Payroll Accounting: Wages, Taxes, and Net Pay
Practice recording complete payroll entries including gross wages, employee withholdings, employer taxes (FICA, FUTA, SUTA), and the payment of net wages.
Problem Scenario
Hotel Corp's payroll for the week ending January 12 includes: Gross wages $25,000. Employee withholdings: Federal Income Tax $3,750; State Income Tax $1,250; Social Security (6.2%) $1,550; Medicare (1.45%) $362.50; Health Insurance Contribution $500. Employer obligations: Match FICA, FUTA at 0.6% ($150), SUTA at 5.4% ($1,350), Employer health insurance contribution $1,500.
Given Data
Requirements
- Calculate employee net pay
- Record the payroll entry for employee wages and withholdings
- Calculate total employer payroll tax expense
- Record the employer payroll tax and benefits entry
- Determine total payroll cost to the company
Solution
Step 1:
Calculate Net Pay: Gross Wages $25,000 - Federal Tax $3,750 - State Tax $1,250 - Social Security $1,550 - Medicare $362.50 - Health Insurance $500 = Net Pay $17,587.50
Step 2:
Record payroll: Debit Salaries Expense for gross amount, credit each withholding payable and Salaries Payable for net pay.
| Account | Debit | Credit |
|---|---|---|
| Salaries and Wages Expense | $25,000.00 | |
| Federal Income Tax Payable | $3,750.00 | |
| State Income Tax Payable | $1,250.00 | |
| Social Security Tax Payable | $1,550.00 | |
| Medicare Tax Payable | $362.50 | |
| Health Insurance Payable | $500.00 | |
| Salaries and Wages Payable | $17,587.50 |
Step 3:
Employer taxes and benefits: FICA match ($1,550 + $362.50) + FUTA ($150) + SUTA ($1,350) = $3,412.50 in payroll taxes. Plus employer health insurance $1,500.
| Account | Debit | Credit |
|---|---|---|
| Payroll Tax Expense | $3,412.50 | |
| Employee Benefits Expense | $1,500.00 | |
| Social Security Tax Payable | $1,550.00 | |
| Medicare Tax Payable | $362.50 | |
| FUTA Payable | $150.00 | |
| SUTA Payable | $1,350.00 | |
| Health Insurance Payable | $1,500.00 |
Final Answer
Employee Net Pay: $17,587.50. Total Employer Payroll Tax: $3,412.50. Employer Benefits: $1,500. Total payroll cost to the company: $25,000 + $3,412.50 + $1,500 = $29,912.50.
Key Takeaways
- ✓The employee bears withholding taxes (they reduce net pay) but the employer remits them
- ✓The employer matches Social Security and Medicare (FICA) — this is an additional cost above gross wages
- ✓FUTA and SUTA are employer-only taxes, not withheld from employees
- ✓Total payroll cost exceeds gross wages by the amount of employer taxes and benefits
- ✓Health insurance costs are split: employee contribution reduces net pay, employer contribution is a separate expense
Common Errors to Avoid
- ✗Recording net pay as the salary expense instead of gross wages
- ✗Forgetting the employer FICA match as a separate entry
- ✗Double-counting employee health insurance (it reduces pay AND is a separate expense — no, only the employer portion is a separate expense)
- ✗Not distinguishing between employee withholdings (come from gross pay) and employer taxes (additional cost)
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Common questions about this problem type
Employee withholdings: $3,750 + $1,250 + $1,550 + $362.50 = $6,912.50. Employer taxes: $1,550 + $362.50 + $150 + $1,350 = $3,412.50. Combined: $10,325. Plus combined health insurance: $2,000. All payable amounts remain as liabilities until remitted.
Federal income tax and FICA are typically deposited semi-weekly or monthly based on the total liability amount. FUTA is deposited quarterly if the liability exceeds $500. SUTA schedules vary by state. Timely deposit is critical to avoid penalties.