Assume an employee of Rocco Rock Company earns $ 1,000 of gross wages during the current pay period and is required to remit to the government $ 100 for income tax and $ 50 for FICA. Consider the following two procedures for paying the employee:
Procedure 1 (Withholdings)
Rocco Rock Company pays the employee net wages of $ 850 and will remit income taxes and FICA on behalf of the employee.
Procedure 2 (No Withholdings)
Rocco Rock Company pays the employee gross wages of $ 1,000 and the employee is responsible for remitting income taxes and FICA himself.
Required:
1. Ignoring employer payroll taxes, under each procedure calculate (a) the total labor cost for the company and (b) the amount of cash the employee will have after satisfying all responsibilities to the government. Do your answers for procedures 1 and 2 differ for (a)? For (b)?
2. Explain why procedure 1 (withholdings) is the approach required by the government.
3. Considering that employers are responsible for matching employees’ FICA contributions, explain why employers might also prefer procedure 1 over procedure 2.
4. Prepare the journal entries required by the employer under procedure 1, assuming that the employee is paid in cash, but the withholdings and matching employer FICA contribution have not yet been paid. (Assume no unemployment taxes.)