Chapter 2 Accounting for Payroll

Financial Management for Spas (367TXT or 367CIN)

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Competencies for Accounting for Payroll

1. Discuss the importance of containing payroll costs, and describe the elements of a spas compensation plan. 2. Discuss the issue of independent contractors in spas. 3. Summarize payroll controls used by spas, identify payroll records, and discuss issues surrounding overtime pay. 4. Outline factors involved in preparing payroll checks manually, and describe two major journal entries involving payroll. 5. Describe issues involved in the reporting of employee tips, and explain how unpaid wages are accrued using adjusting entries.
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Payroll
Payroll is the largest expense for spas. Controlling payroll costs is the largest factor influencing spa profitability.

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Elements of a Spas Compensation Plan

Base pay/salary Variable/incentive pay Commissions (percentage, fee-for-service) Service charges/gratuities/tips Retail commissions Incentive pay Merit pay

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Independent Contractors
Independent contractors help spas deal with labor gaps, special projects, and spikes in business. IRS defines independent contractor status (20-Factor Test) Independent contractors are in business for themselves; employers do not have to withhold or pay taxes on payments to independent contractors. Spas can only control the result of the work done by an independent contractor, not the means or methods the contractor uses.
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Independent Contractors
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Spas must report payments to independent contractors to the IRS by filing Form 1099-MISC, Miscellaneous Income. Three tests for worker status: Behavioral control Financial control Relationship of the parties Spa may rent booth or chair to individual business owner; spa records the amount of the rent as Other Income on income statement.
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Payroll Controls: Segregated Payroll Functions

Authorization of employment and establishment of wage rates for employees Reporting of hours worked by employees Actual preparation of the payroll Signing of the payroll checks Distribution of checks to employees Reconciliation of payroll bank accounts by an independent party
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Other Payroll Controls

Pay employees by check or direct deposit, not with cash. Imprest payroll account: a bank account in which only the exact amount of the payroll for a given payroll period is deposited

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Payroll Records
Time sheets/cards Master payroll file information includes:
- Employees full names - Gender - Rate of pay - Overtime earnings - Total wages paid - Addresses with zip codes - Occupation - Regular earnings - Pay date - Pay period - Dates of birth (if less than 19 years old) - Time and day when their workweek starts - Hours worked each day and week - Additions to and deductions from pay

IRS Form W-4 U.S. Department of Homeland Security Eligibility Verification Form I-9 IRS Form W-2 Payroll journal Employees earnings record
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Overtime Pay
In the United States, overtime pay of 1.5 times the employees regular hourly rate must be given for any hours worked in excess of 40 hours in a week. Special holiday rates may apply in other countries. In hotel/resort spas, when an employee works more than 40 hours in a week working in the spa and also in another hotel department, and is paid with two different rates, the overtime rate is calculated using a weighted average of the two rates. Some states have a seven-day rule; employees are paid 1.5 their regular hourly rate on the seventh consecutive day of work.
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Payroll Considerations When Preparing Checks Manually

Must take into account hours worked, commissions, marital status, exemptions, and enrollment in the spas cafeteria benefit plan and retirement plan. Must make appropriate payroll journal entries.

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Two Major Journal Entries Involving Payroll

Entry to record payroll Entry to record payroll taxes

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The Entry to Record Payroll

Gross pay Federal income tax FICA taxes State income tax Miscellaneous deductions; these could include local income tax, employer contributions to health care plan, union dues, 401(k) contributions, and charitable deductions. The amount of the employees net pay

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The Entry to Record Payroll Taxes

Payroll taxes are taxes paid by the employer based on employee wages. Three major elements of payroll taxes: FICA taxes FUTA taxes SUTA taxes

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Reporting Employee Tips

Most spa employees receive tips from their clients. Tips are voluntary contributions by clients to a spas employees. There are federal and state regulations concerning tip reporting. The spa must pay the employees and the spas share of FICA tax on tips and service charges.

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Accruing Unpaid Wages

Since pay periods seldom end on the last day of an accounting period, wages must be accrued using adjusting entries in Wages Expense and Wages Payable. Because payroll is such an important portion of spa expenses, failure to make proper accrual entries can have a large and misleading effect on reported financial performance for a reporting period.

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