Math / Numbers & Operations

QuestionAssume an employee of Rocco Rock Company earns $\$ 1,900$ of gross wages during the current pay period and is required to remit to the government $\$ 190$ for income tax and $\$ 95$ for FICA. Consider the following two procedures for paying the employee: \begin{tabular}{ll} \multicolumn{1}{c}{ Procedure 1 (Withholdings) } & \multicolumn{1}{c}{ Procedure 2 (No Withholdings) } \\ Rocco Rock Company pays the employee net & Rocco Rock Company pays the employee gross \\ wages of $\$ 1,615$ and will remit income taxes & wages of $\$ 1,900$ and the employee is \\ and FICA on behalf of the employee. & responsible for remitting income taxes and \\ & FICA. \end{tabular}
Required:
1. Ignoring employer payroll taxes, under each procedure calculate: a. the total amount to be paid by the company and b. the amount of cash the employee will have after satisfying all responsibilities to the government. Do your answers for procedures 1 and 2 differ for (a)? For (b)?
2. Which approach does the government require?
3. Considering that employers are responsible for matching employees' FICA contributions, which procedure will employers prefer?
4. Prepare the journal entries required by the employer under procedure 1, assuming the employee is paid in cash, but the withholdings and matching employer FICA contribution have not yet been paid. (Do not ignore employer payroll taxes, but assume no unemployment taxes.)

Studdy Solution

STEP 1

What is this asking? We need to figure out how much money the company pays and how much the employee takes home under two different payment methods, and then decide which method the government likes and which one the company prefers.
We also need to record the transaction from the company's perspective. Watch out! Don't mix up who pays what to whom.
Also, remember that the employer has to match the employee's FICA contribution.

STEP 2

1. Calculate Payments and Take-Home Pay
2. Determine Government Requirement
3. Determine Employer Preference
4. Prepare Journal Entries

STEP 3

With procedure 1, the company pays the employee their net wages directly.
The net wages are calculated by subtracting the income tax and FICA from the gross wages.
So, the company pays $\$1900 - \$190 - \$95 = \$1615$ .
The company payment is $\$\mathbf{1615}$ .

STEP 4

Since the company already took out the taxes, the employee takes home the full $\$\mathbf{1615}$ .

STEP 5

With procedure 2, the company pays the full gross wage amount of $\$\mathbf{1900}$ .

STEP 6

The employee receives $\$1900$ but then has to pay $\$190$ for income tax and $\$95$ for FICA.
So, they take home $\$1900 - \$190 - \$95 = \$1615$ .
Their take-home pay is $\$\mathbf{1615}$ .

STEP 7

The government requires employers to withhold taxes (Procedure 1).
This ensures taxes are collected and remitted reliably.

STEP 8

The employer has to match the employee's FICA contribution of $\$95$ .

STEP 9

Under Procedure 1, the company pays $\$1615$ in net wages and $\$95$ in matching FICA, totaling $\$1615 + \$95 = \$1710$ .
Under Procedure 2, the company pays $\$1900$ in gross wages and $\$95$ in matching FICA, totaling $\$1900 + \$95 = \$1995$ .

STEP 10

Employers prefer Procedure 1 because their total cost is lower.
They pay less upfront and remit the taxes later.

STEP 11

We debit Salaries Expense for the gross wages of $\$1900$ .

STEP 12

We credit Income Tax Payable for the $\$190$ withheld for income tax.

STEP 13

We credit FICA Payable for the employee's $\$95$ FICA contribution and the employer's matching $\$95$ FICA contribution, totaling $\$95 + \$95 = \$190$ .

STEP 14

We credit Cash for the net payment to the employee, which is $\$1615$ .

STEP 15

$\begin{array}{ll} \text{Salaries Expense} & \$1900 \\ \text{Income Tax Payable} & \$190 \\ \text{FICA Payable} & \$190 \\ \text{Cash} & \$1615 \end{array}$

STEP 16

1. a) Procedure 1: Company pays $\$1615$ ; Procedure 2: Company pays $\$1900$ .
The amounts differ. b) In both procedures, the employee takes home $\$1615$ .
The amounts are the same.
2. The government requires Procedure 1 (withholdings).
3. Employers prefer Procedure 1 due to lower upfront costs.
4. The journal entry is shown in step 2.4.5.

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Studdy Solution

STEP 1

STEP 2

1. Calculate Payments and Take-Home Pay
2. Determine Government Requirement
3. Determine Employer Preference
4. Prepare Journal Entries

STEP 3

With procedure 1, the company pays the employee their net wages directly.
The net wages are calculated by subtracting the income tax and FICA from the gross wages.
So, the company pays $\$1900 - \$190 - \$95 = \$1615$ .
The company payment is $\$\mathbf{1615}$ .

STEP 4

Since the company already took out the taxes, the employee takes home the full $\$\mathbf{1615}$ .

STEP 5

With procedure 2, the company pays the full gross wage amount of $\$\mathbf{1900}$ .

STEP 6

The employee receives $\$1900$ but then has to pay $\$190$ for income tax and $\$95$ for FICA.
So, they take home $\$1900 - \$190 - \$95 = \$1615$ .
Their take-home pay is $\$\mathbf{1615}$ .

STEP 7

The government requires employers to withhold taxes (Procedure 1).
This ensures taxes are collected and remitted reliably.

STEP 8

The employer has to match the employee's FICA contribution of $\$95$ .

STEP 9

Under Procedure 1, the company pays $\$1615$ in net wages and $\$95$ in matching FICA, totaling $\$1615 + \$95 = \$1710$ .
Under Procedure 2, the company pays $\$1900$ in gross wages and $\$95$ in matching FICA, totaling $\$1900 + \$95 = \$1995$ .

STEP 10

Employers prefer Procedure 1 because their total cost is lower.
They pay less upfront and remit the taxes later.

STEP 11

We debit Salaries Expense for the gross wages of $\$1900$ .

STEP 12

We credit Income Tax Payable for the $\$190$ withheld for income tax.

STEP 13

We credit FICA Payable for the employee's $\$95$ FICA contribution and the employer's matching $\$95$ FICA contribution, totaling $\$95 + \$95 = \$190$ .

STEP 14

We credit Cash for the net payment to the employee, which is $\$1615$ .

STEP 15

$\begin{array}{ll} \text{Salaries Expense} & \$1900 \\ \text{Income Tax Payable} & \$190 \\ \text{FICA Payable} & \$190 \\ \text{Cash} & \$1615 \end{array}$

STEP 16

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Studdy Solution

STEP 1

STEP 2

1. Calculate Payments and Take-Home Pay2. Determine Government Requirement3. Determine Employer Preference4. Prepare Journal Entries

STEP 3

STEP 4

Since the company already took out the taxes, the employee takes home the full $1615\$\mathbf{1615}$1615.

STEP 5

With procedure 2, the company pays the full gross wage amount of $1900\$\mathbf{1900}$1900.

STEP 6

The employee receives $1900\$1900$1900 but then has to pay $190\$190$190 for income tax and $95\$95$95 for FICA.So, they take home $1900−$190−$95=$1615\$1900 - \$190 - \$95 = \$1615$1900−$190−$95=$1615.Their **take-home pay** is $1615\$\mathbf{1615}$1615.

STEP 7

The government requires employers to withhold taxes (Procedure 1).This ensures taxes are collected and remitted reliably.

STEP 8

The employer has to match the employee's FICA contribution of $95\$95$95.

STEP 9

STEP 10

Employers prefer Procedure 1 because their total cost is lower.They pay less upfront and remit the taxes later.

STEP 11

We debit Salaries Expense for the gross wages of $1900\$1900$1900.

STEP 12

We credit Income Tax Payable for the $190\$190$190 withheld for income tax.

STEP 13

We credit FICA Payable for the employee's $95\$95$95 FICA contribution and the employer's matching $95\$95$95 FICA contribution, totaling $95+$95=$190\$95 + \$95 = \$190$95+$95=$190.

STEP 14

We credit Cash for the net payment to the employee, which is $1615\$1615$1615.

STEP 15

Salaries Expense$1900Income Tax Payable$190FICA Payable$190Cash$1615\begin{array}{ll} \text{Salaries Expense} & \$1900 \\ \text{Income Tax Payable} & \$190 \\ \text{FICA Payable} & \$190 \\ \text{Cash} & \$1615 \end{array}Salaries ExpenseIncome Tax PayableFICA PayableCash​$1900$190$190$1615​

STEP 16

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1. Calculate Payments and Take-Home Pay
2. Determine Government Requirement
3. Determine Employer Preference
4. Prepare Journal Entries

Since the company already took out the taxes, the employee takes home the full $\$\mathbf{1615}$ .

With procedure 2, the company pays the full gross wage amount of $\$\mathbf{1900}$ .

The employee receives $\$1900$ but then has to pay $\$190$ for income tax and $\$95$ for FICA.
So, they take home $\$1900 - \$190 - \$95 = \$1615$ .
Their take-home pay is $\$\mathbf{1615}$ .

The government requires employers to withhold taxes (Procedure 1).
This ensures taxes are collected and remitted reliably.

The employer has to match the employee's FICA contribution of $\$95$ .

Employers prefer Procedure 1 because their total cost is lower.
They pay less upfront and remit the taxes later.

We debit Salaries Expense for the gross wages of $\$1900$ .

We credit Income Tax Payable for the $\$190$ withheld for income tax.

We credit FICA Payable for the employee's $\$95$ FICA contribution and the employer's matching $\$95$ FICA contribution, totaling $\$95 + \$95 = \$190$ .

We credit Cash for the net payment to the employee, which is $\$1615$ .

$\begin{array}{ll} \text{Salaries Expense} & \$1900 \\ \text{Income Tax Payable} & \$190 \\ \text{FICA Payable} & \$190 \\ \text{Cash} & \$1615 \end{array}$