CAT MA1 Course Notes Contents Page
Gross and net earnings
- Gross pay: the total amount earned by the employee
- Net pay: the amount paid to the employee after the employer makes deduction for income tax and certain statutory amounts.
- Total labour cost to employer: employees’ gross pay plus any additional payroll taxes (and perhaps pension costs) that the employer has to bear.
An employee is paid at the rate of $10/hour.
Tax and other deductions amount to 25% for weekly income in excess of $100
Employer payroll taxes = 10% gross wages
If an employee works 38 hours in a week, what are the employee’s gross pay, net pay and the total amounts that have to be paid by the employer to the tax authorities?
Answer to Example 2
Total payments by employer to tax authorities = $70 + $38 = $108
Accounting for labour costs
In addition to being paid whilst working (basic, overtime premiums, productivity bonuses, employees are often also paid when:
- on holidays
- idle (because, say of machine breakdown)
The labour costs are classified as direct or indirect depending on what caused those costs:
Direct labour costs: all hours worked x normal hourly rate
Indirect labour costs: overtime premium, idle time, sick pay, holiday pay.
In double entry, the system is as follows:
Dr Work-in-progress with the gross wages
Cr Wages control account with the gross wages
Dr Work-in progress with the employer’s payroll tax
Cr Wages control account with the employer’s contributions to payroll tax
Dr Wages control account
CR Cash as employee paid the net amount
CR Cash as the revenue authorities are paid employee deductions and employer contributions.
Show the following transactions in wages control account
- 31 March, gross wages calculated as $36,000; deductions for employees taxes = $8,000
- 31 March, employer’s payroll tax calculated as $4,000
- 1 April, employees paid amounts due
- 15 April, tax authorities paid amounts due
Answer to Example 3