The wordings of this question is confusing, can any one please explain it?

  • Creator
    Topic
  • #191719
    salena786
    Member

    Hi guys,

    The question is:

    For the week ended June 30th, Free Co. paid gross wages of $20,000, from which federal income taxes of $2,500 and FICA were withheld. All wages paid were subject to FICA tax rates of 7% each for employer and employee. Free makes all payroll-related disbursements from a special payroll checking account. What amount should Free have deposited in the payroll checking account to cover net payroll and related payroll taxes for the week ended June 30th?

    Solution: Gross wages: $20,000 + $ $1400 (Employer fica tax) = $21, 400 Net payroll & Employer FICA

    I am confused about why the $2,500 isn’t added to the payroll expenses for the employee? It says The co. withheld income income taxes of $2,500 AND FICA. So why are FICA taxes still added back when they are withheld as an expense, but not the income taxes?

    Sorry if this sounds like an obvious question, it’s just not clicking together.

    Thank you!

Viewing 4 replies - 1 through 4 (of 4 total)
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  • #643823
    excel monkey
    Participant

    The 2,500 is already included in the 20,000. While income taxes are withheld by the employer, the employee pays them (out of gross pay). Same with their 7% portion of FICA. Both of these come out of the 20,000 gross wages. The company has to include its 7% of FICA, that's why the 1,400 is added in.

    Think about where the money goes when it's paid out.

    16,100 to employees

    2,500 to Fed Income taxes withheld

    2,800 to FICA taxes (1,400 employee portion & 1,400 company portion)

    21,400 Total payroll deposit

    Hope this helps

    FAR - 91
    AUD - 88
    BEC - 86
    REG - 79

    #643824
    salena786
    Member

    Wow, thank you excel monkey! That makes so much more sense now!

    #643825
    salena786
    Member

    @ Excel Monkey, I had one more question. Isn't the Employer responsible to pay for the Employees portion of taxes as well but the income tax is not his expense, so shouldn't his total expense be $16,100 wages paid + $1400 employee portion + $1400 employer portion? Why is the $2500 included in his $20,000 expense?

    #643826
    excel monkey
    Participant

    It's asking for the amount of the cash deposit, not wages/salaries expense. However, in this question it's the same amount. The journal entries might help:

    dr. Wages Expense ………………………$21,400

    cr. FICA taxes payable…………………………….2,800

    cr. Income taxes withheld payable…………….2,500

    cr. Net wages payable……………………………16,100

    The 2,500 is included in wages expense because it's what the employees have earned/are owed. The company is simply acting has a collection agent for the government, keeping some of the employees money and remitting it to the government. If the company didn't withhold the 2,500, it would have went to the employees, and they would have been responsible for paying it to the government.

    FAR - 91
    AUD - 88
    BEC - 86
    REG - 79

Viewing 4 replies - 1 through 4 (of 4 total)
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