Bookkeeping & Principles
Payroll
Calculating withholdings and net pay.
Questions use payroll charts with annual salary, pay period type, and withholding rates. Common scenarios: bi-weekly pay with overtime, accrued payroll at month-end, and segregation-of-duties fraud prevention. Currency precision (cents) is tested in multi-step net pay problems.
What the exam tests
Periodic Gross Pay Calculation
Determine gross pay for a specific pay period from an annual salary (e.g., bi-weekly = annual ÷ 26; weekly = annual ÷ 52).
Overtime Pay Determination
Calculate total pay when an employee works extra hours at a premium rate (standard overtime = 1.5× the hourly rate).
Specific Withholding Calculation
Calculate the exact dollar deduction for Federal Tax, State Tax, FICA, or medical insurance based on provided percentages or annual costs.
Net Pay Determination
Start from gross pay, subtract all applicable taxes and insurance, and arrive at the final take-home amount.
Journal Entry Construction
Identify the correct debit and credit accounts for recording payroll (e.g., debit Salaries Expense, credit Salaries Payable and various tax payable accounts).
Internal Control and Auditing
Identify payroll fraud risks: the person who hires employees should not also have access to pay employees (segregation of duties).
Multi-Step Procedural Logic
Key rules
- ›Step 1: Calculate gross pay (annual salary ÷ pay periods, or hours × rate + overtime).
- ›Step 2: Subtract non-taxable deductions (e.g., medical insurance) from gross pay to get the taxable income base for Federal and State Tax.
- ›Step 3: Apply Federal Tax % and State Tax % to the taxable base.
- ›Step 4: Apply FICA % to gross pay (medical insurance IS included in the FICA base).
- ›Step 5: Net Pay = Gross Pay − Federal Tax − State Tax − FICA − Medical Insurance.
Common traps
- !Deducting medical insurance before calculating FICA. Medical insurance is not excluded from the FICA base.
Percentage Application
Key rules
- ›Withholding amount = taxable base × tax rate.
- ›Example: Federal Tax at 18% on $2,000 taxable income = $2,000 × 0.18 = $360.
Common traps
- !Applying the tax rate to gross pay when non-taxable deductions should have been subtracted first.
Pay Period Division
Key rules
- ›Annual ÷ 52 = weekly; Annual ÷ 26 = bi-weekly; Annual ÷ 24 = semi-monthly; Annual ÷ 12 = monthly.
- ›Confirm the pay frequency before dividing. Bi-weekly and semi-monthly are different.
Common traps
- !Dividing by 24 (semi-monthly) when the question specifies bi-weekly (÷ 26).
Interpretive Data Reading
Key rules
- ›Extract only the figures relevant to the question. Payroll charts often include columns you do not need.
- ›Note explicitly whether medical insurance is stated as annual or per-period before using it.
Common traps
- !Using an annual insurance figure without converting it to the pay-period amount.
Accounting Classification
Key rules
- ›Debit Salaries Expense for the full gross pay.
- ›Credit Salaries Payable (or Cash), Federal Tax Payable, State Tax Payable, FICA Payable, and Insurance Payable for each deduction.
- ›Distinguish Tax Expense (income statement) from Taxes Payable (balance sheet liability).
Common traps
- !Crediting Tax Expense instead of Tax Payable when the payroll has not yet been paid.
Try one
Gerald Jones earns an annual salary of $44,000 and is paid on a bi-weekly basis. What is his gross pay for a single pay period?
Bi-weekly pay has 26 periods per year, so divide the annual salary by 26: $44,000 ÷ 26 = $1,692 (rounded to the nearest dollar). Dividing by 24 (semi-monthly), 52 (weekly), or 12 (monthly) gives the wrong figures.
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