Taxes & Spending Calculating Gross Earnings 4.01A – Explain taxes on income. “We make a living by what we get; we make a life by what we give.” Sir Winston Churchill Sir Winston Churchill

How do employees get paid? Types of Compensation - Employees Types of Compensation - Employees –Salary- fixed amount –Piece Rate- Production –Wages- Hourly, includes overtime –Commission - % of sales –Combination of above –Performance Bonuses Payroll check is generated by payroll clerk for compensation during a pay period. Payroll check is generated by payroll clerk for compensation during a pay period.

What is Contract Labor? The Individual The Individual –Is Not an employee –Is an independent contractor  Sets own schedule, locations, hours worked, planning  Provides own transportation, tools, materials, labor, capital –Income reported to IRS on a 1099 form by customers –Individual has 100% Responsibility to report and pay all taxes  Responsible for FICA- Social Security –Both employee and employer portion –7.65 % x 2 (15.3 %) of each $ earned –For every $100 pay - $15.30 to FICA taxes  Responsible for State and Federal Income Taxes

Payroll Payroll - A list of employees and the payments due to each one for a specific pay period. Pay Period – the amount of time over which an employee is paid (weekly, biweekly, semimonthly, or monthly). Ex: a one week pay period may run from Wednesday through Tuesday, allowing the payroll clerk time to get checks issued by Friday

Payroll Clerk A person who is responsible for preparing the payroll. A person who is responsible for preparing the payroll. 1)Makes sure employees are paid on time. 2)Makes sure each employee is paid the correct amount. 3)Completes payroll records 4)Submits payroll reports 5)Makes payroll tax deposits * see next slide

Payroll Taxes Withholdings (deductions) from employee pay Withholdings (deductions) from employee pay –Federal, state income tax estimates  Some municipalities have income taxes –FICA (Social security)- employee portion Employer Expenses Employer Expenses –Federal (FUTA) and state (SUTA) –Workers Compensation –FICA (Social Security)- employer matching portion

Tax Deposits Employer makes TIMELY tax deposits for: Employer makes TIMELY tax deposits for: –any money deducted –employer’s part of FICA and –FUTA and SUTA What if a company deducts from your paycheck and does not make the tax deposits? What if a company deducts from your paycheck and does not make the tax deposits? IRS will add fines, lock the doors of the business IRS will add fines, lock the doors of the business

Payroll System 1) Calculates earnings 2) Calculates deductions 3) Prepares payroll checks 4) Reports payroll information to government (Form 940, 941, 1099) 5) Remits payroll taxes owed 6) Records earnings and deductions in payroll and accounting records

Why is Payroll Important? Major expense for companies All records must be accurately maintained Inaccuracies in payroll calculations could: Cost a business thousands of dollars by Wrong payroll amounts and taxes owed Fines from the IRS, state tax authorities Shutting the business operation down

Electronic Badge Reader Identification badge with a magnetic strip that contains employee information used to record starting and ending work hours. Why use? ID for access AccuracyEZ Connects to what?

Biometric Devices Fingerprint scanner Fingerprint scanner Retinal scanner Retinal scanner Why would a company use these devices? Why would a company use these devices? Accuracy in payroll Accuracy in payroll Employee access Employee access

What is Gross Earnings? The total amount of money an employee earns in a pay period before any deductions.

Calculating Gross Earnings Depends on the basis for which an employee is paid/compensated: Depends on the basis for which an employee is paid/compensated: 1.Salary 2.Hourly Wage 3.Commission 4.Salary plus Commission or Bonus 5.Overtime Pay

Salary  A fixed amount of money paid to an employee for each pay period. Example: John Doe (Administrator) makes $30,000 annually (a year) Gross pay= $2,500 a month ($30,000/12)

Hourly Wage Amount of money paid to an employee for a specified rate per hour worked. Amount of money paid to an employee for a specified rate per hour worked.Equation Base x Rate = Tax # of Hrs. Worked X Hourly Rate= Gross Earnings Example: Joe worked 10 $7.25 per hour 10 x $7.25= $72.50

Overtime Pay Only applies to hourly workers Only applies to hourly workers One and a half times the employee’s regular hourly pay rate. Required by Fair Labor Standards Act (FLSA) One and a half times the employee’s regular hourly pay rate. Required by Fair Labor Standards Act (FLSA)Equation 1.5 X Regular Pay Rate= Overtime Rate Example: Joe earns $10 per hour and works 43 hours this week. $10 x 40 = $400 regular pay $10 x 1.5= $15 overtime rate x 3 hours = $45 Total gross pay = $445

Commission An amount paid to an employee based on a percentage of the employee’s sales. An amount paid to an employee based on a percentage of the employee’s sales. Base x Rate = Commission Earned Equation: $ amount of sales x Commission % = Gross Earnings Example: Joe sold a house valued at $250,000. As a real estate agent, he earns 3% commission. 250,000 x.03 = $7500 WOW! BUT…….What if he did not sell anything this month?

Commission What is an incentive for working on commission? What is an incentive for working on commission? –The more you sell, the more money you make!! What is a problem with working on commission? What is a problem with working on commission? –If you don’t sell anything, you have a $0 paycheck! –If the market is down, you might starve! Employer may offer a salary “+” commission plan- each would be lower, but employee has some security Employer may offer a salary “+” commission plan- each would be lower, but employee has some security