Payroll

Appendix
 Objectives
2

1. Discuss the objectives of internal control for payroll.

2. Compute and record the payroll for a pay period.

3. Describe and record employer payroll taxes.

David A . A. Weatherhead 6/14/23 11:01 PM

 PAYROLL DEFINED
3

Payroll – pertains to all salaries and wages paid to employees.

Salaries – expressed in terms of a specified amount per month or

per year.
e.g. Managerial, administrative, and sales personnel

Wages – which are based on a rate per hour, or a piece-work basis

(such as per unit of product).
e.g. Store clerks, factory employees, and manual labourers

David A . A. Weatherhead 6/14/23 11:01 PM

 PAYROLL DEFINED
4

Payroll – does not extend to payment made for personal service by

professionals.
e.g. chartered accountants, attorneys, and architects.

Payments to independent contractors are called fees, rather than

salaries and wages.

N.B. Government regulations relating to the payment and reporting of payroll

taxes apply only to employees.
David A . A. Weatherhead 6/14/23 11:01 PM
 INTERNAL CONTROL IN PAYROLL
5

(1) to safeguard company assets against unauthorized payments

of payrolls and

(2) to ensure the accuracy and reliability of the accounting records

pertaining to payrolls.

David A . A. Weatherhead 6/14/23 11:01 PM

 INTERNAL CONTROL IN PAYROLL
6

Possible irregularities:
 Overstating hours,
 using unauthorized pay rates,
 adding fictitious employees to the payroll,
 continuing terminated employees on the payroll, and
 distributing duplicate payroll cheques.

David A . A. Weatherhead 6/14/23 11:01 PM

 PAYROLL FUNCTIONS
7

1. Hiring employees,

2. timekeeping,

3. preparing the payroll, and

4. paying the payroll.

For an internal control system to work effectively, these four functions should
be assigned to different departments or individuals.

David A . A. Weatherhead 6/14/23 11:01 PM

 HIRING EMPLOYEES
8

Human Resource Department:

 Advertises job vacancies,

 screens and interviews applicants,

 hires employees,

 authorises initial pay rate and subsequent changes,

 authorises termination of employees, and

 provides authorization documentation where appropriate.

The authorization forms are then sent to the payroll department.

David A . A. Weatherhead 6/14/23 11:01 PM
 HIRING EMPLOYEES
9

Payroll Department:
places the new employee on the payroll

(After ensuring the accuracy of this form to prevent payroll fraud like adding fictitious
employees to the payroll).

changes rates as instructed

removes employees when terminated.

David A . A. Weatherhead 6/14/23 11:01 PM

 TIMEKEEPING
10

Hourly employees are usually required to record time worked by

"punching" a time clock.

The times of arrival and departure are automatically recorded by

the employee when he or she inserts a time card into the clock.

e.g. The time card for Jackie Chan is shown below.

David A . A. Weatherhead 6/14/23 11:01 PM
David A . A. Weatherhead 11 6/14/23 11:01 PM
 TIMEKEEPING
12

In large companies, time clock procedures are monitored by a supervisor or

security guard.
(Fingerprint and palm scanners are now available).

At end of pay period, employee's supervisor is required to approve the hours

shown by signing the time card.

When overtime hours are involved, approval by a supervisor is usually

mandatory to guard against unauthorized overtime.
David A . A. Weatherhead 6/14/23 11:01 PM
 TIMEKEEPING
13

The approved time card is then sent to the payroll department.

For salaried employees, a manually prepared weekly or monthly time record

kept by a supervisor may be used to record time worked.

David A . A. Weatherhead 6/14/23 11:01 PM

 PREPARING THE PAYROLL
14

The payroll is prepared in the payroll department on the basis of two sources
of input:
(1) human resource department authorizations and

(2) approved time cards.

Because of the numerous calculations involved, it is customary for a second payroll

department employee, working independently, to verify all amounts, and a payroll
department supervisor then approves the entire payroll.

David A . A. Weatherhead 6/14/23 11:01 PM

 PREPARING THE PAYROLL
15

The payroll department is also responsible for:

preparing (but not signing) payroll cheques,

maintaining payroll records, and

preparing payroll tax returns.

David A . A. Weatherhead 6/14/23 11:01 PM

 PAYING THE PAYROLL
16

The payroll is paid by the accounting department.

Payment by cheque minimizes the risk of loss from theft, and the paid cheque
when returned by the Bank provides proof of payment.

For good internal control, payroll cheques must be pre-numbered, and all
cheques should by accounted for. All cheques must be signed by the
accountant (or a designated agent), and their distribution to employees should
be controlled by the accounting department.

David A . A. Weatherhead 6/14/23 11:01 PM

 PAYING THE PAYROLL
17

If the payroll is paid in cash, it is customary to have a second person count

the cash in each pay envelope and for the accounting department to obtain a
signed receipt from the employee upon payment. Thus, if alleged
discrepancies arise, adequate safeguards have been established to protect
each party involved.

David A . A. Weatherhead 6/14/23 11:01 PM

 DETERMINING THE PAYROLL
18

Determining the payroll involves computing

(1) gross earnings,
(2) payroll deductions, and
(3) net pay.

Gross Earnings
The total compensation earned by an employee. There are three major types
of gross earnings: salaries, wages, and bonuses.

David A . A. Weatherhead 6/14/23 11:01 PM

 GROSS EARNINGS
19

The salary for an employee is generally based on a monthly or yearly rate

rather than on an hourly basis. These rates are then prorated to the payroll
periods used by the company. Most executive and administrative positions are
salaried.

Many companies have bonus agreements for management personnel and

other employees. Bonus arrangements may be based on such factors as
increased sales or net income. Bonuses may be paid in cash and/or by
granting executives and employees the opportunity to acquire shares of stock
in the company at favourable prices (called stock options plans).

David A . A. Weatherhead 6/14/23 11:01 PM

 GROSS EARNINGS
20

Total wages for an employee are determined by multiplying the hours worked
by the hourly rate of pay.

In addition to the hourly pay rate, most companies are required by law to pay
hourly workers a minimum of 1 ½ times the regular hourly rate for overtime
work in excess of 8 hours per day or 40 hours per week. Many employers also
pay overtime rates for work done at night, on weekends, and on holidays.

David A . A. Weatherhead 6/14/23 11:01 PM

 EXAMPLE
21

Jackie Chan is an employee who has an hourly rate of $12 per hour. During
the week ended January 14 he worked 44 hours.
The computation of Jackie Chan's gross earnings for the 44 hours shown on
his time card for this period is as follows:
Gross earnings:
Regular pay (40 x $12) $480.00
Overtime pay (4 x $18)   72.00 $552.00

Assumes that Chan receives 1 ½ times his regular hourly rate ($12.00 x 1.5 = $18)
for his overtime hours.
David A . A. Weatherhead 6/14/23 11:01 PM
 PAYROLL DEDUCTIONS
22

Gross earnings are usually very different from the amount actually received.
The difference is attributable to payroll deductions.

Payroll deductions do not result in an expense to the employer. The employer

acts only as a collection agency, and subsequently transfers the deductions to
the relevant government agencies and other designated recipients.

David A . A. Weatherhead 6/14/23 11:01 PM

 PAYROLL DEDUCTIONS
23

Payroll deductions may be mandatory (statutory) or voluntary.

The former are required by law and consists of NIS contributions and income
taxes.

The voluntary deductions are deducted at the request of the employee and
passed on to the relevant parties involved (e.g. credit union dues, health
insurance, mortgage payments, etc.).

David A . A. Weatherhead 6/14/23 11:01 PM

 NATIONAL INSURANCE
24

Designed to provide individuals with sickness benefits,

unemployment benefits, maternity benefits and retirement benefits.

The current rate for National Insurance Contributions is 11.10%. of

the employee’s monthly or weekly salary. This rate took effect from
October 1, 2018 for monthly and weekly paid employees.

David A . A. Weatherhead 6/14/23 11:01 PM

 NATIONAL INSURANCE
25

The 11.1% is broken down into:

NIS – 6.75%
Non-contributory Pension – 2.00%
Unemployment – 0.75%
Training Levy – 0.50%
Catastrophe Fund – 0.10% and
Health Service Contribution – 1.00%
11.10%
David A . A. Weatherhead 6/14/23 11:01 PM
 NATIONAL INSURANCE
26

Effective January 2023, the maximum insurable earnings is $5,120 per month
or $1,182 per week.

The minimum insurable earnings is $91 per month or $21 per week.

The maximum amount which can be deducted from an employee's salary or

wages is therefore $568.32 per month or $131.20 per week.

Amounts deducted from employees' salaries and wages must be remitted to

the Director of NIS by the 15th day of the month following the month for which
they are due.
David A . A. Weatherhead 6/14/23 11:01 PM
 INCOME TAX
27

In Barbados we have the pay-as-you-earn system (PAYE).

Under this system employers are required to withhold income taxes from their
employees each pay period. The amount to be withheld is determined by

(1) the employees gross earnings;

(2) the amount of allowances claimed by the employee; and

(3) the length of the pay period.

To indicate to the Barbados Revenue Authority the amount of allowances claimed, and hence
his or her Tax Code, the employee must complete an Employee Declaration Form (A47:001).

David A . A. Weatherhead 6/14/23 11:01 PM

 INCOME TAX
28

Withholding tax tables provided by the Barbados Revenue Authority indicate

the amount of income tax to be withheld from gross wages based on each
employee's tax code. Separate tables are provided for weekly and monthly
pay periods.

Amounts deducted from employees' salaries and wages must be remitted to

the Revenue Commissioner by the 15th day of the month following the month
for which they are due.

David A . A. Weatherhead 6/14/23 11:01 PM

 INCOME TAX
29

Individuals are currently given an annual personal allowance of $25,000. This

took effect from January 2007. This amount, together with any additional
allowances claimed on the Employee Declaration form is deducted from the
individual’s gross annual salary to arrive at his or her taxable income.
The rate of tax in Barbados is staged.
Effective January 01, 2020,

12.5% is charged on the first $50,000 of taxable income,

28.5% is charged on the remainder.

David A . A. Weatherhead 6/14/23 11:01 PM

 INCOME TAX
30

There is no limit on the amount of gross income taxable for individuals, i.e. the
higher the earnings the higher the tax payable.

All persons who are subject to Income tax are required to file an income tax
return by April 30th of the year following the one for which the income was
earned.

David A . A. Weatherhead 6/14/23 11:01 PM

 OTHER DEDUCTIONS
31

Employees may voluntarily authorize withholdings for charitable, retirement,

and other purposes. All voluntary deductions from gross earnings should be
authorized in writing by the employee. The authorization(s) may be made
individually or as part of a group plan.

David A . A. Weatherhead 6/14/23 11:01 PM

 NET PAY
32

Net pay is determined by subtracting payroll deductions from gross earnings.

As Jackie Chan’s gross earnings lies within the national insurance weekly
limits of $21 and $1,182, his weekly NIS contribution will be:
$552 x 11.1% = $61.27

Assuming that Jackie Chan, based on his Employee Declaration Form, has a
tax code of 250W, using the relevant tax tables, what would his income tax
be?

David A . A. Weatherhead 6/14/23 11:01 PM

 WEEKLY TAX DEDUCTIONS
TABLE 250W 251W 252W 253W 254W 255W 256W 257W 258W
Weekly Pay
Use Closest 25000- 25100- 25200- 25300- 25400- 25500- 25600- 25700- 25800-
Amount 25099 25199 25299 25399 25499 25599 25699 25799 25899
500 2.40 2.20 1.90 1.70 1.40 1.20 1.00 0.70 0.50
505 3.00 2.80 2.50 2.30 2.10 1.80 1.60 1.30 1.10
510 3.70 3.40 3.20 2.90 2.70 2.50 2.20 2.00 1.70
515 4.30 4.00 3.80 3.60 3.30 3.10 2.80 2.60 2.40
520 4.90 4.70 4.40 4.20 3.90 3.70 3.50 3.20 3.00
525 5.50 5.30 5.00 4.80 4.60 4.30 4.10 3.80 3.60
530 6.20 5.90 5.70 5.40 5.20 5.00 4.70 4.50 4.20
535 6.80 6.50 6.30 6.10 5.80 5.60 5.30 5.10 4.90
540 7.40 7.20 6.90 6.70 6.40 6.20 6.00 5.70 5.50
545 8.00 7.80 7.50 7.30 7.10 6.80 6.60 6.30 6.10
550 8.70 8.40 8.20 7.90 7.70 7.50 7.20 7.00 6.70
555 9.30 9.00 8.80 8.60 8.30 8.10 7.80 7.60 7.40
560 9.90 9.70 9.40 9.20 8.90 8.70 8.50 8.20 8.00
565 10.50 10.30 10.00 9.80 9.60 9.30 9.10 8.80 8.60
570 11.20 10.90 10.70 10.40 10.20 10.00 9.70 9.50 9.20
575 11.80 11.50 11.30 11.10 10.80 10.60 10.30 10.10 9.90
David A 580
. A. Weatherhead 33
12.40 12.20 11.90 11.70 11.40 11.20 11.00 6/14/23
10.7011:0110.50
PM
 WEEKLY TAX DEDUCTIONS
TABLE 250W 251W 252W 253W 254W 255W 256W 257W 258W
Weekly Pay
Use Closest 25000- 25100- 25200- 25300- 25400- 25500- 25600- 25700- 25800-
Amount 25099 25199 25299 25399 25499 25599 25699 25799 25899
500 2.40 2.20 1.90 1.70 1.40 1.20 1.00 0.70 0.50
505 3.00 2.80 2.50 2.30 2.10 1.80 1.60 1.30 1.10
510 3.70 3.40 3.20 2.90 2.70 2.50 2.20 2.00 1.70
515 4.30 4.00 3.80 3.60 3.30 3.10 2.80 2.60 2.40
520 4.90 4.70 4.40 4.20 3.90 3.70 3.50 3.20 3.00
525 5.50 5.30 5.00 4.80 4.60 4.30 4.10 3.80 3.60
530 6.20 5.90 5.70 5.40 5.20 5.00 4.70 4.50 4.20
535 6.80 6.50 6.30 6.10 5.80 5.60 5.30 5.10 4.90
540 7.40 7.20 6.90 6.70 6.40 6.20 6.00 5.70 5.50
545 8.00 7.80 7.50 7.30 7.10 6.80 6.60 6.30 6.10
550 8.70 8.40 8.20 7.90 7.70 7.50 7.20 7.00 6.70
555 9.30 9.00 8.80 8.60 8.30 8.10 7.80 7.60 7.40
560 9.90 9.70 9.40 9.20 8.90 8.70 8.50 8.20 8.00
565 10.50 10.30 10.00 9.80 9.60 9.30 9.10 8.80 8.60
570 11.20 10.90 10.70 10.40 10.20 10.00 9.70 9.50 9.20
575 11.80 11.50 11.30 11.10 10.80 10.60 10.30 10.10 9.90
David A 580
. A. Weatherhead 34
12.40 12.20 11.90 11.70 11.40 11.20 11.00 6/14/23
10.7011:0110.50
PM
 NET PAY
35

Jackie’s income tax is therefore $8.70.

Net pay is determined by subtracting payroll deductions from gross

earnings.

If we also assume that he has authorized his employer to deduct

Shotakan Union dues of $10.00 per week, what is his net pay for
the week ended Jan 14, 2023?

David A . A. Weatherhead 6/14/23 11:01 PM

 NET PAY
36

Gross Earnings $ 552.00

Payroll Deductions:
NIS contributions (552 x 11.10%) $ 61.27
Income tax (PAYE) 8.70
Union dues 10.00
Total deductions 79.97
Net pay $ 472.03

David A . A. Weatherhead 6/14/23 11:01 PM

 MAINTAINING PAYROLL RECORDS
37

To be able to issue the employee with payroll information for each financial
year, an employer must keep a cumulative record of each employee’s gross
earnings, deductions, and net pay during the year.

The record that provides this information and other essential data is the
employee earnings record.

Jackie Chan's employee earnings record is shown on the next slide.

David A . A. Weatherhead 6/14/23 11:01 PM

Appendix A

SHOALIN COMPANY

Employee Earnings Record

For the Year 2023

Name: JACKIE CHAN Sex: Male Date of Birth: May 20, 1965

Address: TEMPLE YARD Marital Status: Single Date of Hire: April 02, 2012

ST. MICHAEL National Ins No.: 140950 Date of Leaving:

ID No.: 650520-0052
Telephone: 229-3000 Tax Code: 250W
                     
Gross Earnings Deductions Payment
Period Total
            Union Total Net Cheque
Ended Hours
Cumulativ Amoun
Basic O/Time Total e NIS PAYE Dues Ded'ns t Number
444.4
Jan 07 42 480.00 36.00 516.00
516.00 57.28 4.30 10.00 71.58 360 2
1,068.0 472.0
Jan 14 44 480.00 72.00 552.00 0 61.27 8.70 10.00 79.97 431 3
  David A . A. Weatherhead
        38         6/14/23
  11:01 PM 
 MAINTAINING PAYROLL RECORDS
39

A separate earnings record is kept for each employee, and it is updated after
each pay period.

In addition to employee earnings records, many companies find it useful to

prepare a payroll register to accumulate the gross earnings, deductions, and
net pay by employee for each pay period.

It provides the documentation for preparing a cheque for each employee. The
payroll register is shown on the next slide.

David A . A. Weatherhead 6/14/23 11:01 PM

Appendix B

SHOALIN COMPANY

Payroll Register

For the week ended January 14, 2023

Earnings Deductions Payment

Total
Employee
Hours           Union Total Net Cheque Tax
Basic O/Time Gross NIS PAYE Dues Ded'ns Amount Number Code

Jackie Chan 44 480.00 72.00 552.00 61.27 8.70 10.00 79.97 472.03 431 250W

Jet Li 44 400.00 60.00 460.00 51.06 0.00 10.00 61.06 398.94 432 252W

Bruce Lee 40 480.00 0.00 480.00 53.28 0.00 10.00 63.28 416.72 433 253W

Chuck Norris 40 500.00 0.00 500.00 55.50 1.20 10.00 66.70 433.30 434 255W

    _____  ____  _____  ____  ___  ____  ____  _____   

1,860.0 1,992.0 1,720.9
    132.00 221.11 9.90 40.00 271.01  
0 0 9
David A . A. Weatherhead 40 6/14/23 11:01 PM
 MAINTAINING PAYROLL RECORDS
41

Note that this record is a listing of each employee’s payroll data for the pay
period. In some companies, the payroll register is a journal or book of original
entry, and postings are made directly to ledger accounts from the register.

In other companies, the payroll register is a memorandum record that

provides the data for a general journal entry and subsequent posting to the
ledger accounts. We shall use the latter method.

David A . A. Weatherhead 6/14/23 11:01 PM

 RECOGNIZING PAYROLL EXPENSES AND LIABILITIES
From the payroll register in Appendix B, a journal entry is made to record the
payroll. For the week ended Jan 14 the entry is:
Date Account Titles and Explanation Ref. Debit Credit
Jan 14 Salaries and Wages Expense 1,992.00
NIS Payable 221.11
PAYE Payable 9.90
Union Dues Payable 40.00
Salaries and Wages Payable 1,720.99

Specific liability accounts are credited for the mandatory and voluntary
deductions made during the pay period.
The amount debited to Salaries and wages expense is the total of the gross
salaries and the amount credited to Salaries and wages payable is the sum of
the individual cheques the employees will receive.
David A . A. Weatherhead 42 6/14/23 11:01 PM
 RECORDING PAYMENT OF THE PAYROLL
Payment by cheque is made either from the employer's regular bank account
or from a payroll bank account. Each cheque is usually accompanied by a
detachable statement of earnings document that shows the employee' s gross
earnings, payroll deductions, and net pay.

Following payment of the payroll, the cheque numbers are entered in the
payroll register. The entry to record payment of the payroll for Shaolin
Company is as follows:
Date Account Titles and Explanation Ref. Debit Credit

Jan 14 Salaries and Wages Payable 1,720.99

Cash 1,720.99

David A . A. Weatherhead 43 6/14/23 11:01 PM

 RECORDING PAYMENT OF THE PAYROLL

When cash is used to pay the employees, one cheque is prepared for the net
pay. The cheque is then cashed, and the coins and currency are inserted in
individual pay envelopes for disbursement to individual employees.

David A . A. Weatherhead 44 6/14/23 11:01 PM

 EMPLOYER NIS CONTRIBUTIONS
45

NIS expense results from the fact that employers are required to pay NIS
contributions at a rate of 12.75% of each employee’s salary or wage. This is
broken down as:
NIS – 6.75%;
Non-contributory Pension – 2.00%;
Unemployment – 1.00%;
Employment Injury – 0.75%;
Training Levy – 0.75% and
Health Service Contribution – 1.50%.
12.75%

David A . A. Weatherhead 6/14/23 11:01 PM

 RECORDING EMPLOYER NIS

The employer's NIS contribution is usually recorded at the same time the
payroll is journalised. The entire amount of gross pay ($1,992.00) shown in
the payroll register in Appendix B is subject to NIS. The entry to record the
employer's NIS contribution associated with the Jan 14 payroll is:

Date Account Titles and Explanation Ref. Debit Credit

Jan 14 NIS Expense 253.98

NIS Payable 253.98

NIS Expense = Insurable earnings x Employer’s NIS rate

= $1,992 x 12.75%
= $253.98
David A . A. Weatherhead 46 6/14/23 11:01 PM
 FILING AND REMITTING NIS AND INCOME TAX
47

Preparation of NIS Earnings and Contributions Schedules and PAYE Tax Deduction
Remittance Forms is the responsibility of the payroll department. As previously
mentioned, both of these should be remitted to the relevant authorities by the 15 th day of
the month following the month for which they relate.

The employer is also required by February 28 following the end of each calendar year to
ensure that all payroll information for each employee has been entered into the
employee’s file maintained by the Barbados Revenue Authority so as to facilitate the
filing of personal income tax returns by April 30. This information includes but is not
restricted to gross earnings, taxable allowances and benefits, NIS withheld, income taxes
withheld, amounts withheld in respect of approved pension funds, and bonus payments.

David A . A. Weatherhead 6/14/23 11:01 PM

 The End

David A . A. Weatherhead 48 6/14/23 11:01 PM