5.1 Payroll - Gross Earnings (Wages and Salaries)

• Calculating: P = Gross Earnings (Pay)

• Overtime Method 1: Premium Method:hourperRatehoursP #

hourperRatehoursOT

hourperRatehours

premumOvertimeEarningsP

21#

#

5.1 Gross Earnings (Wages and Salaries)

• Method 2: Overtime earnings using time-and-a-half rate for over 8 hours of work per day:time-and-a-half rate = hourperRate2

11

RateOThrsOTRatehrsP ##

5.1 Gross Earnings (Wages and Salaries)

• More definitions:– Double time: employees earn double time for

holidays– Shift differential: additional amount per hour

paid to employees to work undesirable shifts– Split-shift premiums: employee is paid a

premium for splitting hours to cover busy periods.

5.1 Gross Earnings (Wages and Salaries)

• Find equivalent earnings for different pay periods:

Common Pay Periods

Monthly 12 paychecks/year

Semimonthly 24 paychecks/year

Biweekly 26 paychecks/year

Weekly 52 paychecks/year

5.2 Payroll - Gross Earnings (Commission)

• Gross earnings (P) = Commission Rate (R) Sales (B)

• Variable commission rate

Sales Rate

Up to $10,000 6%

$10,001-$20,000 8%

$20,001 and up 9%

5.2 Gross Earnings (Commission)

• Salary plus commission:Gross earnings (P) =

Fixed earnings + Commission Rate

• Drawing account - a loan against future commissions. The salesperson receives money in advance and pays a monthly fee.

Gross earnings (P) = Earnings - Draw

5.2 Gross Earnings (Commission)

• Quota bonus system:quota is a minimum amount of sales expected from the employee Gross earnings (P) =

Commission Rate (Sales – Quota)

5.2 Gross Earnings (Commission)

• Finding gross earnings with commission and overrideOverride: Payment to supervisor for sales by the supervisor’s staff – calculated like a commission Gross earnings (P) =

Salary + Commission + Override

5.3 Gross Earnings (Piecework)

• Piecework rate: pays an employee so much per item produced:

Gross earnings (P) = Number of items Pay per item

5.3 Payroll - Gross Earnings (Piecework)

• Using differential piecework: pay rate increases once a quota is reachedexample:

Sales Rate

1-100 units $2.10 each

101-150 $2.25 each

151 or more units $2.40 each

5.3 Gross Earnings (Piecework)

• Chargebacks: To discourage mistakes, many companies require the employee to share the cost of a spoiled item. These penalties are called chargebacks

Gross earnings (P) = Piecework earnings – (spoiled items chargeback

rate)

5.3 Gross Earnings (Piecework)

• Guaranteed hourly wage: Often this is the minimum wage. When piecework earnings dip below the guaranteed hourly wage, this wage is used.

• Overtime earnings: Overtime piecework is usually paid at 1½ times the regular piecework rate.

5.4 Payroll - Social Security, Medicare, and Other Taxes

• FICA – Federal Insurance Contributions Act (FICA) tax is the tax that pays for social security.FICA = 6.2% of earnings with a maximum

earnings subject to this tax• Medicare – tax that pays for medicare

Medicare tax = 1.45% with no maximum earnings subject to this tax

• Self-employed – FICA = 2 6.2% = 12.4%

medicare tax = 2 1.45% = 2.9%

5.4 Social Security, Medicare, and Other Taxes

• Example: finding FICA and medicare tax for a self-employed worker.A self-employed worker makes $44,480 per year. Find the FICA and medicare tax.

FICA = $44,480 12.4% = $44,480 0.124= $5515.52

medicaretax = $44,480 2.9% = $44,480 0.029

= $1289.92

5.4 Social Security, Medicare, and Other Taxes

• State disability insurance – varies from state to state. A typical program deducts 1% of the first $31,800 earned

5.5 Payroll - Income Tax Withholding

• Form W-4 for withholding is completed at time of employment. The questions determine your number of allowances.

• There are 2 ways to determine withholding: wage bracket method and percentage method.

5.5 Income Tax Withholding

• Wage bracket method – use tables in book. There are different tables for weekly/monthly income and also for single/married persons.

• Example: J. Koehler is married, claims 1 withholding allowance and makes $510/week

1. Look at the weekly payroll for married persons table.

2. Get rate for $510/week under column for 1 exemption – withholding is $30 (8th edition table)

5.5 Income Tax Withholding

• Percentage method: use percentage method tables

• Example: E. Owens is single claiming one exemption and earns $2500/month. Find his withholding using the percentage method.

1. Get amount per allowance from first table: $275 for monthly

2. calculate: $2500 - (1 allowance $275) = $2225

3. Get rate from monthly table: 15%

4. Withholding = $61.20 + 15% ($2225 - $833)= $270.00

5.5 Income Tax Withholding

• State withholding = tax rate income

6.1 Taxes - Sales Tax

• Sales tax (part) = amount of sale sales tax rateP = B R

State sales tax rates are in table 6.2 by state• Example: A customer purchases several pizzas for

$49.95. Sales tax in the state is 5%. Find the sales tax and the total amount collected from the customer.

50.2$05.95.49$

%595.49$

BRP

45.52$50.2$95.49$ salestotal

6.1 Sales Tax

• If you know any 2 of 3 values from P = B R, you can compute the third value.

• Example: Sales tax on a lawn mower is $16.14. If the sales tax rate is 6%, find the price of the mower.

269$06.

14.16$

06.14.16$

B

B

BRP

6.1 Sales Tax• Excise tax: for gasoline, tires, luxury cars, and

some services. It is either a percent of the price or a fixed amount.

• Example: For a sale of $125 with a sales tax rate of 5% and an excise tax rate of 8%, find the sales tax, excise tax and total price.

25.141$10$25.6$125$

00.10$125$08.

25.6$125$05.

pricetotal

taxexcise

taxsales

6.2 Taxes - Property Tax

• Fair market value – reasonable price for property.

• Example: Given a fair market value of $120,000 and a rate of assessment of 30% find the assessed valuation.

rateassessmentvaluemarketfairvaluationAssessed

000,36$

30.000,120$

valuationAssessed

6.2 Property Tax• Agency responsible for levying tax needs to

calculate annual property tax rate

• Example: If total tax needed is $10,000,000 and total assessed value is $250,000,000 what is the tax rate?

valueassessedtotal

neededamounttotalratetax

%404.000,000,250$

000,000,10$ratetax

6.2 Property Tax• Express 4% in Dollars per $100.

• Express 4% in Dollars per $1000.

• Mills – one mill = .1 cent per $ = .001 dollar per $Express 4% in mills.

4$100

400$

100$100

4 x

x

40$100

4000$

1000$100

4 x

x

millsxx

401.

4$

1$

001.

100

4

6.2 Property Tax

• Calculating property tax:tax = tax rate assessed valuation

• Example: Given an assessed valuation of $30,000 and a tax rate of 11 mills find the property tax.

BRP

330$000,30$001.11 P

6.3 Taxes - Personal Income Tax

• Ways to do your income tax1. Fill out the forms yourself – obtain from the

library, bank, or government office2. Pay a professional tax preparer3. Use a software package (e.g. Turbotax or

Taxcut)4. Use the web for free – similar to a software

package except you have to do everything in one session (can’t save your work for later)

6.3 Personal Income Tax• Doing your income tax:

1. Adjusted gross income= wages + interest + other income – IRA contributions

2. Find the taxable income= AGI – deduction (standard or itemized) – personal exemption(s) $3200

3. Find the tax from tax rate schedule

4. If tax is lower….refund = withheld – tax If tax is higher….tax due = tax – withheld

6.3 Personal Income Tax

• Example: K. Chandler has job income of $22,000, interest of $300, misc. income of $200, dividend income of $50 and adjustments to income of $1000. What is his adjusted gross income?

550,21$

1000$50$200$300$000,22$

AGI

6.3 Personal Income Tax• Example: The Cooks are married and they have 2

exemptions. They have adjusted gross income of $70,000 and total itemized deductions of $12,000. What is their taxable income and how much tax is owed?

$12,000 > standard deduction of $10,000 (pg . 239) so itemized deductions are used.

600,51$

3200$2000,12$000,70$

incometaxable

010,7$

)600,14$600,51%($15460,1$

tax

6.3 Personal Income Tax• Example: R. Jones is single and has taxable income of

$32,000 and federal income tax withheld of $100 weekly. Determine the amount of his refund or tax due.

535$4665$5200$

4665$

)700,29$000,32%($254090$

5200$100$52

refund

tax

withheldtotal

8.1 Buying - Invoices & Trade Discounts

• Invoice – a printed record of a (business) purchase or sale. Basic format:

retailerwholesalerermanufactur

Quantity Description Unit Price Extension Total

30 Screwdriver $2 $60

50 Hammer $3 $150

20 Saw $1.50 $30

Invoice Total $240

Shipping/Insurance $30

Total Amount Due $270

8.1 Invoices and Trade Discounts

• Trade Discount Example: The list price of a lawn mower is $350 and the trade discount is 15%. Find the net cost.

50.297$50.52$350$costnet

$52.5015%($350)discount trade

8.1 Invoices and Trade Discounts• Series or chain discount: two or more discounts

are combined• Example: Oak hardware is offered a series

discount of 20/10 on a cordless drill with a list price of $150. Find the net cost after the series discount.First discount = 20% $150 = 0.2 $150 = $30Subtract discount: $150 - $30 = $1202nd discount = 10% $120 = 0.1 $120 = $12Net cost: $120 - $12 = $108

8.1 Invoices and Trade Discounts• Using complements to solve series discounts:

Example: Oak hardware is offered a series discount of 20/10 on a cordless drill with a list price of $150. Find the net cost after the series discount.

For a series discount of 20/10, the complements of 20% and 10% are .8 and .9. Multiplying the complements gives .8 .9 = .72Net cost: 0.72 $150 = $108

8.2 Buying - Single Discount Equivalents• A single discount equivalent:

Given a series discount, the single discount equivalent is one discount that yields the same net cost as the series of discounts.

To get the single discount equivalent, multiply the complements of all the discounts together and subtract your answer from 1.

8.2 Buying - Single Discount Equivalents• Finding a single discount equivalent:

Example: If Air Clean Manufacturing offered a 20/10 discount to all wholesale accounts on all heater filters, what is the single discount equivalent?

For a series discount of 20/10, the complements of 20% and 10% are .8 and .9. Multiplying the complements gives .8 .9 = .72Subtract this net cost equivalent from 1:1.00 - .72 = 0.28 = 28% (single discount equivalent)

8.2 Single Discount Equivalents• Finding the net cost using complements:

Example: The list price of an oak entertainment center is $970. Find the net price if trade discounts of 20/15/27½ are offered.

Net cost = List price complements of individual discounts

(1 - .20 = .8, 1 - .15 = .85, 1 - .275 = .725)Net cost = $970 .8 .85 .725

= $478.21

8.2 Single Discount Equivalents• Solving for list price:

Example: Find the list price of a handmade rug from Pakistan that has a net cost of $544 after trade discounts of 20/20.

Net cost = List price complements of individual discounts

(1 - .20 = .8)$544 = List price .8 .8 = .64 List priceList price = $544 .64 = $850

8.2 Single Discount Equivalents• Finding the trade discount :

Example: The list price of a compact disc player is $550. If the wholesaler offers the system at a net cost of $341, find the single trade discount rate being offered.

Net cost = List price complement of discount

$341 = $550 complement of discountComplement of discount = $341 $550 = .62discount = 1 - .62 = .38 = 38%

8.2 Single Discount Equivalents• Matching a competitors price:

Example: S and B distributors offered a 20% trade discount on small compressors list-priced at $450. Find the trade discount that must be added to match a competitors price of $342.

Let x = complement of new discount Net cost = List price complement of discounts$342 = $450 .8 x = $360 x x = $342 $360 = .95new discount = 1 - .95 = .05 = 5%so S and B must offer a 20/5 series discount

8.3 Buying - Discounts: Ordinary Dating Method

• Cash discount– different conventions from trade discount– incentives for timely payment

• Ordinary dating method example: 2/10, net/302: rate of discount (2%)10: 2% discount is offered for 10 daysnet/30: 30 days for no discount, late charge applied

after 30 days

discountcash -discount trade-pricelistcostnet

8.3 Discounts: Ordinary Dating Method• Finding cash discount dates:

A Hershey Chocolate invoice is dated January 2 and offers terms of 2/10, net 30.(a) find the last date for the 2% discount

last date for discount = Jan 12 (add 10 to 2)

(b) find the net payment date

last date for net payment is 30 days past Jan 2, since there are 31 days in January the date is February 1

8.3 Discounts: Ordinary Dating Method• Finding the amount due on an invoice:

An invoice for $840 is dated July 1 with terms of 2/10, n/30. If it is paid on July 8 and shipping charges are $18.70, find the amount due.

Payment was 7 days after invoice so the cash discount applies:

90.841$

70.18$80.16$840$

80.16$840$02.

dueamount

untcash disco

8.3 Discounts: Ordinary Dating Method• Using postdating “as of” for cash discounts:

Seller uses a date later than the invoice date as the start date for the cash discount.

Example: An invoice is dated October 21 as of November 1 with terms of 3/15, net/30. Find the last date on which the cash discount may be taken.

Last date for discount = November 16 (1+15)

8.3 Discounts: Ordinary Dating Method• Find the amount due when goods are returned:

An invoice for $380 is dated March 9, and offers terms of 4/10, net/30. If $75 of goods are returned and the invoice is paid on March 17, what amount is due?

The invoice is paid 8 days after its date (17 – 9 = 8) so the cash discount applies.$380 - $75 = $305 (goods retained)cash discount = .04 $305 = $12.20amount due = $305 - $12.20 = $292.80

8.4 Buying - Cash Discounts: Dating Methods

• Other Dating Methods:

Note: When the net payment date is not given : the net payment date defaults to 20 days past the last discount date

Method Example Conditions for discount

End Of Month 3/10 EOM or3/10 prox

payment is made within 10 days of end of monthAdd a month if invoice date is 26th or later

Receipt Of Goods 2/10 ROG payment is made within 10 days from receipt of goods

Extra dating 2/10-50 extra payment is made within (10 + 50) or 60 days from the date of the invoice

8.4 Cash Discounts: Other Dating Methods

• Finding credit for partial paymentAn invoice for $1140, dated March 8, offers terms of 2/10 proximo. A partial payment of $450 is made on April 5. Find (a) the amount credited for the partial payment, (b) the balance due on the invoice, and (c) the cash discount earned.

(a) 100% - 2% = 98% = .98Amount paid = .98 credit givenso credit = $450 .98 = $459.18(b) balance due = $1140 - $459.18 = $680.82(c) cash discount = $459.18 - $450 = $9.18