Tag Archives | income tax

Payroll Accounting

See also:
Commission Accounting
PEO Arrangement Compared to Outsourcing Payroll
Direct Labor
Pension Plans
Federal Unemployment Tax Act (FUTA)
Outsourced Accounting Services

Payroll Accounting

Payroll Accounting is the function of calculating and distributing wages, salaries, and withholdings to employees and certain agencies. It is generally done through different documents such as time sheets, paychecks, and a payroll ledger. Payroll Accounting also involves the process of issuing reports to upper management, so that they are able to make informed decisions about the company’s labor-cost data.

Payroll Accounts

Below are some payroll basic accounts that are used in association with accounting payroll entries as well as a description of each one and the relevance towards payroll.

Assets

Cash is the petty cash account which is used to empty the accrued payroll account when the payroll is distributed to the company’s employees.

Liabilities

Accrued Payroll represents a liability calculated by taking the gross pay and subtracting all deductions, or the amount that is due to the employees.

Federal Income Taxes Withheld

This account serves as a deduction from the gross pay or payroll account. It is an accumulation of payroll taxes as a percentage amount which is due to the U.S. Government. Payroll tax rates differ from business to business.

Federal Insurance Contributions Act (FICA) Taxes Payable

The FICA Taxes Payable represents a liability that is due to the U.S. Government. It is then used to fund institutions like Medicare and the Social Security Administration.

Insurance Withheld

Insurance withheld is another deduction from the gross pay and represents a contribution to the employee’s insurance provided by the employer.

Note: Other voluntary payroll deductions and withholdings can be present like bond or stock withholdings that a company would use for investments on the employee’s behalf. Other deductions include union dues or pension funds that the company may hold for its employees.

Expenses

The payroll account is the gross pay that is calculated by a payroll accountant (i.e. the salary payment or the hourly rate times the number of hours worked).

Payroll Accounting Journal Entries

This is a typical accounting payroll example of journal entries when a company is calculating and distributing the payroll.

Account                           Dr.               Cr.

Calculation:
Payroll                           xxxx

Federal Income Taxes Withheld                       xxxx

FICA Taxes Payable                                  xxxx

Union Dues Withheld                                 xxxx

Bond Withholdings                                   xxxx

Accrued Payroll                                     xxxx
Distribution:
Accrued Payroll                   xxxx
Cash                                                xxxx

Payroll Accountant Duties

Oftentimes, companies outsource their payroll accounting to specialized firms. These firms can perform the same function for a much lower cost than if the company generated them in-house.


Click here to download: The Guide to Outsourcing Your Bookkeeping & Accounting for SMBs


There are six major job functions that the payroll department or specialized company must perform throughout the year, including the following:

1)  Compute gross pay (hourly or salary)

2)  Compute the total amount of deductions (FICA, taxes, etc.)

3)  Calculate the total amount due to employees i.e. the gross pay minus the amount of deductions.

4)  Authorize the amount of payments due to employees.

5)  Distribute the payroll once authorized.

6)  Issue reports to upper management concerning labor-cost data.

Accounting Payroll System

In the past, accounting payroll systems consisted of two journals. The first is the payroll journal. Then, the second is the payroll disbursements journal. Companies used the payroll journal to accrue for salaries and wages towards employees as well as government obligations withheld from the employee’s paycheck. Thus, companies used disbursements journal to pay off these accumulated accruals when they became due.

But thanks to computer systems like Peachtree and Quickbooks, they have combined both of these journals into a payroll ledger. Furthermore, you can outsource these payroll functions at a lower cost and efficiency for a company.

Guide to Outsourcing Your Business's Bookkeeping and Accounting


Payroll Accounting

Originally posted by Jim Wilkinson on July 24, 2013. 

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Special Tax Bond

Special Tax Bond Definition

A Special Tax Bond is a bond, usually issued by a government entity. It uses a particular tax to pay off creditors.

Special Tax Bond Meaning

Local governments like cities or states normally use special tax bonds. A government entity will use a special tax bond for city or state management. Tax bond payments are usually imposed on the general population through a property tax or special income tax. This depends on the city or state. Once these payments are collected, they are sent off to creditors who provided funding for the particular job.

Special Tax Bond Example

For example, Middleland decided that it would like to build a large park in the middle of the city. Middleland thus decided to issue special tax bonds to gain financing for the project. They used the financing to accomplish the following:

  • Tear down older junky houses
  • Plant grass in the cleared out area
  • Build a running track as well as a new playground

As the land is being developed, Middleland imposes a special tax on the population in the form of extra property taxes. Once the city makes these collections, they are then sent to creditors to make coupon payments as well as principal when the project is all finished.

special tax bond

See Also:
Ad Valorem Tax
Direct Tax
Marginal Tax Rate
What is a Bond?
Coupon Rate Bond

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S Corporation vs C Corporation

See Also:
S Corporation
C Corporation
Limited Liability Company (LLC)

S Corporation vs C Corporation

Although these two entities are very similar, there has always been a debate between an S corporation vs C corporation. The S corporation vs C corporation debate has been ongoing for a while. The following are some major differences that exist which may help an entity choose the proper class of corporation.

Double Taxation

In a C corporation, the entity is forced to pay Federal Income Taxes at the entity level and again at the individual level when it distributes dividends to its shareholders. This double taxation is a huge disadvantage to the C corporation. It acts as a flow through entity much like a partnership. Each individual is only taxed on their earnings from the s corp at the individual level on schedule E of the IRS form 1040.

# of Shareholders

An S corporation can only have 100 shareholders total. This is good if it is a smaller company. However, for larger companies, this is simply not possible because of the amount of cash flow needed to finance a larger corporation. Consider all family members within the S corporation as only one shareholder. This means that there is a way in which there could be more than 100 shareholders. It also means that S corporation holders can increase their interest in the business without losing the status of an S corp.

Forms of Stock

C corps can issue several different forms of stock to obtain financing for its operations. In comparison, an S corporation can only have one class of stock. The C corporation’s advantage is that it has the ability to issue preferred shares or other classes depending on its needs.

Type of Company

You can form S corps only after you set a company as a C corp or a Limited Liability Company (LLC). This is a disadvantage for entities that would like the S corporation status (i.e. partnerships because of the similarities between the two).

Note: This is by no means all of the S corporation and C corporation differences. However, our list includes some of the main ones that influence a company to go one way or another.


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Nexus Overview

Nexus Overview

“Nexus” is a connection between a state and a taxpayer, sufficient enough to allow the state to subject the taxpayer to its taxing jurisdiction and require the taxpayer to file tax returns and pay taxes.

The concept is fairly straight forward, and easily understood, by companies doing business solely within the boundaries of their home state. But for companies engaged in interstate commerce, the determination of nexus becomes a more critical component in taxation matters. Certain activities can trigger nexus for both sales/use tax and income tax compliance, thus requiring an out-of-state vendor to register, report, and remit the appropriate tax to a state where nexus has been determined to exist.

Business Activities That Create Nexus

Typical business activities that create either sales tax or franchise tax nexus include, but are not limited to:

Sellers often fail to register and comply with a state’s taxing requirements due to the mistaken belief that activities of a division and or sub-contractors do not create nexus, that product displayed or available for sell on a consignment basis does not create nexus or that salesmen calling on customers for orders accepted out-of-state does not create nexus. In reality all of these activities do, in fact, create nexus.

The virtual markets and the internet have expanded the proliferation of nexus questions traditionally brought forth by mail-order activity. An understanding of nexus and proactive state tax planning, prior to business expansion into other states, may eliminate burdensome filing requirements and costly penalties and interest for failure to comply.

Nexus Overview

See Also:
Managed Sales and Use Tax Programs
Audit Committee
Carried Interests
Net Sales
Market Positioning

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Internal Revenue Service (IRS)

See Also:
Cash Flow After Tax
Deferred Income Tax
Ad Valorem Tax
Tax Brackets
Tax Efficiency

Internal Revenue Service (IRS) Definition

The Internal Revenue Service or IRS for short is a government agency underneath the Department of Treasury. Furthermore, it is primarily responsible for administration and collections of federal income taxes.

Internal Revenue Service (IRS) Meaning

President Abraham Lincoln created the Internal Revenue Service during the Civil War and Reconstruction period to fund the war effort. Since then, the agency has been primarily responsible for funding the U.S. Government operations and services. The IRS is responsible for not only collecting from individuals and businesses, but also preparation and distribution of IRS forms. It is also responsible for conducting audits of individuals or businesses to ensure accuracy and that fraudulent activity has not occurred. A commissioner, known as the Commissioner of Internal Revenue, runs the IRS. Furthermore, the President fills this is a position. Like the Securities and Exchange Commission (SEC) the commissioner cannot be fired once appointed. This job security allows the commissioner to perform what is necessary without having to worry about getting fired.

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Internal Revenue Service

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Internal Revenue Service

 

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Gross Up

See Also:
Adjusted Gross Income Definition
Gross Profit Margin Ratio Analysis
PEO Arrangement Compared to Outsourcing Payroll
Payroll Accounting
Purchase Option

Gross Up Definition

Defined as paying a full amount without any deductions, gross up is most often used in terms of salary for employees.

Gross Up Explanation

Gross up, explained as a method for human resources to gain the benefit of their wages as soon as possible, is more simple than it appears. When salary is grossed up it is paid fully without any deductions that are not required, like 401k payments. This allows the employee to begin using their entire income as soon as possible. Though gross up wages are paid in full, deductions required by the government still occur. An employee will not be able to avoid income tax when they gross up; taxes will still need to be paid before the final amount is then given to the worker.

Other payments can also receive the gross up calculation. For example, a payment for the purchase of a business can be grossed up. In this case, the receiving party will take their full amount of payment rather than having to wait some time for completion. This allows the previous owner more freedom than if some of the payment is withheld. Gross up operating expenses and other payments occur, as well.

Example

Stella works for a financial services company. Stella, an investment advisor, has a keen sense for prudent investments. Through her years of experience she has earned this skill as well as the art of negotiation. Both of these abilities have worked to her advantage.

Stella is interviewing for a new job. The employer knows that Stella is well suited for the work. Stella also knows this. The interview runs smoothly as Stella continues providing answers.

When it comes time to negotiate salary Stella prepares her words. She begins with the salary she deserves, which it appears her employer is ready to accept. Then Stella brings up the option of her receiving a gross up paycheck, calculator in hand, with some figures. She shows the interviewer how she can make more income while saving the company money. Her explanation is simple; she can invest her wages and receive greater gain in the long run if she is fully paid now. On the other hand, the company will only feel a slight decrease in cash holdings from this. Stella’s resume and years of experience give backing to her claims, that she can be trusted, and the validity of her gross up formula calculation.

Stella completes her argument and is granted a gross up salary. She is satisfied that she has created a good situation for her and her company. She leaves the office with a smile on her face.

gross up

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Deferred Income Tax

See Also:
Marginal Tax Rate
Prepaid Income Tax
Flat Tax Rates
Tax Brackets
Deferred Revenue
Cash Flow After Tax

Deferred Income Tax Definition

In accounting, the deferred income tax definition is a liability listed on the balance sheet. It represents an obligation to pay taxes.

Deferred Tax Asset and Liability

Most large corporations prepare two sets of financial records – one set for investors and one set for tax authorities. Prepare the set of financial records intended for investors according to GAAP standards. Furthermore, it is meant to accurately portray the company’s financial performance and condition. Then prepare the set of financial records intended for tax authorities according to IRS tax laws. As a result, it is meant to minimize the taxes the company has to pay.

Sometimes, the two sets of financial records differ in terms of taxes. This can result in the company paying taxes not been incurred according to the GAAP records. This creates a deferred tax asset on the balance sheet in the GAAP records called prepaid income tax. Or it can result in the company incurring taxes according to the GAAP records that don’t yet have to be paid according to the IRS records. This creates a tax liability on the balance sheet in the GAAP records called deferred income tax. Differences in the timing of the recognition of expenses and revenues typically causes these discrepancies. Or the usage of differing methods of depreciating assets in the two sets of financial records causes these discrepancies.

When the company pays income taxes before recognizing the need to pay those income taxes, record the amount paid as an asset on the balance sheet. This is because it represents a future benefit to the company. Call the asset account prepaid taxes. When the company recognizes the need to pay income taxes before those income taxes are actually paid, record the amount as a liability on the balance sheet. Why? Because it represents a future obligation of the company. Call the liability account deferred income tax.


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Deferred Income Tax Example

For example, if a corporation prepares two sets of financial statements and uses different accounting techniques in each set of documents, then the tax records may end up showing different amounts. Let’s say the ABC Company prepared one set of financial statements for the IRS. It shows a tax expense of $150,000.

During that same fiscal period, the set of financial statements the company prepared for investors shows the company owes taxes of $200,000. The difference of $50,000 has not yet been paid because according to the IRS financial statements, it is not owed yet. The $50,000 represents taxes owed according to the GAAP financial statements. In conclusion, this amount indicates an obligation to pay income taxes in the future.

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