Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 10 Liabilities 445

Phantom Employees

Companies must guard against the fraudulent creation and

cashing of payroll checks. Numerous payroll frauds involve su-

pervisors adding fictitious employees to or failing to remove de-

parting employees from the payroll, and then cashing the

check. Requiring proper authorization and approval of em-

ployee additions, removals, or changes in pay rate can mini-

mize this type of fraud.

INTEGRITY, OBJECTIVITY, AND ETHICS IN BUSINESS

RESPONSIBILITY FOR TAX PAY M E N TS

Social Security tax

Medicare tax

Federal withholding tax

Social Security tax

Medicare tax

Federal unemployment

compensation tax

State unemployment

Government compensation tax

Employee Business

Exhibit 2

Responsibility for Tax Payments

FICA Tax Employers are required to contribute to the Social Security and Medicare

programs for each employee. The employer must match the employee’s contribution

to each program.

Federal Unemployment Compensation Tax The Federal Unemployment Tax Act

(FUTA) provides for temporary payments to those who become unemployed as a

result of layoffs due to economic causes beyond their control. Types of employment

subject to this program are similar to those covered by FICA taxes. The FUTA tax rate

and maximum earnings of each employee subject to the tax are established annually

by law.

State Unemployment Compensation Tax State Unemployment Tax Acts (SUTA)

also provide for payments to unemployed workers. The amounts paid as benefits are

obtained, for the most part, from a tax levied upon employers only. The employment

experience and the status of each employer’s tax account are reviewed annually, and

the tax rates are adjusted accordingly.

Recording and Paying Payroll Taxes. The employer’s payroll taxes become liabil-

ities when the related payroll is paidto employees. The payroll information of

McDermott Co. indicates that the amount of FICA tax withheld is $1,035 on April 11.

Since the employer must match the employees’ FICA contributions, the employer’s