in the credit direction by 8 67 56 28 50 67 56. So those are gonna be our components now, these two, of course, Onley have an employee portion. So we don't see this doubling up as we do with thief. I cut taxes, these two only having one component, that being the employer side. So if we go back to our trial bounce, we can see that we are in balance. We can see that the debits and non bracketed or positive numbers minus two credits in bracketed numbers will equal zero. That means debits equal the credits. The effect of this journal entry then, is this increase to the payroll taxes expenses that went from zero up to 7 4033 48 So note that's gonna be different than the salaries and wages expenses here, which were recorded in the prior journal entry. And also note that this 48 8 96 for the Employees Journal entry the one we're not doing here includes the employee payroll taxes. So this is not the net check. This is this is total check. When we look at the payroll taxes, then the only thing that's gonna be in the payroll tax expense will be the employer portion that we paid for the payroll taxes. So that's an important thing to note. Commonly commonly mixed up, we can see appear that we have the away S D I, which is going to include both the employee and employer portion, these being liabilities that we will then have to pay to the Fed in the future. We've got the food A and Suta, which are just coming from this journal entry. They're not twice that journal entry because they're just coming from the employer portion only. 27. 90 Pay Payroll Tax Expense Journal Entry: In this presentation, we will enter a journal entry related to the payment of payroll taxes. Before this point, we have recorded payroll taxes for both the employee and employee or portion. Now we're gonna work on the payment of those payroll taxes. The recording of the employee and employer portion of payroll taxes came from the register , as well as a worksheet for the employer portion. In other words, we have four employees here for employees represented by this set of numbers. If we some those up, then this 48 7 19 is the regular pay for the four employees we took from that. The O A S T I Social Security, the H I, the Medicare, the F I T Federal Income Tax Group Insurance Union dues for a one K plan to get to the Net pay. This information was used in order to create the journal entry related Teoh the employee payroll. Then we used this worksheet in order to create the journal entry for the employees er portion of of the taxes, including their portion our portion at the employer of away sdvi Social Security H I Medicare food to have federal unemployment tax and sue town State unemployment tax. Then if we look at the result, then on our trial balance, which is always nice toe have a trial balance. When recording journal entries, we'll see that we have the food. M o A S t I hear 6063 10 the ah, this is this is the faker away? Yes, the I Social Security and in the fight for the H I Medicare, the food of federal unemployment tax, the suit, a state unemployment and the f i t federal income tax. These, then, are what we're going to pay now. These are liabilities. They include both the employer and employee portion of the taxes. So, in other words, this so security and Medicare includes the tax, both from what we took out of the employee wages and what we owe for the employer half as well. The food and suta on the food. It will be an employer tax, and the suit up for our case will be an employer attacks. The F I T federal income tax for employees is just an employee tax that's gonna be here. We're not paying any f i t. It's all coming out of the check of the employees. So if we build this journal entry, then what we're doing, in essence, is we're just saying, Hey, these are the things we oh, we're gonna make payment for them notes that if we made payment in practice, we would probably have to group the payment in terms of federal taxes and state taxes. Probably we're gonna group. Then the O A S T I and the Social Security or the H I. Meaning the soul. Security and Medicare would both be going to the to the Fed, which we made group in one payment we may have into separate payment for FOTA and a separate payment for suit because it's going to the state. Um and so just note that the groupings of the payments as to how we're going to write the checks and the groupings of the payment could differ. But the point is that after we have these liabilities, we will be making the payment. In the future. We're gonna record the journal entry related Teoh making the payment which will be similar to any type of payable accounts such as the accounts payable, meaning the liability goes up and now we're paying hits him. The liability goes down as well as cash goes down. So it took to create this. We're just going to say Okay, we had to 15 account to 15 for OSD. I credit of 6000. 61 10. We need to make it go down to zero because we're gonna pay it off. So we're gonna debit it, do the opposite thing to it. 6061 10. Same thing for H I. We have, uh And then if we post that as we go, apparently we're gonna post that as we go, it goes down to zero. That's what we want to happen. So we're gonna make all these go down to zero, then the h I and the Medicare. Same thing. We're gonna say it has a credit here. We're gonna debit it, doing the opposite thing to it. And if we post that as we go, it's gonna make it go down to zero. That's what we want. Then we've got the food, um, has a credit in it. So we're gonna debited for that same amount, then if we post it, it's going to go down to zero And then we have these Suta, which again is gonna be debited for that same amount. Then if we posted, it's gonna go down to zero, and then we have the f i T. Which is gonna be It's a credit here, so we're gonna debit it for the same amount. And then if we posted, it's gonna go down to zero. Then if we add all these up, it should add up to what we're gonna pay, which will be the check here. So that's gonna be the credit. So what are we gonna actually pay if we have pull up the old calculate here? Six So 63.1 plus one for 17.98 for Medicare plus 1 25 38 for food toe plus 8 67.56 for suta and 899.13 for F I T. That gives us 3 9073 15 and something must have going wrong. There was trying one more time We're gonna say six So 63.1 Plus that 1417.98 plus the 1 25.38 plus 867.56 and the 8599.13 gives us 17. 73 15. That's how much we're actually gonna pay. So that will come out of cash. Cash is a debit. We're gonna make it go down by doing the opposite thing to It's a credit bringing the balance down to 554 660 74 cents. Now, if we see the whole thing, then here's our journal entry at the end are what happened here is the cash went down and the liabilities have no now going down because we've paid them off in a similar fashion as any payable type accounts similar to how accounts payable would be note to no effect on net income. Just like when we pay off accounts payable, we haven't incurred the expense at the point in time that we paid the cash we incurred expense prior when people worked and when we recorded the journal entry at that point. So when we pay off the payable no effect on these accounts down here No, These are all liabilities, accounts and an asset account. No revenue and or expense accounts If we look at the G l, it could be useful to look at the GL to see how with this all ties together. So here's our journal entry. We posted the fighter away. SD I here. Before we did that, we had 6063 in it. That was the employee portion of FICA Social Security and the employee employer portion bringing us to 6063 10. Then we paid it off. That's gonna be how this payable account should look and how most people count should look if it's a nice even payable, meaning the liability goes up. So it's gonna be the employee and employer portion every time. And then at some point later, a little bit later, when we make the payment, it goes back down to zero. And then if we do the same for a child or Medicare, same thing it was at 1004 17 98. We paid 14 2004 17 98 bringing it down to zero. So same pattern. It's gonna go up by the employee portion up by the employer portion and then we pay. It goes down to zero. Fouda we have the food over here. It was at 1 25 38 Then we paid 1 25 38 goes back down to zero. Note. There's only one portion on Lee the employees er portion. And then we paid off the employer portion. There's no matching there. We could see that in the Geo. And then if we go Teoh the F I team So we have the f i. T. Here, and it started at it was at 8055. 99 13. It's going. We paid it. Then it goes down to zero. Note again. There's only one entry here, and the reason there's one entry isn't because is because it's an employee portion. Meaning this is not an employer tax. It only comes out of the employee paycheck. So this is an employee tax that we paid off No matching hitter. Then we have the suta, which is the state unemployment tax, and that's gonna be it was at 100 67 56. We brought it down 20 We're paying off the suta again. Typically in our problem, it's on Lee a Employees er tax. It could have an employee portion, depending on the state. But that will depend on the state we're gonna mirror here, in essence, the employer function of it, and many times it'll it'll mere kind of the food, and the Suta will be similar in and the way it's constructed, often times depending on the state. 28. 100 Form 941: in this presentation, we will take a look at Form 9 41 employers quarterly federal tax return. Here's a copy of Forme 9 41 This is the 2018 form. You can find this on the IRS website at i r s dot gov. These are gonna be the components of the form. We're gonna focus here on the calculation of the form. We note that up top, we're gonna have the e i N number the name and then the address. Then we want to know which quarter we are talking about. So remember that when we think about the quarters, of course, three months in 1/4 there's 12 months in the year divided by 43 months per quarter. We will indicate what quarter we are talking about here. Remember that this is a quarterly form which is different from the yearly form. And there was a yearly payroll tax form called 9 40 we don't want to get those two mixed up . They can seem similar, but they're gonna be different. The 9 41 is really the main form, and it's gonna be calculating the f i t federal income tax for the employees, the Social Security, both employer and employee and Medicare, both employer and employee. Because these air larger amounts or this is my guess as to why we need a quarterly form rather than a yearly form because their larger amounts and important then we have to have added lead level of reporting meaning, For example, if we take a look at our 10 40 for individual tax returns that we've report at the end of the year for individual reporting, we do that on a yearly basis for the 9 40 ones for the F I T for the payroll taxes, the soul, security and Medicare. We have to do that on a core elite basis. So that's what we're doing here. The 9 40 then similar form to what we're working with here but will be for Fouda, which is a much smaller tax. So it's actually it's actually still a federal tax, but it'll be a much smaller one when filling out this form week weaken. Pick up this information. This is part one of the form line one says number of employees who received wages, tips or other compensation. So whatever the number of employees are in our case, we have four employees at at this quarter. Then we're gonna and note the days. So this is the actual day within the quarter that we can pick up the number of employees and then we have the wages, tips and other compensation. This So we got to be careful on, because when we look at the wages, total wages, then in our case, this is coming from our register numbers up here was 96 9 73 But this wages here is really trying to pick up the F I T wages. Note that line under it has to do with federal income tax. So really this line to it, where we want the F i t wages, which can be reduced by things such as an insurance or ever retirement plan. So this number is 91 for 25 10 in this case, calculated as the total earnings 96 9 73.5 minus those items that could be reduced. You can think of him when you fill out your form 10 40 or what? What will reduce the G I. The 401 k is not something that will be taxable his wages for adjusted gross income as well as if we're participating in a group insurance type plan. Now, in this case, if this was a cafeteria plan, we would be reducing it. But in this case were saying that this is not a cafeteria plan and therefore will not be reduced from the total earnings to get to the F I t. Earnings. So we're just going to subtract for this example of the 5548 point for giving us that 91 for 25. So we just want to be careful. And keep in mind that the F I T wages could differ from the wages for the total wages. So here's total wages. If I t wages are going to differ, then we're going to calculate the federal income tax withheld. And here we have to just pull this basically from our table what we withheld from. So this is what we withheld in accordance with our register. That's the number we're gonna use. It would be nice if these two numbers were related in some way, meaning it would be nice if we could derive this number by some calculation from this number, but we can't do that because the f i T. It's too complicated. So although these not this number is kind of used when we break it down to an employee by employee basis, that rates will differ because each employee has a different number of allowances and a different number of possibly for a one K plan or retirement plan, which could change those calculations as well as BIA's in different tax brackets. So because we have a progressive system and a fairly complex system in terms of the federal income tax, all we can do is say, Hey, this is the total wages that were we withheld on in total for all of our employees, and this is what we actually withheld. There's no way the IRS can say, Let me look at that number and derive this number, but we'll give both of that data to the iris. Then we've got the Social Security wages and the Medicare wages. These are going to be a bit more straightforward. Will pull this from our table as well. The Social Security wages the 96 9 73 that matches this 96 1973 50 up here. Note that this, too could change or be different from total wages. If, for example, there was a cafeteria plan in this case, there's not so that they're the same. Or if somebody had hit the cap of 128,400 in which case they would be lower by by the amount because of somebody hitting the cap. So then we're gonna take this 96 9 73 50 times 0.1 to 4. So if we do that calculation 96973.5 times 0.1 to form, we get 12,024. 71. That's gonna be the 12,000 Ah, 24 71. Now you might not recognize in this rate, and that's because it's twice the 6.2. So when we take the 6.2% times to that gives us the 12.4% or the 0.1 to 4 we're using here . So note that this is including the employer and employee portion. In other words, if we're taking this total that was taken out of the paycheck for F i t. 6012.36 Social Security F I t. Times two. That's gonna give us the 12,024 71. Notice how nice and easy that works, and that's because it's a flat tax. So in this case, we are able to take the aggregate amount here and multiply times a flat rate, and that should be equal. Teoh adding up all the information that we took out of each individual check at the same rate. So then we're gonna do the same thing for the Medicare. So here's the Medicare. Now again, this number could change. Be different Medicare wages from the total earnings. If there was something like a cafeteria plan in this case, there's not. But it won't be different due to there being a cap. In other words, there is no cap on the on the earnings for Medicare, so that's something we don't have to worry about. So it will usually be higher than or if someone hit the cap for Social Security that Medicare wages will be higher. In our case, it's the same amount, so we're gonna take once again that 96973.5 times 0.29 given us 2008 12 23. That's gonna be this 2008 12 23. Again, we might not recognize that number that 230.29 and that's because it's the employer and employee portion. Or, in other words, it's 0.0, 145 times, too. So there's the 1450.29 and this amount that's 2001 12 can tie into our worksheet by taking the H I 1406.12 times two gives us the 2812 23 24. Rounding difference here. Then, if we add those two up in this line five e says, add column two from lines five a. Five B, five C and five D. So what we are doing here is we're gonna be these two numbers. I tried toe get the calculator there and did something crazy. So we're gonna go 12 24.71 plus 2812 point T three. That gives us 2 14 8 36 94 That's the total fight. Cut taxes then. So if we add that number plus the federal F I t federal income tax, which is 1703.26 The 31 8 40 20 is gonna be the total taxes that we're gonna Oh, for F I t Social Security and Medicare. Now, we already paid him. I shouldn't be. I shouldn't say what we owe. That's gonna be the liability related to this quarter. Then if we go up to the second port or down a couple lines here we've got, we're still on five e. This is the total fighters, Social Security, Medicare. And then we have in line six total taxes before adjustments. And that's our 31 8 40 20 that we just added up, adding up line 35 e and five F. Then if there's any adjustments down here, like if we're off at pennies because of rounding, they allow us to adjust for that, which is nice. So we don't have to write a check for, like, a penny. We can just say our adjustments off by a penny. So or a few pennies less than a dollar, hopefully and then we're okay. We're not gonna deal with them with eight or nine for current quarters. Adjusted for six pay sick pay current quarters adjustment for tips. So we're gonna remain in line 10 total taxes after adjustments. 31 8 40 Then we're not gonna have any qualified small business. So in our example, we just have line 12 total taxes after adjustments and credits. Still 31 8 40 20 cents. Now we gotta pick up our deposit. Sideline 13 says total deposits for this quarter, including overpayment, apply from the prior quarter. This is typically the most confusing part of calculating this form because note that this number here should be the same as this number. But this number of top it represents the liability. So we've re calculated the liability. If we were to interpret what we're saying to the iris, we'd be saying, Hey, this is our recalculation of F i t. So security and Medicare liability for this quarter this then, should be a calculation of what we have paid, meaning it should have already been paid similar to our 10 40 that we do on the end of the year for individual taxes. In other words, we create the 10 40 We didn't we come up with a number that says, Hey, this is the liability that we owe for the year ended and then we say, withheld from our wages, meaning what we've already paid is this amount. Typically, then we have a refund for most people if their W two employees, and that's because we paid a little bit more. That's how the desist systems designed. It's impossible, almost pretty much impossible for all practical purposes. For most people to have the 10 40 with holdings match exactly what will be withheld. So it's designed to have a little bit over and then get a refund here. However, because it's more of a flat tax, we can know exactly what will be paid and this is just a information returned. Then we're just saying, Hey, this is what we owed. This is what we already paid In order to get the supporting information for the amounts that already were paid, we could go back to the check register, would go back to the G l and see the checks that were paid In our case, we're gonna go back to the journal entries, so we had this check with paid going out of the checking account. This cheque was paid and these two dates are on 9 15 and 10 15. Which you might say This one happened in the third quarter and this happened in the fourth quarter. Note. What happened here, though, is that these two payments are still both applied to the third quarter. And that's something that can be confusing with payroll. Obviously, we made the payment here in October, October, November, December being part of the fourth quarter. But we should have applied it to the liability incurred when the payroll period ended in the third quarter. So we're gonna add these up now, when we look at this information, we did it all with one journal entry for all of the all of the tax liabilities, which includes what we need then of the O A S T i, the h I still security and Medicare, but does not include the Fouda and Suta those they're gonna have to be paid when we do the 9 40 calculation or accounted for when we do the 9 40 form, not the 9 41 and we need the f i t. So, in other words, we're looking for these amounts for these two payments. If we add these up. These are the amounts that we have already paid. They've already coming out of our checking account. So if we take out the calculator and see if we can add these up properly, we've got the 6063.1 plus the one for 17.98 plus the 8599.13 plus the 5961.61 plus the 1394.25 and the 8404.13 given us the 31 8 40 20 cents. So if we go back to our form than 31 8 40 20 cents matches the liability, So just note that this one here is the liability which were getting mainly from our register up here, our payroll information to calculate the liability. This down here should match because we've already made the payment. But we need to support this information by going back to the journal entry, uh, or the or the register in order to see what has been paid 29. 100 Payroll Controls and Documentation: In this presentation, we will talk about payroll controls and documentation exempt and nonexempt employees. It's important to know these terms because the regulations will differ depending on whether an employee qualifies as exempt or nonexempt. So, in other words, the employees that are exempt are not subject to the Fair Labor Standards Act, F l s a wage and hour laws. So, amongst other thought things in particular, the overtime calculation would not be present or not being needed or required for employers , given the employees who are exempt. So if they're exempt from that status, then they aren't required to have, amongst other things and overtime calculation based on the the federal law, the Fair Labor Standards Act. Now, why would that be the case? Well, if someone is exempt than typically, we're dealing with highly skilled workers, managers, executives, individuals who we would we would assume have their own basic negotiation abilities. Whereas the overtime calculation is typically there in order, Teoh, or one reason it would be there is in order to make sure that advantage isn't taken of workers who do not have a lot of other options and therefore I would have less choice in being able to are required to work long hours without added compensation, so exempt workers then would be workers that were typically be salaried employees. So we typically think of the higher level employees that manages the highly skilled workers to be salary based, Whereas the nonexempt workers were typically thinking of workers that would often the hourly based now it's not required. That may not be that necessary distinction. And there are some instances where someone has a salary based where we'd still want to calculate their hourly rate because we need to calculate overtime. But as a general rule in the rule, we will typically follow here. If someone is a more highly skilled or an executive, then they would probably be exempt and they would have a salary income. If someone is needing to be calculating overtime on and required to cap it over time and is not exempt, then that would typically be an hourly worker. Some other differentiations is the exempt workers typically going to have a college degree or possibly be more educated, possibly have more say or ability to make judgment calls within their employment within the profession within their job payroll records that the employees and needs to receive these, we're gonna be records that the employees required to receive from the employer. That's gonna be a copy of the time card and a copy of the pay stub. There's gonna be items that the employee needs to be provided with when we talk about the pay stub. Note that we could get paid with a check, a physical check or electronic Lee. In either case, the pay stuff will typically have information more than just would be on any type of paycheck are in normal type of check stub, including the Usually it'll have the net pay the growth pay for the time period, and it will have the deductions that were withheld so that the employee can get all the information of their of their time that they can see how much did they earn growth, How much was taken out, what was it taken out for? And the net check that they are actual receiving. They also typically will have on the pay stub of that information in terms of the year to date number, as well as just the number for this particular pay period when considering payroll internal controls. We know that they will differ from company to company will have more internal controls as company to grow because we'll need more controls in order to safeguard the payroll process , a process that can be subject to fraud. One of the major internal controls we always want to think of whenever thinking of internal controls is the separation of duties. We want to have some separation of duties so that if there is some type of fraud taking place that it should be more likely to be caught if the papal process has, ah separation of duties, not one individual who is in charge of the full payroll process. We also want to make sure that their documentation verifying verification of employees duties and that's gonna assign responsibility to the employees. We want to make sure that we can hold individuals accountable by well defining their task and then having them sign off on the task so that we can see and verify the task have one happened and to who is responsible for those particular tasks. Those should be documented. Common errors that a good system of controls can prevent are gonna be things like continued payment for terminated employees, or even a system where employees that are no longer there were fraudulently still getting a paycheck and possibly being deposited in a similar named type of account. If there's a separation in terms of the entering of the payroll data and the distribution in some way of of the pay cheques, then that may be a way to to help, to find out these problems, meaning, if we don't, if we have some type of verification in the distribution process of the payroll, as well as the entering of the payroll and the data input side, as well as stolen paychecks still on prior to distribution. So these were gonna be just a couple of things that we want to be able to safeguard against . And again, some problems could happen with payroll in that payroll being processed for employees that don't exist or prior employees possibly being deposited into bank accounts with similar names, those types of fraud that could take place, as well as just errors with the payroll never removing someone from the payroll records even after they have been terminated. Payroll documentation and retention. When considering the payroll documentation, we really want to make sure that we're holding onto the payroll documentation for a good while, probably longer than many other types of documentation, because we want to make sure that if anything happens later on in terms of payroll, we have that documentation. It is very possible for something that happened in the future and US toe have toe look into the payroll documents. It's also something that has a bit more complex city. Given the fact that we are withholding information and pain various sources on behalf of the employees, we want to make sure that we are in compliance with that obligation because if we're not, then we have a problem not just with not paying payroll taxes, but with possibly being charged with, um, taking money from the employees and not paying their responsibilities like we basically are required to dio. So we wrote, We want to be very careful with the payroll tax records. Now the taxes basically mandate a seven year recommendation, which a statue show statute of limitations for many other types of documents is like three years, possibly five years. So seven years is an extended period of time. It might be recommended to even hold payroll documents longer than that. And if there's a case of fraud, we should note that the iris would require documentation basically indefinitely at that time. So we definitely want to make sure that we're retaining the payroll records in a secure way for, ah, good time so that we can safeguard against any problems in the future. When disposing of papal records. We want to make sure we do it in a safe way in a secure way. And typically, that would include shredding or incinerating the payroll records to make sure that they don't said someone doesn't get ah hold of sensitive payroll information, including Social Security numbers and other sensitive data that can be used against employees, are in a harmful way. If we have the information in a database program, I want to make sure that once we get rid of the information that we have purged the database and completely I got rid of the information. So once again we can be certain that that sensitive information is not being taken, buy or stolen 30. 110 Form 940: In this presentation, we will take a look at Form 9 40 which is the employer's annual federal unemployment or photo tax return. Here's an example of the form This comes from the I. R s website, which you can find at I r s dot gov. We've got the 10 40 currently for 2017. It has the same information up top that we see in the 9 41 which will include the E i N number. Ah, the employer identification number, name, trade and address note Over here. However, even though we have a similar looking box, it's not the same as we see on the 9 40 ones, because this is a yearly return rather than a quarterly return. So this box includes stuff. If we had to amend the returned or some other special circumstances like it, it's like the last return or something like that. Then we would select the appropriate items here. But this isn't a quarterly return that the thing we really want to remember here They sound very similar, of course, one because of the numbers and to because it's a payroll tax form. But the 9 41 is actually the quarterly returns that 9 40 if the yearly return. So it also seems kind of funny that the 9 40 the thing we do at the end of the year, has a number that's before the 9 40 ones that we do on a quarterly basis. Note that they're not related in many different ways. The 9 40 at the end of the year. In other words, it would be makes sense for us to think that the IRS would want us to make a 9 40 return 9 41 return quarterly for 4/4 and then re sum up that data again in the yearly return in this form. But 9 41 That's not what it's happening, however, There are actually two different types of taxes that we are dealing with for the 9 40 ones and the nine forties. In other words, really, what's happening for the 9 40 once is it's reporting our main taxes, meaning it's reporting F I t. Federal income tax, Social Security for the employer and employee side and Medicare for the employer and employee side. So my guess is the reason that we need to record that on a quarterly basis rather than on a yearly basis, is because of its significance. We're recording the main taxes there. The 9 40 on the other hand, which we only have to report at the end of the year, is only reporting the food attacks, federal unemployment tax, which is a much smaller tax. So, really, what's happening here is the irises saying, Hey, we're gonna give you some pity here and not make you report this on a quarterly basis, but instead just on a yearly basis. But we do want to see that quarterly taxes for the F. I T. So security and Medicare. So, in other words, this one lines up closer to what we think of and know of with our personal taxes, like the 10 40 that we have to file at the end of the year. That is also an information return that we would basically say, Hey, this is how much we owe. At the end of the year, we should have already paid it, and we file that one time. That's similar to the 9 40 here that we do for the federal unemployment tax. We go down to the calculations, then we got our registered data up here. That's gonna be our data from outward register. We will use then to fill out this form 9 40 were here in part one. So the 1st 1 says, if you had to pay state unemployment tax in one state only we're gonna pick the Nevada. Just pick a state here. Note here that you might think, Well, why do I need a state? Because it's a federal tax. Aren't all states equal win considering federal taxes? But notice that the food attacks is the law got kind of mixed up with the state taxes, meaning the food attacks is lower If you paid suit attacks, in other words, the state would have to have a suit, a tax law to pay the suta to get the lower rate for FOTA, which most states did and therefore, in essence, will have a lower rate of food. So when you think of food, we really are applying a lower rate, pretty low rate, but it's only applicable if we're paying suta taxes generally. And that would only be applicable if the state had a suit attacks. Which because of that requirement, most states do So we're just gonna pick a state here. That's why we need a state on the B. Says, if you had to pay state unemployment tax in more than one state, then we'd have to make sure that again. We kind of paid the suit attacks to calculate the food at the lower rate. And then two says, if you paid wages in state that is subject to credit reduction, so we're not gonna deal with that here either. So then we have the total payments to all employees. This is going to come from our earnings record. So we have the 2 41 206 from the earnings record. It's not gonna differ than, in other words, we may have different types of earnings wages. If we're talking about F I t earnings or for talking about O A S T I earnings, it could defer. We're just gonna take that total earnings, typically here for the Fruita earnings. Next thing says payments exempt from fruit attacks. In our example, we don't have any exempt payments from food to tax. Line five says total of payments made to each employee in excess of 7000. This number can be confusing because it's often not the number that we have calculated when we're calculating our payroll calculations. In other words, we didn't really calculate the amount that would be over the 7000 for each employee and therefore not to be used within the calculation for the food taxes, we calculated the number that would be included, in other words, the wages for food. So then we can use that to calculate what the food attacks would be. So we would already know the photo wages, and we would actually know what the food attacks was based on those fruit toe wages, which would be the food of wages, times the food rate. So what we're gonna do is actually skip down to what we know, and then we'll back into this number. What we know is this number line seven total taxable photo wages is 28,000. That means that this calculation these wages were the food a wages for all employees who reached that cap of 7000. So this is calculated as you keep on increasing the food toe wages until you get to that cap and then you stop calculating food or wages so note the photo wages will be much different than total earnings. It will be much lower. Most employees will reach that cap. The only reason they would not is typically or the main reasons they would not is if they were laid off sometime in the year and never reached 7000 or if they were hired towards the end of the year. Other than that, most employees will reach the cap. In our example, we had four employees and they all reached the cap of 7000. So we just have 7000 times four employees. 28,000 is our wages. Then we're gonna most by that times, the food to rate. And that's where we already have the food to calculation here. So in other words, we know this number already. Then weaken back into this number. If this is the future wages and these are the total wages, then all the wages above the food to cap is just the difference between the two or 2 41 2 of six minus 28,000. So that's 2 13 206 So then we'll kind of back into this number 2 13 to work six. So the iris wants is going to read it this way. They're going to say that we have to 41 206 minus 213206 to get the photo wages that we're actually going to use. And we calculated it this way. We basically said, Hey, we already already found that food, toe wages and we didn't know how much was over photo. So we know these two numbers 2 40 2 41 206 minus 28,000. And that gives us the 2 13 2 or six. Once we have that then line ate, says food attacks before adjustments. We're gonna take that line seven times 70.6 So we'll just take that calculation 28,000 times 0.6 That's the 1 68 and we would already have. We can already probably have that on our worksheet and knew that this will be a worksheet. Not part of the register register shows the net pay the gross pay to the net pay. And this is an employee er tax on Lee and therefore we need ah worksheet. That would probably be included. Teoh, the register calculation. So there's are 1 68 if we continue down to Part B or Part three that there's nothing import . Three. It's as if all the taxable food toe wages with you paid were excluded from T State unemployment tax. Multiply line seven by 70.54 In other words, if there's an issue where we didn't play state Suta tax, we would have to pay more Fouda tax because Fouda is tied to Suta. So if if we paid the state tax than typically we have this nice lo fu tau rate. If, on the other hand, for whatever reason we did not pay Suta tax, then we're probably gonna have to pay more for food toe. We're not gonna deal with that. In our example, we have been lying 12 food attacks after adjustments which will remain the same at 1 68 Then we have the deposit amount and just like the 9 40 ones, we have to make sure that we know the difference between this amount, the liability calculation and this amount which will be the amount we actually paid. They're going to be the same, but a number, but they're coming from different sources. This is us recalculating food, telling the Irish Hey, this is our food a liability. And we should have already paid it in a similar way that we already have paid our taxes when we report our 10 40 individual tax return at the end of the year. In this case, however, it should be exact because it's a flat tax, easy to calculate should offer to be paid. This, in other words, is just information return, not a return that's gonna tell us Hey, this is how much we owe and write a check for. So we're gonna get that from our payroll register and in this case are journal entries. So we're looking at a journal entries. This is when we paid payroll, we paid 17. 30 17,073 15 and then 3 16,048 um, for these two journal entries and we're picking up just the food portion in this case, which is this portion. So it's gonna be a smaller amount, of course. So it's the 1 25 38 the 40 to 62. If we were to pull out the trusty calculator and add that up 1 25.38 plus 42.62 We get 1 68 So that is our 1 68 And that's gonna be the amount that will go here on our food to return . It will match. It will be the same and therefore we won't owe anything. But we want to make sure that if we get audited, if they double check on that that this numbers are payments that we can go back and see if they have been paid. We can also see if they have cleared if they cleared that the the bank and therefore no if the if the IRS has deposited those amounts. 31. 120 Form W 3 & W 2: in this presentation, we will take a look at form W three and form W two. Here's a copy of a form W two from the I. R s website, which you can find at I r s dot gov. This is just a demonstration form. And of course, the W two is a form that most of us are most familiar with. A form that we see a form that we get as employees at the end of the year. Ah, form That tells us how much we've earned and the with holdings we have so that we can then use it in order to fill out our responsibility. Our individual form 10 40 at the end of the year. If we go through this from an employer standpoint, it's important to note what the form W two is saying to us and what they're doing on their side. One. It is, of course, reporting to us, our wages and what was withheld from us and therefore I form that can be used to fill out our tax return. That's one major purpose of the form. It's also form that they're going to be sending not only to us but to the I. R. S. And that's important to note as well, because the iris is really not dependent on us to report our information. In this case, for the W two, they already have it. They have a copy of the W two, which is given to them by the employer is required to be given to them by the employer. So whenever you get a W two and 10 99 for that for the same which is similar, you gotta note that this is not only telling us what we've earned, it's also telling us Hey, this information is reported in this format to the IRS. If you report something differently, even if you believe it, be correct as different. You're gonna have an issue with it because the iris is really just matching what you report to what we report here. So that's the first thing T note with the WTI that we want to make sure that we have a good understanding of if we go through the components of the W two. We, of course, have the employer identification number. The E I N number needs to be recorded every time we have some type of payroll information for the IRS. We got the employer's name address. We've got the control number. Then we have the employees, first name and initial last name and the employees address. Then we go through the points where we will spend most of our time looking at the actual reporting of the numbers. We're most familiar, probably with the first box, which is wages, tips and compensation. Note that this box, however, is not the best representation of total wages because it will be reduced by things such as a 41 K plan and possibly a cafeteria plan. So when we look at the total wages, when we try to say, how much do we earn throughout the year, most of us will go here and look at Box one, but it's not the best representation because it's probably lower than what our total earnings are because they've been reduced for the calculation of taxes by things that are not including the gross income for tax calculations. So we'll look a little bit more of that when we put the numbers here in box to, of course, is the federal income tax withheld. We have withheld taxes. It's been withheld from US, meaning we've made payments throughout the year for the employees now. We didn't actually write the check, but the employer was responsible for taking the money out of our wages and pain for us. Then we have the Social Security wages, and this could differ than from Line one, and it could differ based on hitting a cap for Social Security. And it could be differ based on something like a cafeteria plan. Then we've got the Social Security tax withheld, and then we have the Medicare wages So the Medicare wages could differ from lines one and three based on one if there's a cafeteria plan and to there's no cap. So this one Line five is probably the closest to our actual wages of the three wage categories. So if we're gonna look at the W two and try to figure out what we actually got paid, what we're actually earning Line five might be the best or closest to. It Still might be low by, say, the cafeteria plan. If there is one and then we have the Medicare tax and then we have the sole security tips. What? We're not gonna get into too much as allocating tips. What? We won't be dealing with tips here verification, code dependent care benefits, non qualified plans. And then the, uh, the whether or not we have a retirement plan here. So line 13 is whether we have a retirement plan. Box 12 We're gonna go over. Some of the things that could be exempt typically are kind of things that could be in box 12 including things like a retirement plan that would be coming out of box one and a reason that Box one would differ than, say, Box five. And we could have a cafeteria plan that would be reducing pretty much all three of these items if it was qualified to do so that we would indicate down here that would be an informational format or informational purposes down here. Then we've got the employer state I D number, which we're not gonna spend time with here because it will differ from state to state. But then we have to state wages, state income tax, whatever the state law is, and it could mirror the format that the Fed has, or it may be typically a little bit more simplified than the Fed s, so it could probably be similar or possibly more simple, simplified up sometimes. But if changes from state to state and in local wages and local taxes note the W three, in essence, has the same stuff here. So we've got lines 1 35 to 46 wages. So security wages, Medicare and then federal income tax if I t. So security tax and Medicare tax. And that's because the W three will just be summing up all the W twos. So if you think of all of our employees like is one big conglomerate thing of oven employees, then they then the W three would basically be reporting all of their stuff all of their wages in one group. So it's going to sum up in other words, the W two's. That's mainly what we want to get on the W three and is gonna leave the W three at that. We'll do a little bit of a calculation for this now. If we had the earnings records for it in this case, four employees here Anthony, Cindy, Jill and Judy. Then we're gonna take this data and create the W twos from it. So this earnings record will have one for Andy. We got the total earnings. We've got the O A S T i earnings, which in this case, we're gonna be the same except for Judy, which differs because Judy reached the cap and the cafeteria plan is not There's no cafeteria plan reducing these, So they're the same for her and other employees. Then we've got the FOTA wages, which isn't gonna be on Fruita is not on the W two because it's an employer tax suta as well Food and suta. And then we got the OSD. I we've got the actual amounts that were taken out of each employees checks And then we've got the H I Medicare taken out of the each employee's checks and f i t the amount taken out of each employee's checks insurance, which is not a cafeteria plan not qualified to reduce net income taken out and then union dues and the 401 k which will be a reducing federal income tax and then the net pay. So these are our totals. We're gonna then go through each of the deputies pretty quickly. So here's just a copy of a W two. That's kind of like a simulation form, and we would take that information and fill out Box one. Wages and compensation, which would differ in this case from Box three, is different from Box three, in this case from the retirement plan that was here. So the difference between the 20,008 12 50 the 19 7 16 96 85 can be seen in 12 a indicated by a code, which should be the retirement plan. And it's also indicated here that we have a retirement plan now. If there was a qualified cafeteria plan, it could be down here with a D D, which would, which would be just an informational piece as well. But ours isn't a cafeteria plan. It's just a note that, uh and then we So we've got the Social Security, and then we've got the Medicare wages. These two are the same because this employee hasn't hit the cap, and therefore these two will be the same note that this number's probably closest to the actual earnings of this employee, then the federal income taxes. Based on these wages, the Social Security is based on these wages note. The F i T can't be derived directly from these wages because it depends on the amount of exemptions and all that, which will be calculating on the form 10 40. This one, however, should be, ah, flat tax, so we can actually see that the 20 81 20,002 810.5 times 0.62 is this 1000 to 90 and we can see that this 20,000 for Medicare Times 0.145 should be the 103 78. So these two, we can actually re calculate this one. We cannot. And so that's gonna be the first employee second employee Similar. We've got the wages in box one differing from Box three for Social Security and Medicare. Because Box one is being reduced by the 401 K plan, which we can see in box 12 A then sold security and Medicare will be the same because this employee did not reach the cap. F i t. Federal income tax being calculated based on box one. But we can't see a direct link because of the complexity and the f i t. Federal income tax, Social Security 6.2% Medicare, 6.2% of box three and box five, respectively. Same thing for our third employees. Fox one differing from Box three due to the retirement plan in blocks 12. And it being this box three, same as box five. Because this employee didn't match the cap. Same calculations box 24 and six, then our last employees a bit different. This is our high earner here. This is Judy Jones. Uh, she has wages in box one, differing from box three. Social Security wages differing than total compensation one because Box one has the 8000 7 50 for the amount that was in the retirement plan but also because she hit the cap, which is at 1 28 400 So if we start to see higher wage individuals, this one's just going to stop at whatever the cap is. In this case, it's 1 28 400 So, notice of these three numbers, they're all differing. The Medicare is probably the closest to what the actual earnings are because the Medicare does not have a cap and is not being reduced by something like the 41 K or retirement plan that if we were to add all those up, then this would be Box one wages. If we were to add up all four boxes for our four employees, this would be boxed three wages. Social Security wages for four employees, Medicare wages for four employees, federal income tax for four employees, which cannot directly be tied to this number because it's too complicated. Social Security, however, and Medicare can be calculated on ah total basis as well, meaning the 1 94 66 times 660.62 gives us the 12,065 57. And if we were to take the 2 41 206 times two point over 145 we get the 4 3097 there, so these two we can calculate because they're nice, flat taxes. 32. 130 Reconciling Year End Payroll Forms: In this presentation, we will reconcile our year end payroll forms and, in essence, double check vet. They've been filled out correctly, So we have here our forms 9 41 and the W three. These are the two forms that we can use to reconcile each other and make sure that the two forms have been filled out correctly. We can double check, in other words, our quarterly form by tying it out to the W three and vice versa. Check the W three to the quarterly forms. Remember what the's quarterly forms are doing is there are calculating the three main taxes , which are the F I T federal income tax for the employees, the Social Security tax for employees and employer, and the Medicare tax for employees and employers. This is gonna be done on a quarterly basis. So we've got January, February, March, April, May, June, July, August, September, October, November, December or quarter for work, or 3/4 to quarter one. The W. You three, of course, is just a yearly form that will be reported at the end of the year. Summarizing all the double YouTube is that we send to both the employees and the I. R s. So what we can do is double check these forms because we can see here on the totals. Here we have the total wages, soul security and Medicare wages, as well as the calculations for federal income tax, Social Security tax and Medicare taxes, which have been withheld. So to do that, we're gonna try to match these out. Now, what we don't show here is the 9 40 than that form 9 40 which is the year in form. And that's because it's reporting Fota, which is just a tax for it's an employer only tax and therefore not reported on the W three . It is possible for us to kind of compare the food of wages, but we still have to do some reconcile ing to make sure that we're picking up the correct wages on food on the food, a form which is a yearly form the form 9 40 So common misconception would be that the quarterly forms that 9 40 ones. The iris wants us to report everything quarterly and then summarize that same information again on the yearly form. 9 40 Not necessarily the case that forms 9 40 ones report the three main taxes, the big taxes, the F I T federal income tax, Social Security and Medicare, which the IRS wants to see on a quarterly basis. Whereas the Form 9 40 reports attacks. That's usually a lot smaller FOTA federal unemployment tax and therefore the iris is happy or content enough, I guess, just to see that reported on a yearly basis rather than on a quarterly basis. So they're actually two different things. We're reconcile ing there. So if we look at what we have is we have quarter three and quarter four in this example, we only have 2/4 rather than 4/4. And that'll make it a little bit easier for us to show how this reconcile in process would work. If we had 4/4 of data. Then, of course, we were just at of the 4/4 of data. So in the 19 forties, over here this box box to is the wages and tips box and these are really wages and tips for F I T. Calculation. Meaning this and this for the 2/4 should add up. Teoh this box one. So if we were Teoh tie this out to double check everything. At the end of the year, we're gonna say, OK, but 914 to 5 point wound plus the 135909.9 should add up to the to 27 +335 and you might even have been subtracted. Sometimes two to seventh UH, 7335 minus That should go to zero. So that would tie out. And then we're taking a look at the federal income tax withheld Box three should tie out to the federal income tax box to on the W three. Now again, you can't tie this number to this number because it's too complex because it'll change by employees, but we can sum them up and double check that way. So again, it's not flat tax, so we can't do a simple calculation from the wages to the tax. We can take the 17 of over 3.26 plus the 25212.4, and that should give us to 42 to 15 66. If we subtract that 42 to 15.66 back to zero, then we'll take the social security wages. So we have the social Security wages here and here. Vecchia tile to sell security wages here on the W three. So if we're Teoh had the Social Security wages up, we're adding the 96973.5 and the 97632.5 to get the, um 1 94 6 So six. So if we subtract out what we have 1 94 6 So six back down zero and then we're looking for the Social Security here. Now, this is where it gets a little bit complex. This is the actual tax. And, uh, this could differ from the tax that we're going to see over here. So let's see why we're gonna add up the one to go to 4.71 and down here, the 1 to 1 of 6.43 And that's gonna different. It will always differ, by the way, the 12,065 57. Why? Because we multiply this by twice the amount. This, in other words, is not 570.62 but 0.1 to 4 or twice the wages. In other words, it's the employer and employee portion. So if we take this amount and divide by two, we'll get just the employee portion, which is what Sport reported on the W twos in the W three. Same is gonna be here. So this is the Medicare taxes on these two lines. If we add those two lines were going to say, That's the 96973.5 plus 2144232.5, giving us the 2 41 60 to 41 206 So if we subtract that out 2 41 206 back down the zero and then we're going to the same calculation for Medicare wages. So we will add those to, uh okay, So that's going to be and hit some funny there in Russia to 812.23 plus the 4182.74 That's the 6994 97 again, that's going to differ from what we have here, because we see this rate of 0.29 which is really twice the rate that we typically what probably no 0.145 because it's both the employer and employee portion. Therefore, if we take this number and divide by two, we're gonna get there 4 3097 which is the number we want the 4 3097 These are the numbers that weaken generally reconcile. In most cases now, there may be some reasons why these numbers would differ. And if there were, we'd want to make a reconciliation and know exactly what the differences are. So when questioned, if questioned, which we quite possibly could be by the IRS in terms of some type of audit, we could give responses to any kind of differences between the W three and the 9 40 ones. Remember once again that we're talking about. We only had 29 40 once here because it was our first year of operations, our first year of payroll, and we only had 2/4. If we had 4/4 we would have to add up the 4/4. Then we're having the Form 9 40 which we can't tie out as neatly with with the other forms the W three and three W two's. Why? Because the W threes and the W twos are employee taxes and this form is an employer tax, and they don't tie out also to the quarterly forms at 9 40 ones. Because those report different taxes, they report federal income tax. So security and Medicare. So but 9 40 ones do report some employees, er taxes that are portion the employer portion of Social Security and Medicare but doesn't report the employer attacks of Fouda. This is the only if tax form that reports the employer attacks of photo. We can, however, look at the total payments for all employees, the total compensation, and try to reconcile that in some way to the amounts that are on the W three and UH, 9 40 It may not reconcile exactly Teoh any particular box. It be closest to box to the Medicare box on W three, but it could differ by a cafeteria plan, but we can reconcile that difference and know what the difference would be. Between the total payments here and the Medicare calculation on Box three of the W ah twos in the W three and Box three of the W twos. And the W three would, of course, also reconcile to adding up the nine forties, which we just did on a Box five C in part one 33. 315 Payroll Calculations: in this presentation, we will take a look at payroll calculations. We're gonna start off with the comparison of annual salary to hourly salary. This could be important when discussing and considering what type of salary to have and the comparison between the annual rate and an hourly rate. If we're given something like an annual rate of 50,000 year and we want to break down Okay , what is that? In terms of basically an hourly rate, we can take the 50,000 and then divided by. And this is the key 52 weeks in the year. Rather than doing something like trying to divided by 12 months, remember that 12 months is gonna be a little bit less accurate. And just because of the way timing is, it's not perfect. That's why we have the calendars a little off. Got the leap years a little off. Ah, but 12 months is gonna be more inaccurate than using that weeks in a year, which would be 52 a bit more accurate. Teoh. Use the 52. We do want to know that number for payroll calculations. There's 52 weeks in a year that would give us the 961 54 per week Note that this is rounded typically gonna be rounded toothy penny when we're talking about payroll Ah, and s so just be careful of that when you have it in Excel Excel will even though you see it rounded to the penny use whatever number is actually in the cell when making calculations. So be careful there if we then take that and divide by 40 the 40 hours in a week and that would give us the hourly rate of $24.4. Now, of course, if we had any kind of calculation where we had a $50,000 a year and we were agreed to work some other a number of hours other than 40 like 35 hours or something, then we can divide by 35 we get our hourly rate in the similar fashion. So, of course, the calculation 50,000 divided by 52 weeks in a year, gives us 9 61 53 8 right, rounded to 54. If I used this ungrounded number and then divide by 40 hours in a week, I get 24.384 blah blah, 24.4 So just be aware of that rounding. Now we'll take a look at a commission. That situation. I remember that a commission basically just means that we're gonna get paid based on sales , typically. So our sales number, whatever the sales number is, we will typically get a percentage of that. And the point of the commission will be to try to get people, of course, to be more motivated to create sales. So there's going to be pros and cons to a commission based system. Ah, the pros are gonna be that more people are motivated to spend their time more productively to make sales if they're going to get paid based on a commission basis. The downside to that is that we could have sales situations. Where are more sales driven and people feel more pressured. So if you're in a type of industry where customers don't want to feel pressured or think the sales fourth, maybe to pressuring or having problems between sales individuals, then the commission based can't have some problems there. So pros and cons with the commission also note there's pros and cons in terms of how do we deal with that minimum wage again in terms of commission? Because if we don't have the hourly salary, we need to make sure that, in essence, we're over the minimum wage. Through the commission, Teoh comply with minimum wage requirements. But the Commission is pretty straightforward. We will take the sales amount times. Whatever the commission rate is, if it's 5% if we're gonna pay 5% Teoh whatever sales were made by an individual, then that would be 3000 in this case. Now we'll take a look at a pay base based on piece rate pay, and that's gonna be the concept that we're not gonna pay people based on just hours. We're not gonna be basing on the sales because if they're not in the sales area, but we may still want to base our sales on performance. And one way to do that is to say, if we're making things how many things were made, we will pay by the units that were produced, So that's gonna be ah, pretty traditional type of payment method. How many units were produced will pay by units produced so units completed. If we have 50 units completed, whatever the rate then per unit for saying it's $12 per unit 50 times 12 would give us the 600. Then there's pros and cons to this kind of pay rate. It only really applies. Given situations where we're actually producing units and typically units that are all the same, we want units that are all the same in nature. If we're dealing with areas where we're have more creative type of units or the quality could defer ah, lot within units, then this method could have problems. The downside being that people will try to produce more units of lesser quality to try to get paid more, that's gonna be the type of incentive. So if we're making all the same units that have to pass a similar type of quality assurance thing and they're all the same, then this method could be a useful method. The benefit of it, of course, is that if we pay just hourly, then the tendency, just the incentives that are there are for people to spend less time being being productive because it doesn't pay anymore to be productive. Eso the pro the benefit. The gold here would be Teoh. Have people spend their time being productive and pay the more productive people more money through this system? Another problem, of course, though, is that since we're not paying just on hourly rate, it's difficult to apply rules and regulations like the minimum wage. So once again, we have to be careful here to make sure that we still need to track, in essence, the hourly rate so that we make sure that they payment is qualified and over in compliance with minimum rate wage requirements, which are not going to be based on units we produce. Because that's gonna differ from company to company, the minimum wage will typically be based on traditional our hourly type of pay. 34. 320 Overtime Calculation: in this presentation, we will take a look at overtime calculations were first gonna look at a time calculation to consider the fraction of ours. Time seems like a fairly straightforward thing to calculate, however, because it's based on 60 minutes in an hour. We have to have that conversion in order to do many types of calculations. In other words, are rates in payroll are usually not in terms of rate per minute, They're typically in terms of rate per hour and therefore any types of minutes. If we have fractions of hours, we have to convert them from minutes to fractions of hours. So to do that, if we have an employee that worked 45 minutes, for example, if we had that 45 minutes, we divide that by the number of minutes in an hour. 16. That 45 divided by 60 would give us the percent of your time, which would be 75. That would be the percent of an hour. So 7.75 oven our now. This, of course, is important because when we haven't rate, we don't want to take our hourly rate in multiplied by 45 minutes. That won't work. We have to multiply it by 450.75 hours. Now, if we're considering overtime rates, then typically we aesthetic of overtime. That normal overtime rate would be a time and 1/2 time and 1/2. Now, when we consider time and 1/2 we have to consider what that means. So if we're saying that we pay someone $10 an hour times time and 1/2 we could calculate what that is is basically a 50% increase. And over time you can think of you got a 50% raise so you could calculate that times 500.5 , another 50%. And that would be $5 plus the $10 that would be $15 time and 1/2 the other way. You can think of it, of course, if if you have to $10 times 100% which would be 100% or one and then another 50% which would be 50 so 150% or 1.5 or time 1.5 0.51 point 550%. If we move the decimal two places to the right, that gives us our $15 so time and 1/2 150% of the original pay rate. That's what we're gonna get. Typically, that's the typical overtime calculation. Other rules can apply to overtime in that the federal law basically means that we can't go over the 40 hours. Anything over 40 hours, in other words, would typically be considered over time. If the employees is subject to overtime wages. However, many states also imply or impose of law that says that anything over eight hours in a day needs to be paid overtime wages. And let's just consider that rule eight hours in a day s O that we can see how over time might be thought of. It's pretty straightforward. Teoh. Look at it in the individual case. But again, if we start to accumulate a lot of data, they start to get more and more complex. So, for example, on Monday, if we had hours worked, 7.5 hours worked in the day, then we're just gonna say seven point for it. Five hours is all regular hours, and there's no overtime because we're not over eight hours Tuesday for saying that they worked 8.5 hours, which would be eight hours and 30 minutes. If we convert, you know 0.5 to how many minutes? 30 minutes. We're going to say that that's eight hours of regular pain and 0.5 hours, 30 minutes of overtime that would have to be paid at the overtime rate that, if we had Wednesday, were saying nine hours. That, of course, would be eight hours of regular pain. And then one hour of overtime Thursday were saying eight hours. All of its gonna be regular pay. No overtime. We got Friday. We work total of 9.5 hours. According to the time sheet, we're gonna say eight hours of it is regular 9.5 minus eight would be the 1.5. So that would be the totals here, then the 7.5 plus 28.5 plus the nine plus eight plus the 9.5 gives us 42.5. We know that the regular pay is that 7.5 plus eight plus eight plus eight plus 8 39.5 and then the overtime is the 0.5 plus the one plus the 1.5 or three hours, we can calculate that in two ways. We can, of course, take the 20.5 0.5 plus the one put 1.5 for the three, or we can take the 42.8 minus the 39.5, meaning this is our total hours. This is our regular hours. These then will be our overtime. Or, in other words, that regular hours 39.5 regular hours plus the three OT hours overtime gives us our total hours of 42. Now again, we're applying on eight rule a day type of limit. Hear anything over eight hours a day would have to be paid time and 1/2. That's our assumption. If, on the other hand, we're just talking about a 40 hour work week, meaning anything over 40 hours would be over time, then we would just take the 42 5.5 minus 40 to get 2.5. So you just got to be aware of what the overtime regulations could be. It could be on a weekly basis where we would take the the total per week I'm subtracted from the whatever requirement would be and in this case, 40 to give us the 2.5 overtime or if we haven't some type of daily requirement, whatever that daily requirement is. And it can be note that companies do have a decision if they want to pay overtime as well. So they have to comply with the minimum regulations, which which would be federal regulations and typically the state regulations being some type of higher limit. And then they can apply whatever they want in order to incentivize people to work overtime and it So it could be whatever the overtime law is, so just know the theory of it and then be able to apply what if ever it Maybe it might be a weekly rate, which can be nice because some people would prefer and you can give options. If you are an employer and you have something like a 40 hour weekly rate and then anything over that would be over time, because then you can tell people Well, how about you only work a few like less days a week, four days a week at a higher number of hours, more than eight hours a day, and you get to that same 40 hours, whereas So if you work four days a week for, like, 10 hours a day, then instead of five days a week, you get a whole another day off and put four days at 10 hours. Many employees might like that better, even if they don't get to paid the overtime. So it's note that, huh? A daily limit. While it could help people to not be working too many hours in it in an individual day, it can have some detriments as well, by basically preventing employees from possibly having options to work different type of pay schedules that they would enjoy working. So there's pros and cons, whatever that. Whatever the payment structure is, though, note how to put that in place. Note that the daily method is a little bit more complex as well. It's not that hard in any individual day, of course, but as we start to compile data for long periods of time for an individual employees and long periods of time for multiple employees, it could start to be more complex. Next, we want to look at a standard type of rounding system. Note that if we're paying someone hourly. Typically, they're gonna be logging in and out of the system, and the system will just time stamp whatever they log in and out of it. So if we have a digital system or some type of time clock, we can imagine the old time clock with a punch in. Or if we have a time clock, that's online. Then we check in and out. Clearly, it's not gonna be exactly on the hour. So if we if we, for example, going at 903 a. M and punch out at 105 p. M. Well, what do we do with those those minutes? Typically, we're going to round two like, Ah, 15 minute type of estimates. So every 15 minute type of vestment, because that'll make it nice and clean for us to do our payroll calculations. So here, basically around nine Teoh around one would be four hours burnt 9 10 11 12 1 And then, if we are going back from lunch, 1 30 about 1 29 1 30 then we leave at 5 25 Then again, this is close to If we round this up, Teoh 1 30 it's gonna be close to 5 30 So we're typically going to say that that's gonna be 1 30 to 5 30 and therefore four hours now again, different companies might have different types of conventions. And you could argue, well, that if this is the case, people have an incentive to come in, you know, a few a few minutes late or leave a few minutes early. But typically, if we're talking about a few minutes, it's not gonna affect behaviour too much, and therefore, that's typically going to be the rounding type of convention we can use in our time sheets when calculating number, amount of time at the end of the time period in order to calculate our payroll. 35. 330 Payroll Register: in this presentation, we will discuss the payroll register and what is included in it. The payroll register is gonna be one of the most important types of documents that will be used in order to track record and accumulate payroll information. It will include broadly broad categories, including the wages, the growth pay growth pay being paid before the deductions. So, of course, that's not the Net paid. Not what we actually receive as paychecks then will record the deductions in the payroll register and then the net pay what we actually receive as a paycheck and disbursements. So the payroll register is gonna start to show us some of the complexity in paid role notice that no one component of payrolls that complex whenever we think of payroll laws and types of laws that relate to payroll taxes. When we think about it in an individual case, it doesn't seem too overwhelming. We could say what we can apply that individual law in an individual employee for an individual payroll. But when we start to apply ah, lot of different sim fairly simple laws to payroll, we can see that it does start to build up the complexity and the calculations in just the amount of data that we need. And we start to see that when we build the payroll register, so we'll go over just some of the data that will be included. And then when we work a problem, we'll see that the payroll register and how to do some calculations with it. So first we need the marital status. Why? Because the marital status is going to be needed in order to calculate federal income tax, which is a progressive tax system in a marital status. Married or single is one of the components to that number of with holdings are gonna be what also gonna be needed for federal income tax calculations, salary and hourly rate. So clearly we will need the rate there so that we can calculate the wages that will be there for if their salary or hourly number of regular hours worked. So we're gonna need the hours worked in the hourly rate in order to calculate the regular rate, and then we need the number of overtime hours worked, however, that be calculating whether it be based on a 40 hour work week or a 40 hour work week and an eight hour day. We need to break out the overtime, our list and the regular hours. Then we can calculate the regular pain, that being the regular pay rate times the, um, regular pay hours. And we can calculate the overtime pain, that being the overtime rate, usually time and 1/2 150% of the regular rate times the overtime hours. Then we want to the growth pain, which will include the regular pay plus the overtime pay. Do you get the gross pay? Meaning the amount we would get, if not four deductions, including taxes and other types of deductions. Then we have the federal income tax. That's what we're gonna have to with hold on. So and that's gonna be a bit difficult of a calculation that are working probably the most difficult calculation in our worksheet, because we're gonna need to know marital. There's a few things to take into consideration. We need marital status, We need the number of exemptions and we need the pay period that is involved. Is it monthly? Bimonthly? Is it weekly? And then we need to look up based on that information. What the federal with holdings will be now. Of course, the computerized system can help that process a lot. But as we look at the manual process, what's actually happening? It's It's a pretty complex system to do by hand. At least then we have the Social Security, and also not just to do by hand. It is a lot easier to do with a computer, of course, toe. Look up this information, but to explain it, to be able to understand it for an employee to know what's going on, then it helps to to see the actual process, what's actually being used. So we'll take a look at those calculations. The most complex thing will probably do. Social Security taxes, then, is something that we need to withhold, and it's a lot more straightforward. People probably don't understand Social Security as well as federal income tax, because whenever we think of taxes, we typically think of 10 forties and income tax. That type of withholding and the soul security is another form of tax, but it's going to go into a separate fund. It's still going to the Fed separate fund the taxes a lot more straightforward, however, because it's gonna be a flat tax, in essence, So we're just in for the most part, is gonna take the wages. The growth pay times a flat rate. Generally, it is currently around 6.2, but percent. But the rate doesn't matter. That's not really what you want to memorize as much as the process, the rates easy to look up. What we need to know when with regard to taxes, is what type of tax is being applied and then just look up the rate and apply the tax that is being applied. And this is more of a flat tax. Medicare with holdings will have to with calculate that as well, based on grows paid times, Medicare. Same thing. It's more of a flat tax that's easier to Dio will just take. The girls pay tens the rate, which is currently, I believe, 1.45%. But again, the percents not as important, you need to know Well, it's just basically ah, flat tax based on the gross pay. So whatever that rate is easy to look up. We just take a flat tax much more simplified than doing the federal tax, which is a progressive system. And then we have the estate income tax withholdings that will differ from state to state. Now, if we're in a different state or even a different country than all we need to know is what ? What is that state applying again? There's no new taxes under the sun. Typically, the question is, Are they applying some type of progressive tax rate where we have to look at the tables and take into consideration different factors or they apply in some kind of straight tax rate? Ah, flat tax, where it's a lot easier. We just take the gross pay in, multiply at times with holdings. So whatever they're using, usually the state won't will either copy the Fed in some way. Ah, and you use a similar system or, um, use a simpler system of flatter tax, other state taxes, local taxes. Again, These will change from state to state and location, toe, live location. Ah, for a one K or other retirement plan, this is gonna be a benefit now. So, um, these air things that a company may choose to offer or UN employees may choose to participate in or not. But when we give the growth pay. Of course, when we give the pay check out, we have to subtract this out because we're gonna pay into the 401 k for the employees and give them the net check. And that's kind of like a benefit to the employee, as opposed to you might think the taking the self security in the federal tax and the Medicare is a requirement. So offering the 401 k and offering to take it out of of the check and put it into some type of retirement plan for the employees is a benefit. Those are good things for the employees and not necessarily mandated. Like taxes are insurance deductions, same type of concept. If we have insurance that is being taken out of the check I out of time period again, that's usually a benefit. That's usually a good thing, that the company is doing that for the employees as ah has a choice, and we have to take that out and the register. Garnishment and levees may not be considered a good thing, but again, it's something that's gonna be required by law. So if there's some type of garnishment that is given by a court order. Something happened. And then they're garnishing the wages, taking money out of their wages directly, rather than, uh, you know, waiting for the person to pay there the legal fees they're taking over the wages directly from the employer again putting the emphasis on the employer. Now the employers responsible for making the payment in the form of a garnishment rather than the employees being the one responsible Teoh make the actual payment. Union dues are something that could be taken out again that will apply only in cases where there is a union involved and then any other deductions that we're gonna take out. So there's gonna be a you know, a long list of stuff that we're gonna put into a worksheet. And some companies may not include some of this stuff, some of these other type of deductions, especially over here. State taxes could be similar or different. But ah ah, money. Many of these things will apply here, and we'll put this together when we start to put together a worksheet. If we were just looking at work sheet now and we don't go through the calculations, it just looks like a a lot of members on a worksheet, so it's best to really build this register step by step and concentrate on each calculation . And then when we see the full product, when we see all the employees on it and we see just a bunch of numbers and this calculations of all these things, if we can then focus in on one individual thing like, what is the marital status? What is the number withholding? What is the salaries? Why do I need it then? It's not that complex. But if we look at a completed payroll register with with multiple employees and state taxes and especially if we have some of these other deductions, it's usually more intimidating. Then it needs to be if we break it down piece by piece, so that's what we'll do. Going forward will start to create the payroll register. We'll look at it piece by piece, and we'll do a problem where we calculate these calculations in a payroll register 36. 410 Fringe Benefits: In this presentation, we will discuss fringe benefits. French benefits are important within payroll because, in essence, they're going to be a form of payment. Their rewards for services done, however, and that's just like any type of payment. Their rewards for services, however, they're typically going to be non cash compensation. And when we consider non cash compensation, the question is, well, do we need to include that in wages? Even though we didn't get paid cash? Is it still wages? And a big implication of that are a big problem with that, Or a big concern as to whether it is wages or not? Is, is it subject to taxes? Is it subject to federal income tax, state income tax, the self security and Medicare tax? So that's gonna be a big component. Now there's gonna be different reasons and incentives why an employer might want non cash compensation. They may be providing just just types of benefits through their business, further employees as perks of the job that are non cash compensation. But clearly there's also an incentive to try to plan for non cash compensation in the areas where it may lead Teoh compensation that cannot be. It wouldn't be taxed in other words, and employees who was either to receive cash, which then would have to pay federal income tax, state income tax, all security, Medicare or was to receive some other kind of French benefits. Some other type of, in essence compensation. And even though it's not cash, not as liquid possibly not is preferable in that, for that reason could still be preferred because if it were not subject to taxes, so that's gonna be a big issue now. Of course, most things if they're going to be something that's just non cash doesn't necessarily mean it's nontaxable. Most things are, in other words, so if someone received some, like a car or something for a compensation or some other type of type of reward, that would be a costly type of thing, or a vacation or something like that. Typically, that would still need to be included in income. That's a form of compensation. Typically subject Teoh taxes on it, so there's questions in terms of words. Are those limited things possibly that could be received by employees and reduce the payroll tax not need to be included in the payroll and one is going to be de minimus benefits. And that basically just means small benefits, minimum benefit, small, small type of things that if an employer gives small French benefits and you know, you kind of think of that in terms of accounting terms, it's something that's in material meaning there kind of your basically saying, We're basically saying they're too small to manage to matter about there, not something that, uh, when someone goes to work somewhere there, they're gonna take into consideration as part of their compensation package to influence their decision as to whether to go one place or another. So that's one type of French benefit we don't typically need. Teoh include education assistance is often, ah, benefit that can be provided by the employer and be a really great way that an employer can give incentives for an employee to continue toe skill up and improve themselves, and show that that you value the employees and give some tax benefit there. If they're able to basically reduce the growth wages because then that could reduce taxes on it. Ah, employee discounts. So and there's gonna be another type of area where, if you're in a particular industry, and there's discounts than within within limitations. You can basically apply the discounts and as a bonus for working in certain industries. And of course, certain industries have different types of discounts that could be available within that industry. Meals, meals gonna be something that will again within reasoned the determined as to whether it should be calculated as as wages or not. Is it part of travel? Is it part of? Is it basically is it for the benefit of the employer? Or that something that's gonna be extravagant for, um, the employees? Those are gonna be some concerns as to whether or not it should be part of compensation or not moving expenses. Reimbursements It could be. It could be something that would be beneficial to the employee and the employer transportation benefits and again that the questions here are whether or not it's it's a benefit to the employer typically, or the employee asked of whether it needs to be included in payroll taxes or not. So we're not gonna get into a lot of detail on the fringe benefits. We're just gonna point out here that there are there is a concern, of course, that if wages are typically given in terms of cash, then or check or direct deposit, then there is, ah, an incentive for for companies and employees to try to find compensation in other ways which possible, or look for ways that would not be included in payroll for compensations that would not be included in payroll taxes to look for those types of things. Now, most things the default will be that compensation is compensation. And if you get paid in something, if you get a car or some other kind of equipment or or a present or something like that, if it's over, you know a certain value that's not de minimus and value, then typically, we would have to find the fair market value of it and included as wages. But there are some types of things that could be beneficial, and those are things that are nice for a company to look into, because they can have some advantages in some effect. In terms of giving the employees MAWR through these types of compensation, French benefit types of compensation 37. 415 Deductions From Gross Pay: In this presentation, we will take a look at deductions from gross pay when considering deductions from growth pay. We may 1st want to look at what is growth pay? Gross pay is going to be before we have the deduction. So growth pay is going to be what AARP April would be if we did not have deductions, including things like taxes. So we're getting from growth pay, in other words, to the end result, which would be the Net pay and deductions then are gonna include things like mandatory deductions, which are federal and state income taxes, deductions by law, deductions we have tohave. So remember that the business is, in essence, required to make these types of deductions. It's important to note that the federal income taxes we're talking about here that are coming out of growth pay are the responsibility of the employees. In other words, there the employees taxes now that the employer is responsible and required to take them out by law. But they are these taxes related to the employees and again that concepts a little bit confusing because who's who has to pay the taxes? The employer is the one that's actually write the check, but the money theoretically is coming from the employees. It's coming out of their paycheck. So we're taking this money out of the employee paycheck by a law because we're required to do so as the employer. And then we're paying it. Teoh the state or the Fed the government on behalf of the employees. Then we have the Social curium Medicare. Same type of idea here. These air, both federal and or this is a federal income tax in federal income tax, Social Security and Medicare, Federal income tax and we are once again taking that out. Were required. Teoh. It's not a payroll tax that is necessarily in this context for the employer. It's being paid by the employee. Now we'll talk more about who pays which taxes, the self security Medicare is gonna have an employee component and an employer component. But when we look at our pay step, when we look at what's being pulled out of our paste home, that's of course what we theoretically paid it came out of our taxes. The reason I say theoretically is because we could debate in terms of, you know, what's the employer actually going to do what happens to the market when we when we impose taxes, what happens to whatever the negotiation will be? Four pay in terms of the negotiation. So from an economic perspective, you can kind of have a question as to you know, who's really paying the tax based on what happens in terms of markets. But what happens in terms of the actual paycheck calculation is that we have gross pay. This is going to be Social Security and Medicare that's being taken out of growth. Pay for our check, and then the business will have to pay their portion. They're a portion of soul security, and Medicare is something that we don't see on the pay stub not coming out of our check. That's an added piece that is actually payroll taxes to the employer. This piece, these things that are being deducted aren't really payroll taxes to the employer. They're just part of wages. They're part of what the employee has earned and therefore the employer. All the employer is doing is just taking it out and pain some of our bills for us. Ah, and that's what's really happening here. The payroll taxes to the employer will be the employer portion of Social Security and Medicare and some other things like photo, federal unemployment tax. So then we have the voluntary deductions when we get from growth pay and we're working our way down to net pay, and those are gonna be things like retirement plans and that these are These are good things, these air voluntary detections. So note they're similar because when we talk about federal income tax and Social Security, those air really the responsibility of the employees. Theoretically, we have to pay them as good citizens were supposed to pay our taxes And the, um and we can think of the business has kind of doing us a favor by taking him out of our paycheck directly so that they make the payment for us. It makes our lives easier. But of course, these are mandated to do so, and the main reason they are mandated is because the iris trusts and has more leverage over a company to force them to to comply. Then they do over individuals. So therefore, these air mandated now voluntary is the same kind of idea. If we have a retirement plan, well, the the company is providing that retirement plan in some way, and they're giving us the option to participate in it and the option then to take the money directly out of our paycheck and put it into the retirement plan. And that's typically a good thing. So that's gonna be a good option. Same kind of concept, however, that we're still just taking money out that belongs to the employees and pain it to some other area. In this case of retirement plan for the employees retirement cafeteria plans, usually some type of insurance plans are another type of benefit, typically that can be offered huge benefits and note that if you work in somewhere, ah, deductions that are mandatory don't tell you a whole lot about the culture of the employer . But if they're giving the voluntary deductions than those air things that do, because those are gonna be things that the companies deciding to provide as part of their benefit package. And so those are the things that are really differentiating one company from another company. So other types of insurance voluntary deductions could be included as well, so Section 1 25 plans Section 1 25 being a section of the Internal Revenue Service code, the iris code and under the Section 1 25 plan, we typically have plans dealing with medical expenses so they're typically going to be benefits related Teoh medical expenses. So pretax deductions Healthcare eyes typically what will be covered under the 1 25 plans. And, of course, the goal here is going to be to incentivize and hopefully make the medical plans or health care more affordable for employees. 38. 510 Federal Income Tax (FIT): In this presentation, we will take a look at the federal income tax calculation or F I t. Now the federal income tax calculation. First, we should define what we're talking about here because when we hear federal income tax, you may think of that from different context. Most likely move. People think of federal income tax as what is reported on the 10 40 at the end of the year . And it's true. That's what federal income taxes what we pay, what we have to report. But we don't usually pay it at the end of the year. Most people don't Most people pay it throughout the year, and if we're W two employees, we pay it by with holdings that are actually done from the employer. So when we talk about federal income tax here, we're talking about the calculation of those with holdings. Note that we do want to keep in mind this big link. There's a huge link between the with holdings we have here and our reporting of taxes on the 10 40 at the end of the year, which is done primarily by the W two that we will get from our employer telling us not only what the tax will wages are, but how much what was with held. So the other federal income tax you may think of when we're thinking about the company side is the federal income tax that the company pays now. I'm not talking about the payroll tax company pays for the employees, but the fact that they were a corporation, a separate legal entity, pay income tax so in every instant, pays tax in some way, so pass through entities. Still, the income would pass through to the owners, and they would pay income tax. So in essence, in other words, there is a federal income tax that the company or the business pays in some format as well . A corporation being easy to imagine They're gonna earn income just like we, as individuals dio and then pay taxes based on what they have earned. This federal income tax for payroll taxes is not at all related Teoh the taxes for the company. Although these taxes are part of payroll and therefore can be deducted as an expense, it's an expensive of having ah, business and paying employees. It's really an employee expense. But in any case, we are talking about federal income tax calculations for with holdings throughout the time period. For each of the employees, this is one of the most complicated ports of the taxes. Once we you know, when we look at Social Security, it's complicated for a few different reasons. One that reason that federal income tax will be confused between different types of federal income tax or whose federal income tax are we dealing with and the type of year. When are we dealing with it? We're dealing with the withholding or the federal income tax on the 10 40 at the end of the year related but different also one of the most confusing taxes because it's impossible to get it perfect. Um, all we can do is make an estimate on it, and the estimate process is gonna be structured and formalized through a series of table. So this will be the most confusing type of tax we dio, especially if we do it by hand. If we do it with a computer, then the computer can just generate it. But we probably don't have much idea of what is going on and probably couldn't explain it to well do anyone else or do much tax planning with it if we didn't have a better understanding of it. So the federal income tax that we're gonna need to withhold from each paycheck will be based on a few different things. We're gonna need marital status. We're gonna need to pay frequency. Meaning When does the company pay period? Do they pay weekly monthly, bi weekly, semi annually. And we need the taxable income for for this calculation. Now, these things these things are gonna be necessary, of course, because if you think about the 10. 40 at the end of the year, it's based on these things. That tax we pay is a complicated calculation, by the way, we also need the number of allowances. So the these four things are gonna be types of things that are gonna be in our 10 40 at the end of the year. So the income tax is not a flat tax. It's a complicated tax to calculate. In order to calculate it, we need to know if they married or not. Why? Because marital status will change. The tax brackets were in and how many exemptions we have on the 10 40 at the end of the year and therefore the with holdings we have will have to be in such a formatted kind of lineup so that if we add them up, they will cover the tax and the envy of the frequency. The pay frequency on that, of course. Ah, well, when we look at the tables, which is how we'll have to do these types of calculations, the tables will be broken out by how frequent we pay. So do we pace weekly, semi weekly monthly or ah bi monthly so well that will determine what table we use and then that the taxable income we need to know the taxable income for the pay period, how much they're getting paid for this particular time period. And that's an indication of what the total tax will be as well, because obviously we have a progressive tax rates. If you think about your 10 40 the more income you make than the higher tax bracket you're latest dollars will be in. So we need to know that in order to do the calculation for but with holdings throughout the year and then the number of allowances is gonna tie in loosely Teoh the number of exemptions we know on the 10 40 exemptions like ourselves, our spouse, our dependence and the allowances may not line up ter perfectly to that number, but they're kind of based on that number as well, to try to calculate what the with holdings will be. These are the types of things we needed in order to calculate with holdings these attacks, things that were provided to us by the employees on the form W four when they became employed with us. Once we have that into the system, we don't really care about tax planning anymore. Way never do as a payroll. We don't do tax planning as payroll side of things because that would be confusing, you know, issues. We've got to separate that those duties out. So what we're doing now is just saying, Okay, this is the information that was given to us. How much do we withhold? That's what. That's the only question here that we eat. And we need this information in order to do that. Now, to get that, if we were to do this by hand, we would get that orphan into this by a computer the iris is going to give that information , and we could do that by using tables which are given to us by the circular e employers Tax guy. This is for 2018. You could look it up. Just goto iris dot gov and look for the circular e. And within it we can find the tax tables. Now a computer system will have those tax papal tables for us already and just pull that number out. But its really useful to go through the tables at least a few times to see the complexity of it and even going through the tables. We really don't understand what the table. How did the table get constructed, right? It's not a flat tax. It had to take these into consideration these calculations into consideration to make the table. So you can tell from a planning standpoint, this is kind of a confusing issued t get this federal income taxes. There's no guarantee, in other words, that the federal income tax withheld will line up Teoh what will actually be a taxable at the end of a year on the 10 40 calculation. But we do our best, so the tables will look something like this. If we go into the circular Eem and we find the tables, it'll be broken out. We gotta go to the correct table. So, for example, this is the table for a single person for a company that pays weekly. So if we pay weekly and we have a single individual, we can go to this table and we can look into whatever the weekly earnings were. If our employees earned 0 to 70 dollars, that's how much they're They're gross wages were and they had no ah, no allowances. They chose zero. Even though they have one exemption for themselves, they chose zero on and then they wouldn't. Why would they do that? So they don't have any with holdings. Typically, you know, So they got and that would be zero would be taken out now. Obviously, as as the income goes up, the withholdings would typically work. So if there wages were between 1 35 and 1 40 and they claim zero, then we would withhold $7. Now, this is only the beginning of the table. That's why there's all zeros here. But as the income goes up, then if they had one exemption, they would pay zero. And as the exemptions go up, of course, if they had zero exemptions, they would. We would withhold MAWR because we would expect them to go more money at the end of the year . When they do their payroll calculation. At the end of the year, these tables will go down. Teoh. Fairly decent amount of income. They will stop at some point, you know. So if someone makes a lot of money, then we won't be able to use these tables, and we'll have to use a different method in order to calculate their withholdings. So if they're married and weekly, then once again we pay weekly and they are married, Then we find there how much they got paid weekly for that particular papered. And then how maney allowances they have from their W four and then wherever that lies. If they were at one allowance and they made, you will say here somewhere between 3 55 and 3 65 like, say, 3 58 then they would go here. Also note that the way the table is, it's got 3 55 here and 3 55 here so way have the question. What if they made 355? Do we pick up the $5 withholding or the $6 Now, typically, we want to be more conservative. I we we as the business would rather just withhold mawr than less So will typically air on the higher withholding because we'd rather have our, you know, over withheld. And then anything we over withhold like they'll get back on the 10. 40. So we'd rather have them not owing money on the 10 40 than owing money Obviously a dollars not gonna make a big difference, but typically well, we'll air on withholding too much rather than too little. Ah, and in this case, so usually that's the case. So then if we have ah, single person still but now they pay bi weekly. Now this bi weekly is a decision by the company. So obviously the company pays people bi weekly, which is different than semi monthly Thes tables will differ than semi monthly. But once we know what table we use, we'll just use the same table each time. So this will be bi weekly again looking at the paid tables, the only things changing are gonna be these These stats up here and obviously the amounts withhold will change based on the papers. How much was earned in this case by weekly the earnings for employees? Ah, that get paid by weekly. You would think that they would earn, you know, more than than the weekly table that up here. So then we've got we've got married bi weekly, same type of idea and obviously that things are gonna change. Why? Because marital status will change the amount of with holdings. And these tables originally were built on the concept that we only have one income because obviously the employer only knows of that single income. So the tables air kind of constructed as if there's only one income. And we know that families typically have more than one income now and other income sources . So these tables are far from a perfect, you know, estimate. Unless we make that w four calculation more accurate in some way. Okay, so then we've got the semi monthly for single. So remember, semi monthly is different than ah bi weekly. So because there's 24 compared to 26 pay periods, So this table will differ, then semi monthly, two by two by weekly because there's they're slightly different a number of pay periods and then met married semi monthly. Ah, and then we have single for the monthly if we pay monthly and then married monthly. So a note. If you're doing this by hand, you got to find the right table. You gotta find you know where they were earned for each employee. Look at how many allowance or at and then look what the deduction would be again. Most of these all have zeros because we're only looking at the head or the first portion. And as the wages go up, then more with holdings would go up as well. Okay, so we were going and then we have daily, of course. So the other method is going to be the percentage method. So if we can't typically, we're gonna use the tables. But for example, if they earn too much money, then we can't use the tables. We have to use some other method, and that would typically be a percentage method. And you can think of the percentage method. It's kind of like this is kind of how they would create the table. So these air useful to look at and try to calculate just to try to figure out OK, you know, how are these tables being built? And if you if you look at these, of course, we know that the tax rates are progressively going up as income goes up. And so if you're trying to build a table, you basically and these won't line up with the table exactly, but they'll give you an idea of how this is being built. So if they earned between 71 254 so what that means is, if they if they had less than the 71 they wouldn't pay any taxes. But if they had between this mount, we're gonna have to subtract. Ah, you know, whatever they have. If they have 100 minus the 71 that's what they're gonna pay taxes on. So we don't we lending to calculate that 10% on that portion, and that would be how much tax they would pay. If if we're in this bracket, if they made somewhere between 2 54 and 815 then no, we kind of already calculated the tax up to 254. This this lining up to here? We've already calculated attacks on that. So we don't need to re calculate that what we need to do is just calculate the tax on the portion above to 54. That's below 815. So if it was, like 909 100 minus the 254 and then we're just gonna take the 18 which is the amount of tax on the to 54 plus the difference between you know, the 900 ah minus 22 54 and that would that be a 12% rate that rates going up as we make more money? And then if they made something between 815 and 1658? Then again, we already configure the tax. As of this line, that's the last point. So so as of that point, they had the tax would be eighties 5 62 and then whatever they made above that, So if they made 1000 200,200 minus 288 15 times the higher tax rate of 22% 39. 520 Medicare Tax: in this presentation, we will take a look at the Medicare calculation when considering Medicare. We're talking about the federal Insurance Contribution Act that they Fike. A type tax pica federal insurance contribution can be broken out into the Social Security component and the Medicare components. We're concentrating here on the Medicare component now, like the other fighter component, like Social Security, it has thes two layers to it. It's got the employer layer and the employees layer. This is going to be the most confusing component or part or thing to understand within the Medicare taxes, because we can confuse these two once again, we could confuse Ah, the 1.45 as if that's the only thing being paid or whose pain these taxes and the idea of this tax is similar to the 41 K plan. Again, that 41 K plan is not the same thing as a Medicare plan or so scary plan or a fighter plan in terms of the benefits and the payouts. But in terms of the pain into the program, you can think of it as a similar type of set up, meaning the employer is mandated to put in 1.45% which you'll notice it is a lot smaller if we if we move the decimal two places, it's 20.145 and the employer is is mandated to match that, in essence, putting in another 1.45 So what does that mean then? This is a Medicare is gonna be a payroll tax that will taken out. But remember, from the employer standpoint, the employee portion is not really a payroll is not really a payroll tax. To the employer, it's just payroll. It's part of the payroll. So in other words, the employees gonna earn whatever they earn and of their earnings. They're gonna have to take out 1.45% which we will take from them and just do them. The service have taken out their earnings and paying it not to them, but to the government, were mandated to do that sets. But in essence, we're just taking the employee wages that they've earned and allocating it to someone else that they owe. Whereas the employer portion is a payroll tax to the employer, meaning it's not coming out of girls pay, it's coming out of our you know, their employers checking account. In addition, Teoh, the employee tax. So in this in, in essence, this is really the payroll tax to the employer. This is really kind of a payroll tax to the employees. The employer sees it as just part of wages. It's something that's got to be owed to the employees. Now again, from an economic standpoint, you can. There's arguments in terms of what's really the effect of taxes. Who is really paying the taxes if you think about markets and whatnot. But from a logistic standpoint, from a record keeping standpoint, the accountant sees this as just the employees, part of the employees wages. It's not a separate tax. We just pay it out. Two things for the employees. This will be a separate tax and its attacks. That's not being called on the corporate income. It's been based on the employee wages. So this is going to be broken out typically as payroll taxes on recording when we have record the income statement. So that's usually the confusing piece. So note that really, the tax that's being paid between the employer and employee, the total tax being received or paid for Medicare is the sum of both of these taxes on the earnings of the employees. Often, miss people often think that it's only 1.45 This is what you'll see on the paste up actually coming out of the pay stub. But it's really twice that, because the employers put it in a portion as well. Because it's the same portion. It could be confused, and it can be confusing in terms of who's paying it or how the calculation is working. The calculation will be based on the gross profit for the employees each employee. So then there's no cap as there is with the Social Security type of payment. In part of the reason for that. And just if if we were to speculate on, part of the reason, if you're trying to find reasons for the tax code, can be difficult sometimes. But if we were to speculate, the Medicare is more of a pure safety net program now. So in other words, you have to qualify to get the benefits for neck for Medicare out at the at the end, whereas so security you get the benefits just for paying into the program. So so security. Kind of morphing into more of a, uh, kind of a retirement type of plan, in some sense, from the federal level. Whereas the Medicare really is paying in, it's still really a safety net program to help people that are having problems. Andi need the Medicare assistance, and because of that, it's ah, it's also less costly 1.45% of a lot less than the Social Security rate, which was it was a 6.2 now, no, that's really it's really twice that it would be 12.4 for Social Security and 2.9 for for Medicare. But again, it's substantially less so. There's no cap, and we don't deal with that that camp issue. It's the flat tax of the actual calculation for both these components is pretty straightforward. Whatever the gross wages, we just take a flat tax a lot easier to do than the federal income tax. We do have an an additional 9.9% big difference Saudi 0.9 addition for wages over 200,000 and this is another kind of component, that's all that's clearly ah, debatable component. As to as to whether that's your change or how that should change to this, this is likely more likely of a cap that could change over time, possibly than possibly the rates, which could change over time to, but probably not as often. 40. 605 Taxes Employer Employee: in this presentation, we will take a look at taxes for the employer and employee, or look at taxes and deductions and determine whether or not it's the employer tax or employee tax and deductions. In other words, we're looking at who is responsible for pain these items. Is it the employer or the employee? Now this is a confusing question because in one sense you might argue that they're all employer responsible taxes because employers really the one that's facilitating the payment , making the actual logistics off the payments happen. However, the question is really whether or not it's being taken out of the employee's gross pay to get down to net pay. Or is it something that the employer is paying over and above and outside of the calculation of gross pay? And that might be a more accurate way to think about it, because there's a lot of implications when we say that an employer tax on employee taxes at an employer deduction or an employee deductions and again, from a economic standpoint, you could argue who is actually paying the tax what's really happening. If we didn't have, you know, the laws that we have here so it might be more accurate and easier to think about in the context of which taxes are going to be coming out of the growth pay to get to the Net, pay for the employees in our payroll calculation in which taxes are gonna be paid by the employer and not be involved in the growth pay calculation. So we're gonna list these out. And if the thing says if we say yes in each column or in either column, I yes means that it's gonna be an employer responsible type of item. If we say no, it's going to be non employer responsible in that column. And if it's yellow, then that's gonna depend. And that's how we'll go through these. And if you memorize the last slide, then you have an advantage here. If you contralto recall what you remembered on the last lied. So we're gonna go through these here. We got Social Security. What type of taxes? That is it an employer tanks and employees tags or both, And we're gonna say it is an employer and it isn't employee tax and confusing a bit. Why? Because remember that the Social Security they set up kind of like as if it was a form one K matching type of thing. So there's an employer portion to it and there's an employee portion to each pay it. Currently, I believe, 6.2% off the employee wages, so that's gonna be on both sides. So when we see the growth paycheck calculation, the amount coming out here is really only half of the total amount that will be paid. The other half will not be coming out of the paycheck. It will be coming out of the employer's payroll taxes on their side on their checking account. Then we've got Medicare. Is it an employer Tax? Yes. Employee tax? Yes, same thing, because these are the two fighter taxes and they're set up in a similar fashion in that the employer will pay for a portion of it, half of it kind of like a matching type of idea. And then the employees will pay for a portion of it, so it will be calculated in the gross pay, reducing the growth pay, but only by half. That's only half that will actually be paid, the other half being paid by the employer not included in the calculation of net pay. Gross baited to net pay paycheck calculation and then we get the federal income tax. Is an employer tax? No. Now note that this you might say well, with federal Doesn't a corporation fate pay federal income tax? Yes, they dio, but we're talking in the context of payroll, federal income, tax meaning federal income tax that's calculated on the basis of employee wages, not federal income tax, calculated on the basis of the corporations. Net income. That's that's a different type of federal income tax. A note. Uh, we have to be careful in the context. Here we're talking about federal income tax as a payroll type tax. In this case, it's not something that the employer pays but is responsible for calculating and pain for the employees. In other words, the employer does the logistics of taking it out of growth, pay to calculate net pay and then paying it. Teoh the Fed to the government. But it's being paid on behalf of the employees out of their girls pay not as something out of the employer funds again, theoretically, so then we have the federal unemployment tax isn't an employer tax Yes. Is it an employee tax? No. So this is going to be something that does not come out of the calculation of Net pig roast paid to net pay. It's not gonna be part of the paycheck calculation. It's not gonna be on the pay stub. The employees won't even see this. And so for that reason, and because it's a lot smaller, we may not have any familiarity with it just by being an employee. The employer, On the other hand, we'll have to feel how yearly 9 40 pay this tax. So it's smaller tax, but it's still something that that's a pain, because you gotta calculate it. There's a little cap on it and everything so on. You have to report for it so that one comes out of the employer portion. Not out of the employees state unemployment. Is it an employer tax? Yes. Is it an employee of tax? It depends on the state. Now, this one room is that unusual one, and that we usually are not touching it on the state taxes here because we're gonna it's gonna change from state to state. We can apply the same principles most of the time to the states. But remember that the state unemployment tax is closely, closely tied, linked to related Teoh the federal unemployment tax because of the way the legislation basically happened. So that means that every state really kind of has a minimum standard in order to meet the regulations that were basically put in place as the federal unemployment tax, what's put in place. In other words, in order to get a lower tax rate for the federal tax, the state has to meet some minimum requirements and therefore all the states will do that so that they can keep the money in this team in the state rather than go to the Fed. So therefore, we're going to include the state tax, and we're gonna say, Yeah, it's gonna be an employer tax because that's part of what's kind of standardized. But it could also be a partially on the employees as well, and that's gonna depend on the state. The state has more leeway. Thio Thio have an important portion there, so it will be paid by the employer not included in gross pay, and it possibly could have a portion to it depend on the location. That will be a reduction from our gross pay to arrive at net pay for our paychecks. Workers Compensation compensation is that employers acts. It is an employer tax. Is it an employee tax? No, not an employee tax. So workers compensation something that's gonna be paid out of the employer taxes. And obviously it's four compensation for employees. We don't have any employees. We don't have worker's compensation. But it's not gonna be a calculation to arrive at. Net Income is not coming out of the employees Gross income to arrive at net income. Then we have the 401 came math. If we have a matching plan, is it an employer tax? Yes. Is it an employee tax? Yes. Now? No. This is where specifically have to say that it has a matching plan. Like many. For one case, dio. If we're talking about other attacks of retirement plans, then it's still a benefit no matter what, because it usually has a higher amount, you can put into it. But there may be differences as to whether the employer put or who puts the money in and how much is by each of these. But if there's a matching plan, then it's kind of similar to what we said in Social Security appear they're not the same thing. The so security is not Ah 41 K because the Fed isn't really holding onto the money in a similar doesn't have to account for it in that way in a similar way. But the ah withholding is similar in that the employees gonna put something that's gonna come out of the employees check, and the employer then is going to match it in some way that coming out not from the employee check, but from the employer, uh, general checking and then voluntary duck deductions. Are the employers know? Are they coming out of the employee? Yes, so anything that's voluntary. Typically, the employee has an option as to whether they wanna have the deduction or not. And the employer is giving the benefit the service, not of paying for it but of facilitating the transaction of taking it out of the employees , check for them and making the payment for them so that the employee doesn't really have to worry about it. If the employer wants some voluntary deduction to go to a savings account, or something like that, then the employers is just taking it out of the check and putting it directly to where the employee wants automatically and more of a service. It's going to be calculated in the calculation for net pay, however, because it's gonna be paid by the employer but four and out of the funds that was earned from the employees. 41. 615 Federal & State Unemployment Tax: In this presentation, we will take a look at federal and state unemployment tax calculations when considering federal and state unemployment tax calculations. We are considering types of taxes that are employer taxes, so we're focusing in here on employer type taxes. FOTA is going to be something federal unemployment tax is going to be something that is not a employee tax at all. Unlike the fighter taxes, Social Security and Medicare, which have a employer and employee component, the food to tax is a pure employer attacks. It has no employees component to it, meaning when we look at our paycheck and that paste of the calculation of our net pay, it doesn't have any Fouda removed from it. Fouda is a payroll tax. There will be an expense on the corporations or the business books as a A payroll tax and not part of the wages paid for the employees. So the food attacks then is going to be on the 1st 7000 Now this could change, and this is something that's really kind of confusing toe look at meaning. We're gonna take each employee and we're only going to pay food attacks. The employer is paying the food attacks based on the 1st 7000 of wages for the employees, that means that after they make you know 7000 and $1 we don't pay any more tax on food of after that for that next dollar. So for that kind of is a little unusual in some ways. Meaning that means that if we have more employees, then we're gonna have rather than pain, employees more money. We're gonna end up paying more food at because most likely and employees, even poor time employees, if they're employed by us for the entire year, will earn more than $7000. So for each employee, if they're employed for the entire year, then we're probably gonna be paying more than 7000. We're gonna have to pay. You know, the maximum food attacks per employee by the food attacks is fairly small as well. So that's another area that's really a bit confusing. If you have test questions on it, it's a bit confusing if in practice it's it's more straightforward. So the way you'll see this is that it'll it'll say that the food attacks is 6%. And remember, when we talk about these percentages in these caps that they could change over time. But if they these ones are more stable than other things we talked about. But the types of taxes that we're talking about are going to be a types of applicable standards. So once anything changes, we want to just go back and make sure that we are checking the correct rate and apply it and use the same principles that we're using to calculate the tax. So the rate, the way the wrong on the law set it up is basically saying that the rates gonna be 6% however, that we're gonna try to mandate the states in some way Teoh implement their own suta and therefore we're going to say, Hey, the federal taxes 6%. But you get a 5.4 rate reduction if the state complies with suitor requirements in accordance with the Fouda loss. So within the food to the law, the federal income tax law, the feds basically said, if you states put together a Suta State Unemployment Tax Act that complies with this A, B and C, then we'll give you a 5.4 discount or deduction, which means that the net tax, the actual food attacks and for all practical purposes is 0.6. Now, notice is pretty low tax rate 0.6 for the food to tax. So again, if you look, if you look at it and they ask you, what's the food? A tax rate, What's the federal unemployment tax rate? It's really 6% with this deduction, which basically every almost every state or ah complies with and therefore the rial application rate, the one you're actually gonna use most likely to calculate is gonna be this 10.6%. So from an application purpose for all practical purposes, most the time we're gonna have a food to rate that we're gonna use at 0.6%. But, um, the wording of it's gonna be 6% if the state complies with its from the 5.2. I mean, the 5.4 and the deduction given us to that 0.6% Now note. This isn't 6% of 60.6. So if we were to convert this to a decimal moving at two places to the left and that calculatedly 20.6 so it's 0.6 of the 1st $7000 earned for each employee for food attacks, which is an employee er tax. Uh, that's going to be paid, meaning it's not coming out of the of the paycheck. And then the state Unemployment Tax Act will vary. We've noted here that all states typically have some type of state unemployment, and the state unemployment will typically meet the minimum so that they qualify for this 55.4. In other words, you know, the state would rather set up their own system and collect the 5.4% rather than have the have the Fed take it at the sixth at you know, the 6%. So if the state has to impose a tax, they would rather take the tax typically, so they're usually going to comply here. But that would be kind of like a minimum standard, and they could add some more standards to it and vary the tax in some way for the suit attacks. But oftentimes it'll it'll mimic the same type of calculation. Some type of low, um, cap here, like 7000 would be for the 1st 7000 or 8000 or something like that and then have a similar type of rate up to that point. So reporting period and tax deposits notes that different There's gonna be different requirements for when, in essence, we have to pay the deposits for our payroll, and it really depends on how how larger payroll is. So the laws is gonna try to give more flexibility to painful periods that have have less employees and less total payroll. So, in essence, you know, the larger the payroll is that the more frequently we have to pay so we could end up pain, you know, on what we could. Our payroll periods and taxes could be a monthly, semi monthly or the next business day, and we won't get in a lot of detail in terms of what those paper, you know exactly what the dollar amounts are because those could change. And very just be aware that as we report the payroll, we need to make the deposits as we go. And so if we're, um, if we're doing payroll weekly or or bi weekly or semi monthly or monthly, once we process the payroll, there's a question asked you, how long can we wait until we give the money to the government, meaning after every payroll period, we're taking money out of the employees. Wages for the with holdings. How long do we have until we have Teoh remit the money to the government, pay that government out, pay that money to the government? And of course, they want their payments sooner rather than later. And eso we make those payments as we go and then we verify the reporting, kind of like we do with a 10 40 for individual income taxes. That's what the quarterly reports will do. And 9 40 ones are not there to calculate and pay the tax the 9 41 zehr there to report and verify the tax code and the payments that theoretically and should have actually physically been made by that time. So when we do the 10 40 I mean, when we do the 9 40 ones at the end of the quarter for payroll taxes, the quarterly reports at the 9 40 at the end of the year for Fouda we should not be beach pain at that point. Kind of like your 10 40 at the end of the year. We shouldn't owe money on the 10 40 at the end of the year for everything was done right. We should have actually overpaid on the 10 40 and get money back for the same thing is true for payroll taxes that we should be pain as we process payroll and we have some time period after payroll processing t make that payment, and then we're just gonna report that we have paid and the liability on the nine forties Quarterly and the 9 41 at the end of the year. Note, too, that, unlike the 10 40 we're not thinking and we're gonna get money back because it's not. It's not a complicated it's not a A system that is more complicated, like the income tax, meaning it's more flat tax that calculations should be exact. We should know exactly how much we owe. We should have paid exactly what we owe. So if we did it all correctly, we can conceivably make it exact. And it should be as opposed to income taxes, which that's an impossibility. You're always gonna be off, and hopefully, hopefully there's a bit of a refund because that makes things easier. At the end of the year, 42. 620 Form 941: In this presentation, we will take a look at Form 9 41 The form 9 41 is a quarterly federal payroll tax return so that form 9 41 is going to report those federal taxes of those federal taxes, including the federal income tax, the Social Security and the Medicare on a quarterly basis. Note that when we talk about the federal income tax where we're not talking about the taxes for the corporation, which are going to be reported on the corporate or whatever business entity we're talking about, it's not the income tax for the for the corporation. It's the income tax for the employees. So note that the Form 9 41 is going to report the payroll taxes and in this sense, were talking payroll taxes for both employer and employee. Remember that when we when we record something on the books as payroll taxes on on the income statement for payroll tax expense, we typically just think of the employer portion. That's what were we will record as payroll taxes on the income statement. The employee portion will be included in just the payroll expense because it's really payroll expense that has been earned by the employee. That's not the taxes that were paying over and above what we would pay the employees anyways. It's just so happens we're going to pay that portion to the government rather than to the employees, although the employees earned it. When we talk about the 9 41 we're going to be reporting not both components. The with holdings we took from the employees and the component for the payroll taxes that we owe on top of those with holdings now quarterly then will mean that there's going to be four payments we're gonna have divide the year in the quarter. So there's 12 months in the year. If we divide 12 by the 4/4 that we're gonna have, we're gonna have three month time periods. So the first quarter of, of course, January, February, March, then April, May, June, July, August, September, October, November and then December 3 month time periods. And when you first start looking at this, that can seem a little bit confusing. When we see quarters. You might just start to think it's easy. Sometimes people start to think that there's four months because it's 1/4 but remember, we're taking 4/4 off a 12 month year. 12 divided by four is three. We've got three month quarters that we're talking about whenever we break the year up into the quarters. And then the question is, when do we have to report the 9 40 ones when we actually have to turn them, turn them in? Well, the first quarter is January, February, March, and then we have till the first of next month. Teoh, turn in the 9 41 Meaning we have to record everything and get it all set up and report it by April 30th the second quarter being the same April, May, June. And then we have to compile that data as of the end of June for the three months into June and get it done and and, uh, turning in by July 31st. And then the third quarter, which includes July. August, September, has to be turned in by the end of October or is due by the end of October. And then the quarter of October, November in December is going to be due by January 31st of the following year. So that's gonna be our quarterly returns when they're due. This is gonna be a copy of the 9 41 and you could find this on the IRS website. You can just go to the I. R s dot gov and type into the forms section and 9 41 and you can get a copy of what the 9 41 looks like. This is just the first page. It's typically a two page document, but this gives you the major components of the first page. If we zoom in on this a bit, we're going to say that we have the employer identification number. That's gonna be the I. D. Number for any payroll calculations. And again, any entity, no matter what, the entity, will typically need an e I in number and report the payroll. We got the name trade address. Then we need to report which quarter that we are filling out the 9 41 4 and then we'll go through these calculations. We'll fill this out a little bit more completely later. But note, of course, we have the wages, tips and compensation. This is will be for the for all of the employees here. So we're talking all of the employees kind of combined together. When we do the payroll checks, we're and do the pay steps will actually have to break this out by employees as well and give give the similar information for the employees. But this is gonna be combined. All of our employees. Then we've got the federal income tax withheld. Ah, for wages, tips and other this number. There's no calculation here. Note. We're not gonna basically take the wages, times, anything we can't because it differs. It's not. It's not a straightforward tax. Um, it'll differ from employees to employees. All we can do is is basically add up what we came up with based on our calculations on what we withheld from each employee, then we have the Social Security and Medicare calculations here. Now what we have is the Social Security wages and then the Medicare wages. And then we have the tips broken out separately, which, if we have tips that would be applicable. Otherwise, we put the total wages here. Now, note that this may differ than line to the Social Security wages for all of our employees may differ from line to for For one thing, I hear there could be a cap on the Social Security wages, and this will be reflected again on your W twos. You may see that there's three lines for wages for self security wages, federal income tax wages. Federal income tax is decreased by things like a 41 K plan, whereas the Social Security is not Social Security wages have a cap on it, whereas the federal income tax does not, and then Medicare doesn't have a cap on it, whereas the Social Security does. So we could end up with three different, you know, wages, lines one for federal income tax, which could differ from these. The self security wages which could differ from the Medicare for the entire company. Then we're gonna take the Social Security wages and multiply it times point 1 to 4, which, of course, is if we move the decimal place two points over 12.4%. And remember, we said that it was 6.2. That's how much we pay and the employer times two. That's where you get in there. 12.4. Removing the decimal two places over This would be 12.4% or 0.1 to form on the Medicare side, we have the points, Um 0 to 9, which is 90.45 Oh, point or 145 which is what we pay on the employee and employer side times two for both. And so we're paying 20.29 between the employer and employee. So that's where we could see that we're reporting both sides here, the employer and employee side. And then we're going to basically add those columns up here, t get to get our total taxes that we will. Oh, meaning we're adding the federal income tax, the employee tax on Lee and the Soul Security and Medicare, which is adding up the employee and employer or portion of federal taxes. Then we have some other lines, like adjustments, and there's gonna be some fractions of a penny type of things that are off. So if something's if our calculations are different than what what we calculated to be by fractions of a penny, then we can make some adjustments there, and then we have some other type of adjustments we won't go into at this time to finally arrive at the taxes after adjustments, whether they be just rounding adjustments or any type of other adjustments involved reporting those three types of taxes this is reporting than the liability component. This is how much we owe. We've re calculated it. We've already recount. We've already calculated it as we've done payroll in our payroll registers and actually withheld what should be reported here. Because this line here, this is just going to report what we already calculated for the federal income tax. And we've re calculated a flat tax, that flat tax just being a percentage times each individual's each individual's pay rate. So if we take the total times the pay rate, it should be the same. So our tax should be pretty much exact. And then we have this rounding thing that we could round if it's not exact. Now, Line 12 is total taxes after adjustments and credits, and then line 13 is gonna be the deposits we make. So these are gonna be the deposits we've made. So notice what we're doing here. We've got the liability that's been fully adjusted here, and then we've got what we deposited already. So this isn't a formal. We're gonna make the payment at this time. We're not trying to determine how much do we owe. We're just basically double checking how much we owe calculating it in kind of a different way and reporting it on a quarterly basis Here. So So this is just a reporting requirement. Shouldn't be on area where we are filling out and pain taxes at this point in time. So then we have the balance due, or overpayment, which again, hopefully there isn't any balance. Do our overpayments. If we had made an error somewhere, then there could be. But hopefully it's all it's all been paid up, and we're good, and we're just gonna report what has been done successfully already. Then we have a section B of the 9 41 the section B is going to give us some of the payment type of schedules. Now, Section B is only going to be required if we're over a certain amount of income amount. Otherwise we can weaken, have ah, summary. That's part of the 9 41 that is a bit less detailed. But of course, what we're gonna have here is we're gonna say there's three months within, um are quarter that were reporting for the 9 41 whether it be quarter 123 or four. And we're gonna actually break out the payments that were made here. So we'll just actually break out the payments by month and list out those payments. And of course, then we can sum up those payments for a month, one month to and among three. And if we add up the three months, that should then add up to our total payment that that we have our total payments, the sum of all the payments we have made designated to this quarter. And as we can see here that the total here online 12 on formed 9 41 So whatever we come up with here should this should be supporting what we reported on line 12 of 9 41 And if there's any discrepancies, if the IRS says, Hey, we didn't get paid in this and that and then, of course, then we have to go through. These will give us a list of the actual payments. We can see if they've cleared the bank and see if these payments have actually cleared and then we can talk to the iris and actually go through the list of payments we have and take anti them off and ask the IRS Hey, is this what you have on your side? And the problem will typically be if there is a discrepancy that the iris either doesn't have the payment, didn't clear or it's been applied to the wrong quarter, which is very possible, depending on how we reported it. If we accidentally made a payment at the end of the third month and applied it not to quarter one, but 2/4 to then it got applied the wrong quarter in, which has got to make sure that we have our applications to the correct quarters, and that should be a way that we can fix any tax of problems related to that. 43. 625 Form 940: in this presentation, we will take a look at Form 9 40 9 40 It's gonna be the annual federal unemployment or the Fouda tax return. So the 9 40 is going to be something that is gonna be an annual return, as it says here, and it's really just reporting the food. Now you might think these these numbers air so close to each other the nine forties, which are the quarterly returns in the 9 40 ones. That one. They're easy to get mixed up. For that reason, remember that the 9 40 ones, for whatever reasons, are the quarterly returns, and the 9 40 is kind of like the yearly return. The other thing that's confusing about them is one because numbering is so close and and to just because they're both payroll tax forms, it's easy to think that the 9 40 or the year inform is going to sum up in some ways, um, the payments that have been recorded or the types of taxes that are on the 9 40 ones. But that's not exactly the case. The 9 40 reports of completely different federal income tax, which is the food a tax, the federal unemployment tax. So note that the 9 41 is gonna be covering all other federal payroll taxes. So the 9 40 ones the 4/4 9 40 ones cover the federal income tax again. Not for the corporation on their net income, but for the employees payroll taxes, the income tax, the F I T and then the Social Security and Medicare. For both the employer and employee sides. Those are the 9 40 ones. The 9 40 isn't going to recap that again on an annual basis. What the 9 40 does is calculate just thief Ouda Tax The federal unemployment tax. Um, and the reason one reason this is the case is that it's kind of a waste of time to record the 9 40 once. Or maybe it's it's thought of as in material or not worth the effort to record to report the food attacks on a quarterly basis. Because it's such a it's a smaller tax. There's not as much being recorded, so therefore, the requirement is really just an annual requirement. So it's not really that we have quarterly requirements and an annual to sum everything up. It's more along lines that we're not gonna add the food a requirement to be broken down on a quarterly basis, in part because it's a smaller type tax therefore will allow. It's not to be reported until the end of the year, although the payments, like in all taxes, should be paid on the way as we go. So because it's a yearly form that's gonna be do, it's, it's we're gonna record the whole years worth of data from January to December, and then it's going to be due by January 31st. So clearly, obviously the end of the year is gonna be a a big time for record keeping. So we've got to do that last quarter and then we've got to do that nine forties so the 9 40 will look something like this. This and again, you can get this from the IRS. Gonna iris dot gov Look up the forms, look up form 9 40 you can get an idea of what the 9 40 looks like. It will be much. It'll be pretty much the same typically from your two year, but we do want to make sure if there's any changes to we need rates or anything. It will be reflected, of course, in the new in the newest form. So I want to make sure that you that you're down, whatever you're working on, downloading the newest form, this is the 2017 form here, so I will have the e i n number. Once again, we always need that guy in number. No matter what type of entity we are in the employer identification number, name, address, then we're gonna check the boxes that are applicable up here. Note that it's not the quarters, of course, because it's an annual return. But if it's an amended return, we got to say it's amended. If there's no payments for employees in 2017 we wanna have that. And if it's a final return, then we got a note. That, and the final returns can be a bit of a pain. We want to make sure that we close everything out for, um, for a corporation in terms of payroll taxes as well as everything else. So the first portion is gonna tell, ask for the state and asked, Basically, have we paid the state taxes? Are we subject to state taxes? Because remember that the state taxes or that are in some way related suit attacks is related to make sure that we have the lower food to rate. So if we paid the state taxes, we typically have that lower food to rate, which is gonna be the point. 006 or the 60.6%. Now, when we calculate the photo wages, it's a little bit confusing, cause you might remember that we talked about the fact that the food has a $7000 limit, her employees. So in essence, we're gonna be paying food attacks up to $7000 per employee, which pretty much all employees will will hit that if they've been employed for the entire year. Unless we hired them in, like, December or something or, you know, the last quarter, then they're probably gonna be paid 7000 orm or and so we're gonna have to pay food A for each employee for around 7000. Typically. Now, we've already calculated that probably when we did our when we did our calculations in the register to see what our payroll wages are for food or food, A payroll taxes. But the way we're reporting it here is we're gonna have to say that Here's our our payments to all employees. Basically what we paid and then any exempt payments we have, as well as the total of payments made to each point in excess of 7000. So we're gonna have, in other words, to have total payments and minus everything paid over the 7000 to get Teoh the number that we basically are gonna be using to calculate FOTA which we which we probably already have, which is, which is the, um, line six here, the sub total. That's kind of like a business kind of like our food toe wages that will have to make the calculation on, and that will be here. And then we're gonna apply the fruit attacks before adjustments is going to be the 0.6 It will take line seven food of taxes, times 70.6 that's 6%. And that, in essence, is going to be our food a tax. Now, if we go down to part three, we're talking about that as types of situations where the food of wages are you paid were excluded from the state unemployment tax and that's a case. Well, if you didn't pay state unemployment, you're not gonna get the 6% or you're going to get that higher rate and you're not gonna get that exemption. You have to add back in. You know that that that higher percentage for the federal percentage. So if that's applicable, we'd have to fill that part in here for any exempt wages from state taxes and pay the higher food to attacks once again similar to the 9 41 We would then have our our tax liability that we would calculate. Here, this is is a basically a recalculation of the tax liability because we've already calculated it and paid it. And this is going to re calculate it on a summary basis, meaning we're taking it and kind of as a whole and applying the tax rate, which should work because it's ah, it's ah, flat tax. So even though we calculated it as we wind on each individual wages on each individual pay period, it will still work out if we take the total the total wages that are food wages, times that the same rate. So we're gonna report that there and then we're going to report the food attacks. Ah, deposits that we have made. So we're gonna do the comparison and we're not gonna pay the food attacks now. We've already been paying it. The government wants their payments as the paychecks are being received. As we take the money from our we're not withholding money in this case, but as, ah, it big. As employees earn money, they want to be paid their food attacks in relation to the employees earning money throughout the year. So we've already made the payments and we're gonna report this So this form is just a reporting form. In other words, it's not a form to calculate how much tax well, and then write a check. Typically, if we do, we'll probably owe interest in penalties on it if we're paying for pain right now. So line 12 and 13 should be the same. If they're not, then we're gonna have to owe money or we're going to get a refund on it. But if we did it correctly, then they should tie out. Unlike like a 10 40 which is impossible to do that the payroll taxes typically is possible because the flat tax. So we should have paid pretty much exactly exactly what the taxes, and we should be able to just report it now and say, Here's a recalculation A recap of how much we owe for photo. Here's a recap of the deposits that we've already made. You can go ahead and verify that those deposits are made on your side of things, and just that will be the summary report for food.