Employee Related Liabilities:

See pages 666-670 in your text.

Employers are required to withhold from their employees wages amounts due for federal, state,
Social Security and Medicare taxes. Most employers also withhold for insurance and if applicable union
dues. Employers are required to pay in the amounts withheld to the appropriate tax authorities, which
for federal, social security and medicare, is the federal government. The state amounts withheld are
sent to the appropriate state governments.
The actual amounts withheld represent current liabilities to the employer as they are obligated to pay
those to the appropriate authorities. They are not expenses.

Employers do however have three main payroll tax related expenses. They are:

Matching of employee social security/medicare ( FICA)

Federal unemployment tax (FUTA)

State unemployment tax. (SUTA)

Your text explains that the Federal unemployment insurance/tax rate is 6% of employee wages up to
$7,000. However you are allowed a credit of up to 5.4% if your state unemployment rate is that high.
Companies state unemployment rates are based on the amount of unemployment claims their
employees file. It works like your car insurance the better your driving record and no claims, the lower
your premiums.

Occasionally states run out of money for unemployment claims and need assistance from the federal
government, it is for that reason that companies also pay federal unemployment tax to provide for
these funds.

Companies pay a combined rate of 6.2+ 1.45 = 7.65%for social security and medicare. This amount is
both withheld from employees and also paid by the company up to the first $118,500 of your wages. In
addition another 1.45% is charged on wages in excess of $118,500. So literally every $1.00 withheld for
these amounts by your employer is “matched” by the employer.

It is expensive to have employees, which is why some employers try to pay young people “off the books”
or in cash. Just remember employers save themselves up to 13.65% on payroll taxes in addition to not
covering these workers for any type of insurance.

Vacation and sick days are typically offered by employers. GAAP requires that companies should
recognize the expense and related liability for these compensated absences in the year earned by
employees. The exception is for sick pay. If sick pay accumulates but does not vest, AND you will NOT
receive payment for these unused sick days if you are fired or quit/retire from the company then do not
accrue them. If however you “vest” in sick days and when you leave the company you will receive pay
for unused sick days than yes, accrue and expense them as they are earned.
Homework Assignment #1

Due Wednesday, January 10th, please complete the following problems on employee related liabilities.

Please submit a copy of the problem and the answer. Please use either word or excel to do the work.

Please submit it printed, stapled and with your name on it. It is worth 5 points.

Problem #1: (see EX 13-7 for guidance)

Tower Company’s payroll for September 2017 is summarized as follows:

Unemployment Tax

Payroll Wages Due FICA Federal State

Factory $160,000 $160,000 $50,000 $50,000

Sales $ 80,000 80,000 10,000 10,000

Administrative $ 200,000 200,000 --------- -----------

Total $ 440,000 $440,000 $ 60,000 $60,000

At this point in the year, some employees have already received wages in excess of those to which
payroll taxes apply. Assume that the state unemployment tax is 3%. The FICA rate is 7.65% on an
employee’s wages to $118,500 and 1.45% in excess of $118,500. Of the $440,000 wages subject to FICA
tax, $50,000 of the administrative wages is in excess of $118,500. Federal unemployment tax rate is .8%
after credits. In addition to FICA and Medicare withheld, Income tax withheld from employee wages
were as follows:

Department Federal withholding State withholding

Factory $32,000 $ 8,000

Sales $16,000 $ 4,000

Administrative $ 40,000 $ 10,000

Required:

1. Prepare a schedule showing the employer’s total cost of wages for September by function.
Round all computations to the nearest dollar.
2. Prepare the journal entries to record the factory, sales and administrative payrolls including the
employer’s payroll taxes as of September 30, 2017.
Problem #2 (see Ex13-3 for guidance)

Casey Company began operations on January 2, 2017. It employs 11 people who work 8 hour days and
are paid hourly. Each employee earns 8 paid vacation days and 5 paid sick days annually. Vacation days
may be taken after January 15 of the year following the year in which they are earned. Sick days may be
taken as soon as they are earned, unused sick days accumulate and are considered vested. Additional
information is as follows:

Actual Hourly Vacations Days Used Sick Days Used

Wage Rate by Each Employee by Each Employee

2017 2018 2017 2018 2017 2018

$11 $12 0 5 3 4

Casey Company has chosen to accrue the cost of compensated absences at rates of pay in effect during
the period when earned and to accrue sick pay when earned.

Required:

1. Prepare journal entries to record transactions related to compensated absences during 2017
and 2018.
2. Compute the amounts of any liability for compensated absences that should be reported on the
balance sheet at December 31, 2017 and 2018.