Payroll Accounting 2010
Bernard J. Bieg and Judith A. Toland
CHAPTER 2
COMPUTING WAGES & SALARIESCOMPUTING WAGES & SALARIES
Developed by Lisa Swallow, CPA CMA MSDeveloped by Lisa Swallow, CPA CMA MS
CHAPTER 5 CHAPTER 2 CHAPTER 2
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Fair Labor Standards Act (FLSA)Federal Wage & Hour Law provides for
two types of coverage
Enterprise coverage includes all EE if Two or more work in interstate commerce and $500,000 or more annual gross sales or produce goods for
interstate commerce Plus many nonprofits (schools, etc.) regardless of annual
sales volume
OR
Individual employee coverage EE whose company may not meet enterprise
coverage, but in fringe occupation For example: drive for fleet that transports goods,
with annual revenues equal to $225,000
Many family businesses are exempt!
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Employee & Employer Defined
An employer is an individual who “acts directly/indirectly in the interest of an employer” in relation to an employee
An individual is an employee if he/she performs services in a covered employmentCommon-law relationshipIRS test based on behavioral control, financial
control or relationship between two parties Specific rules apply to employees of
corporations, partners in partnerships and statutory employees
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FLSA & Domestics
Domestic help includes nannies, gardeners, chauffeurs, etc. Casual baby sitter and companions for
aged/informed not coveredThese employees must earn minimum wage
and overtime if:Work more than 8 hours/week or ifEarn at least $1,700 in a calendar year
Live-in domestics need not be paid overtime
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What is Minimum Wage?
Includes all rates of pay including, but not limited to Commissions Bonuses and severance pay On-call or differential
Exceptions to minimum wage Training wage for first 90 calendar days of employment
for newly hired EE under age 20 (“opportunity wage”) Retail/service entities and farms employing full time
students – 85% Full time students employed at their own university - 85% Student learners in vocational training - 75% Physically or mentally impaired employees with
certification
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Minimum Wage vs. “Living Wage”Minimum wage
$7.25 after July 23, 2009 “Living wage”
Law that attempts to keep working poor’s wages on track with cost of living
100+ cities have local laws requiring employers that do business with government to pay a calculated living wage
Some states now include private industry
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Tipped Employees “Tipped employee” regularly averages $30/month in tips Minimum tipped wages is $2.13/hour, therefore tip credit =
$5.12/hour EE must make $7.25/hour when combining tips/wages ($7.25 x 40
= $290 minimum weekly gross) ER must notify affected employee in order to take the tip credit
Examples of tips received for 40-hour work week #1. Reported tips = $43
Is $85.20* (minimum tipped wage) + $43 > $290 No - so ER must pay additional wages ($290 - $43 = $247)
#2. Reported tips = $1189 Is $85.20 + $1,189 > $290 Yes - so ER pays $85.20 wages
#3. Reported tips = $111 Is $85.20 + $111 > $290 No - so ER must pay additional wages of ($290 - $111 = $179)
*40 hours x $2.13/hour = $85.20
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Overtime Provisions & ExceptionsWorkweek established by corporate policy
Must be seven consecutive 24-hour periods For example 12:01 a.m. Saturday - 11:59 p.m.
FridaySome states require daily overtime (OT) over
8 hoursFLSA sets OT at 1.5 times regular payExceptions follow:
Hospital EE, overtime for 80+ hours in 14 days or over 8 hours in a day
Retail or service industry employees earning commission (special rules)
EE receiving remedial education – up to 10 hours overtime per week without overtime pay
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Compensatory Time Off
In specific situations employers may grant employees compensatory time off in lieu of overtimeEE in public safety or emergency response can
accumulate 320 hours x 1.5 = 480 hours compensatory time instead of OT
EE whose work doesn’t include activities from exception in bullet above can accumulate 160 hours x 1.5 = 240 hours compensatory time instead of OT
EE must be paid out comp time when employment terminated 9
Exempt vs. Nonexempt Employees“Exempt” means exempt from some, or all, of FLSA provisions
White-collar workers Executives Administrators Professionals Highly compensated employees Computer professionals Outside sales
Test of exemption Employee must be paid on salary basis See Figure 2-2 (p. 2-10) in text - certain salary and “primary duty”
requirements must be met
Blue collar workers are always entitled to overtime pay
Note: Putting someone on salary doesn’t mean he/she is exempt!! 10
Child Labor RestrictionsNonfarm occupations
Employees age 16 and 17 may work unlimited number of hours each week in nonhazardous jobs
14- and 15-year olds are limited to employment in retail and food/gas service With very specific conditions as to hours and conditions of
employment
Agricultural occupations Under age 12 employment is generally prohibited Kids age 10 and 11 may work as hand harvest laborers
outside school hours only between 6/1 and 10/15 Subject to many strict limitations ER needs to have Certificate of Age on file
Violations of child-labor provisions can result in up to $11,000/offense
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What the FLSA Does Not Cover
Employers are not required to Pay extra for weekend/holiday work Pay for holidays, vacation or severance Limit number of hours of work for persons
16 years of age or over Give holidays off Grant vacation time Grant sick leave
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Determining Employee’s Work Time
Principal activities require exertion, control or employer mandate Prep at work station is principal activity and in some
situations changing in/out of protective gear may be part of workday
Travel (when part of principal workday) is compensable Idle time Rest periods under 20 minutes are principal activities
(can’t make EE “check out”) Meal periods are not compensable time unless employee
must perform some tasks while eating – generally 30 minutes or longer
Work at home is principal activity for nonexempt employees
Sleep time is principal activity if required to be on duty less than 24 hours
Training time is generally compensable
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Noncompensable ActivitiesPreliminary and postliminary activities
Portal-to-Portal Act defines these activitiesNeed not be counted unless customary or
contractualFor example checking in/out of plant
Absences due to illnessTardiness may result in ‘docked’ time,
based upon system in placeMust be paid for fractional parts of an hour
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Timekeeping FLSA requires employers to retain time/pay records Traditional types of records used to collect payroll data
Time sheets Time cards Computerized time/attendance records, main kinds
include Card-generated systems (computerized totals) Badge systems (microchips or bar codes) Cardless or badgeless system - EE enters identification
number PC-based system
Next generation technology Touch screen (PC screen reads touch input) Web-based time accounting systems (internet, wireless
devices such as PDAs) Biometrics (unique characteristic such as iris scan) 15
Methods of Computing Wages/Salaries
Most common pay periods are as follows
Biweekly (26) - same hours each pay periodSemi-monthly (24) - different hours each pay
periodMonthly (12)- different hours each pay periodWeekly (52) - same hours each pay period
ER can have different pay periods for different groups within same company!
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Calculating Overtime PayThere are two methods
Most common method Calculate gross pay (40 hours x employee’s regular
rate) OT rate then calculated by multiplying 1.5 x employee’s
regular rate x hours in excess of 40 Other method
Calculate gross pay (all hours worked x employee’s regular rate)
Then calculate an overtime premium (hours in excess of 40 x overtime premium rate) Hourly rate x ½ = overtime premium rate
These methods result in same total gross pay! 17
Steps to Follow When Converting Period Wage Rates to Hourly Rates
Used to calculate pay for salaried nonexempt employees
Annualize salaryCalculate regular grossCalculate hourly payCalculate overtime (OT) rate - (1.5 x
hourly rate)Add OT pay to regular gross
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Example #1 - Calculating Gross Paycheck
FACTS: Salary quoted is $1,500/month - paid weekly - 43 hours in one pay period
$1,500 x 12 = $18,000 annual $18,000/52 = $346.15 weekly gross $346.15/40 = $8.65 regular rate $8.65 x 1.5 = $12.98 OT rate $346.15 + ($12.98 x 3) = $385.09 gross
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Example #2 - Calculating Gross Paycheck
FACTS: Salary quoted is $2,000/month – paid semimonthly - 4 hours OT in one pay period
$2,000 x 12 = $24,000 annual $24,000/24 = $1,000 semimonthly gross $24,000/52 = $461.54 regular rate $461.54/40 = $11.54 regular rate $11.54 x 1.5 = $17.31 OT rate $1,000 + ($17.31 x 4) = $1,069.24 gross
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Example #3 - Calculating Gross PaycheckFACTS: Salary quoted is $2,000/month for 38 hour
work week - paid semimonthly. Two rates in addition to semimonthly gross (regular pay between 38-40 hours/week; 1.5 after 40 hours). Of 16 hours of OT in one pay period only 12 over 40.
$2,000 x 12 = $24,000 annual $24,000/24 = $1,000 semimonthly gross $24,000/52 = $461.54 weekly rate $461.54/38 = $12.15 regular rate $12.15 x 1.5 = $18.23 OT rate $1,000 + ($12.15 x 4) + ($18.23 x 12) =
$1,267.36 gross
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Example #4 - Calculating Gross Paycheck
FACTS: Salary quoted is $1,600/month for 35 hour work week -paid semimonthly. OT is calculated as regular hourly pay between 35-40 hours/week; 1.5 after 40 hours. Of 16 hours of OT in one pay period, 6 hours are over 40 hours weekly.
$1,600 x 12 = $19,200 annual gross $19,200/24 = $800 semimonthly gross $19,000/52 = $369.23 weekly rate $369.23/35 = $10.55 regular rate $10.55 x 1.5 = $15.83 OT rate $800 + ($10.55 x 10) + ($15.83 x 6) = $1,000.48
gross22
Example #5 - Calculating Gross Paycheck
FACTS: Salary quoted is $2,200/month - paid biweekly - 11.5 hours OT in one pay period
$2,200 x 12 = $26,400 annual $26,400/26 = $1,015.38 each biweekly pay
period $26,400/52 = $507.69 weekly rate $507.69/40 = $12.69 regular rate $12.69 x 1.5 = $19.04 OT rate $1,015.38 + ($19.04 x 11.5) = $1,234.34 gross
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Salaried Employees - Fluctuating Workweek
EE and ER may forge an agreement that a fluctuating schedule on a fixed salary is acceptable Overtime is calculated by dividing normal salary by total
hours worked Then an extra .5 rate is paid for all hours worked over 40
or Can divide fixed salary by 40 hours – gives different pay
rate each week Then an extra .5 rate is paid for all hours worked over 40
Alternative – BELO Plan Appropriate for very irregular work schedule Deductions cannot be made for non-disciplinary absences Guaranteed compensation cannot be for more than 60
hours Calculate salary as wage rate multiplied by maximum
number of hours and then add 50% for overtime24
Piece Rate FLSA requires piecework earners to get paid for
nonproductive time Must equal minimum wage with OT calculated one of
two ways
Method A Units produced x unit piece rate = regular earnings Regular earnings/total hours = hourly rate Hourly rate x 1/2 = OT premium Regular earnings + (OT premium x OT hours) = gross pay
orMethod B
(Units produced in 40 hours x piece rate) + [(Units produced in OT) x (1.5 x piece rate)]
Note: two methods don’t give same results!!25
Example #1 - Calculating Piece Rate Gross Pay
FACTS: 4,812 units inspected in a 47.25 hour week (600 of those units produced in extra hours). Employee is paid .12 per unit. Calculate gross using both methods.
Method A (4,812 x .12) = $577.44 regular piece rate earnings 577.44/47.25 = $12.22 hourly rate $12.22 x .5 = $6.11 OT premium $577.44 + ($6.11 x 7.25 hrs.) = $621.74 gross
Method B
(4,212 x .12) + [600 x (.12)(1.5)] = $613.44 gross
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FACTS: Inspection rate = $.08/unit. An EE inspected 6897 units in 43.5 hours. She inspected 423 of these in overtime. Calculate using both methods.
Method A (6897 units x .08) = $551.76 regular piece rate earnings $551.76/43.5 hours = $12.68 hourly rate $12.68 x .5 = $6.34 OT premium $551.76 + ($6.34 x 3.5) = $573.95 gross
Method B (6474 x .08) + (423 x .08 X 1.5) = $568.68 gross
Example #2 - Calculating Piece Rate Gross Pay
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Special Incentive Plans
Special incentive plans are modifications of piece-rate plans Used to entice workers to produce more
Computation of payroll is based on differing rates for differing quantities of production
Example of incentive plan .18/unit for units inspected up to 2000
units/week .24/unit for units inspected between 2001-3500
units/week .36/unit for units inspected over 3500
units/week28
Commissions
Commission can be used in many combinationsWith base salary or stand aloneAs long as minimum wage provisions are met
Exceptions are outside salespeople who are exempt from FLSA
FACTS: Sam sold $40,000 of product. His quota is $31,500. He gets 2% in excess of quota. His annual base salary is $30,000. He gets paid biweekly
$30,000/26 = $1,153.85 base earnings ($40,000 - $31,500) x .02 = $170 commission $1,153.85 + $170.00 = $1,323.85 gross
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Bonuses and Overtime
Bonuses that are part of employees’ wage rates must be included for period covered by bonus Those known in advance or set up as
incentives must be added to wages for week
Then divided by total hours worked to get regular pay
OT calculated based upon this rate
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Profit-Sharing PlansProfit Sharing Plans
EE shares in corporate profits – receives his/her share in the form of:
Cash payment Profits paid into retirement or savings account Profits distributed as stock
These payments must meet standards established by Department of Labor
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