To start, let's place the total salary expense into the Salaries Expense account! (Why? Because salaries are a cost of operating the business, therefore they're an expense!)
We just determined the total salary expense was $6,000...
Total Salary Expense = # of Employees x Hours per Week x Hourly Rate
Total Salary Expense = 10 x 40 x $15
Total Salary Expense = $6,000
...therefore, we'll debit the Salaries Expense account, as we're incurring an expense by paying our employees (and expenses have a normal debit balance)!
From here, we must determine how much of this $6,000 is going out to employees vs. being paid to the government as the employer's tax burden!
Remember: Federal & State Income Taxes and FICA Taxes are the employer's tax burden...
...therefore, we've gotta determine how much we'll be paying towards those out of our $6,000 total salary expense!
We're able to obtain the following tax rates for Federal & State Income Taxes and FICA Taxes...
Question: Your lemonade stand has 10 employees that work 40 hours a week and make $15 per hour. Federal income tax is 15%, state income tax is 5%, FICA taxes are 7.65%, and unemployment is 6.2%. Record the total salaries expense.
- Federal Income Tax = 15% x ???
- State Income Tax = 5% x ???
- FICA Tax = 7.65% x ???
...which need to be multiplied by our total salary expense...
- Federal Income Tax = 15% x $6,000
- State Income Tax = 5% x $6,000
- FICA Tax = 7.65% x $6,000
...to determine our tax amounts!
- Federal Income Tax = 15% x $6,000 = $900
- State Income Tax = 5% x $6,000 = $300
- FICA Tax = 7.65% x $6,000 = $459
From here, what accounts will we place these tax amounts into?
Something critical to understand here is: we owe the government these tax amounts. And whenever we owe something, it represents a liability. Therefore, we're going to store these tax amounts in liability accounts! Specifically... Income Tax Payable & FICA Tax Payable!
Let's start with Income Tax Payable. We have a total of $1,200 owed in income tax...
- Federal Income Tax = 15% x $6,000 = $900
- State Income Tax = 5% x $6,000 = $300
- FICA Tax = 7.65% x $6,000 = $459
...therefore, we'll credit Income Tax Payable by $1,200, since we're increasing the amount we owe to the government in income taxes (and liabilities have a normal credit balance)!
Concerning FICA Tax Payable, we owe $459...
- Federal Income Tax = 15% x $6,000 = $900
- State Income Tax = 5% x $6,000 = $300
- FICA Tax = 7.65% x $6,000 = $459
...therefore, we'll credit FICA Tax Payable by $459, since we're increasing the amount we owe the government in FICA taxes (and liabilities have a normal credit balance)!
Alright, so we've determined we're paying a total of $1,200 + $459 = $1,659 in taxes...
...meaning that we have $6,000 - $1,659 = $4,341 left over for payout of salaries to our employees!
We owe this amount to our employees, therefore we'll record it as a liability, specifically to the Salaries Payable account! Since we're increasing the amount we owe, we'll credit Salaries Payable by $4,341!
