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(Payroll Tax Entries) The following is a payroll sheet for Otis Import Company for the month of September 2017. The company is allowed a 1% unemployment compensation rate by the state; the federal unemployment tax rate is 0.8% and the maximum for both is \(7,000. Assume a 10% federal income tax rate for all employees and a 7.65% FICA tax on employee and employer on a maximum of \)118,500. In addition, 1.45% is charged both employer and employee for an employee’s wages in excess of \(118,500 per employee.

Name	Earnings to Aug. 31	September earnings	Income tax Withholdings	FICA	Unemployment tax
State	Federal
B.D. Williams	\)6,800	$800
D. Raye	6,500	700
K. Baker	7,600	1,100
F. Lopez	13,600	1,900
A. Daniels	107,000	13,000
B. Kingston	112,000	16,000

Instructions

(a) Complete the payroll sheet and make the necessary entry to record the payment of the payroll.

(b) Make the entry to record the payroll tax expenses of Otis Import Company.

(c) Make the entry to record the payment of the payroll liabilities created. Assume that the company pays all payroll liabilities at the end of each month.

Step by step solution

01

Definition of Payroll Taxes

Payroll taxes can be defined as all those taxes that a business entity withheld from the salaries of its employees. The employer then pays such taxes to the government of behalf of its employees.

02

Payroll sheet

Name	Earnings to Aug. 31	September earnings	Income tax Withholdings	FICA (7.65)	Unemployment tax
State	Federal
B.D. Williams	$6,800	$800	$80	$61.2	$2(WN 3)	$1.6(WN 4)
D. Raye	6,500	700	70	53.55	5(WN 5)	4(WN 6)
K. Baker	7,600	1,100	110	84.15
F. Lopez	13,600	1,900	190	145.35
A. Daniels	107,000	13,000	1,300	901.50 (WN 1)
B. Kingston	112,000	16,000	1,600	635(WN 2)
Total	$253,500	$33,500	$3,350	$1,880.75	$7	$5.6

Date	Accounts and Explanation	Debit $	Credit $
	Salaries and wages expenses	$33,500
	Withholding taxes payable		$3,350
	FICA taxes payable		$1,880.75
	Cash		$28,269.25

Working note:

1. $\left[\left(11,500×7.65\%\right)+\left(1,500×1.45\%\right)\right]$
2. $\left[\left(6,500×7.65\%\right)+\left(9,500×1.45\%\right)\right]$
3. $\left[\left(\$7,000-\$6,800\right)×1\%\right]$
4. role="math" localid="1660197368684" $\left[\left(\$7,000-\$6,800\right)×0.8\%\right]$
5. $\left[\left(\$7,000-\$6,500\right)×1\%\right]$
6. $\left[\left(\$7,000-\$6,500\right)×0.8\%\right]$

03

Journal entry to record the payroll tax expenses

Date	Accounts and Explanation	Debit $	Credit $
	Payroll tax expenses	$1,893.35
	FICA taxes payable		$1,880.75
	FUTA taxes payable		$5.6
	SUTA taxes payable		$7

04

Journal entry for payment of payroll liabilities

Date	Accounts and Explanation	Debit $	Credit $
	Withholding taxes payable	$3,350
	FICA taxes payable $\left(\$1,880.75×2\right)$	$3,761.50
	FUTA taxes payable	$5.6
	SUTA taxes payable	$7
	Cash		$7,124.10

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