Payroll Accounting 2012 Bernard J. Bieg and Judith A. Toland CHAPTER 2 COMPUTING WAGES & SALARIES Developed by Lisa Swallow, CPA CMA MS

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 employment  Common-law relationship  IRS test based on behavioral control, financial control or relationship between two parties  Specific rules apply to employees of corporations, domestic employees, partners in partnerships and statutory employees LO-1

What is Minimum Wage?  Includes all rates of pay including, but not limited to  Commissions  Nondiscretionary bonuses and severance pay  On-call or differential pay  Discretionary bonus (one which is not agreed upon or promised before hand) is not included in an employee’s regular rate of pay  Other types of compensation not included in regular rate of pay include  Gifts made as a reward for service  Payments for a bona fide profit-sharing plan  Vacation, holiday, sick day or jury duty pay  Vehicle, tool or uniform allowances LO-1

Minimum Wage vs. “Living Wage”  Minimum wage is $7.25/hour  “Living wage” refers to local ordinances that vary between cities  Law that attempts to keep low-wage workers’ wages on track with cost of living  100+ cities have local laws requiring employers that do business with the government to pay a calculated living wage  Some states now include private industry LO-1

Tipped Employees  “Tipped employee” regularly average more than $30/month in tips  Minimum tipped wages is $2.13/hour, therefore tip credit = $5.12/hour – but may be calculated differently based upon state law  Employee must make $7.25/hour when combining tips/wages ($7.25 x 40 = $290 minimum weekly gross)  Tip credit remains the same for overtime pay calculation purposes  Examples of tips received for 40-hour work week #1. Reported tips = $43  Is $85.20 (40 x $2.13 minimum tipped wage) + $43 > $290  No - so employer must pay additional wages ($290 - $43 = $247) #2. Reported tips = $1,189  Is $ $1,189 > $290  Yes – so employer pays $85.20 wages #3. Reported tips = $111  Is $ $111 > $290  No - so employer must pay additional wages of ( $ $111 = $ 179 ) *40 hours x $2.13/hour = $85.20 LO-1

Overtime Provisions & Exceptions  Workweek established by corporate policy  Must be seven consecutive 24-hour periods  For example 12:01 a.m. Saturday - 11:59 p.m. Friday  Some states require daily overtime (OT) over 8 hours (if state plan is more generous than FLSA, state law is followed)  FLSA sets OT pay at 1.5 times regular pay  Exceptions to the above are as follows  Hospital employee, overtime for 80+ hours in 14 days or over 8 hours in a day (whichever is greatest)  Retail or service industry employees earning commission (special rules)  Employee receiving remedial education LO-1

Compensatory Time Off  In specific situations, employers may grant employees compensatory time (called ‘comp time’) off in lieu of overtime  Employee in public safety or emergency response can accumulate 320 hours x 1.5 = 480 hours comp time  Employee 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  Employee must be paid out comp time when employment terminated LO-1

Exempt vs. Nonexempt Employees “Exempt” means exempt from some, or all, of FLSA provisions  White-collar workers as outlined in Figure 2-2 (p. 2-10) are exempt  Executives, administrators, professionals  Business owners, highly compensated employees  Computer professionals and creative professionals  Outside salespeople  Test of exemption found in text - certain salary and “primary duty” requirements must be met  Employee must be paid on salary basis at least $455/week  Blue collar workers are always entitled to overtime pay Note: Putting someone on salary doesn’t mean he/she is exempt!! LO-1

Child Labor Restrictions  Nonfarm 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 - very specific conditions as to hours/employment conditions  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  Employer needs to have Certificate of Age on file Violations of child-labor provisions can result in serious fines LO-1

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 LO-1

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 and wait time (waiting to provide employer’s service)  Rest periods under 20 minutes are principal activities (can’t make employee “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 < 24 hours  Training sessions  Waiting for doctor’s appointment LO-2

Noncompensable Activities  Preliminary and postliminary activities  Portal-to-Portal Act defines these activities  Need not be counted unless customary or contractual  For example checking in/out of plant  Absences due to illness  Tardiness may result in “docked” time, based upon system in place  Must be paid for fractional parts of an hour  Time for nursing mothers to breast feed and/or express milk (part of HCERA) LO-2

Records Used for Timekeeping LO-3  FLSA requires certain time and pay records be kept  Time sheets indicate arrival/departure time of employee  Computerized time/attendance recording systems  Card-generated systems use computerized time cards  Badge systems employ badges in conjunction with electronic time clocks  Cardless and badgeless sytems require that an employee use their PIN number to process timekeeping  PC-based system allows employee to clock in via computer  Next generation technology includes touch-screen kiosks, web- based, biometrics and interactive voice response

Computing Wages/Salaries Most common pay periods are as follows  Biweekly (26) – 80 hours each pay period  Semi-monthly (24) - different hours each pay period  Monthly (12)- different hours each pay period  Weekly (52) – 40 hours each pay period Employer may have different pay periods for different groups within same company! LO-4

Calculating Overtime Pay There 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! LO-4

Steps to Follow When Converting Period Wage Rates to Hourly Rates Used to calculate pay for salaried nonexempt employees  Annualize salary  Calculate regular gross  Calculate hourly pay  Calculate overtime (OT) rate - (1.5 x hourly rate)  Add OT pay to regular gross LO-4

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 = $ weekly gross  $346.15/40 = $8.65 regular rate  $8.65 x 1.5 = $12.98 OT rate  $ ($12.98 x 3) = $ gross LO-4

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 = $ 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, gross LO-4

Example #3 Calculating Gross Paycheck FACTS: Salary quoted is $2,000/month for 38 hour work week - paid semimonthly. Two rates in addition to semimonthly gross (regular pay between 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 = $ 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, gross LO-4

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 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  $19,200/52 = $ 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, gross LO-4

Example #5 Calculating Gross Paycheck FACTS: Salary quoted is $2,200/month - paid biweekly hours OT in one pay period  $2,200 x 12 = $26,400 annual  $26,400/26 = $1, each biweekly pay period  $26,400/52 = $ weekly rate  $507.69/40 = $12.69 regular rate  $12.69 x 1.5 = $19.04 OT rate  $1, ($19.04 x 11.5) = $1, gross LO-5

Salaried Nonexempt Employees - Fluctuating Workweek  Employee and employer 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 overtime premium 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 overtime LO-5

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 or Method 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!! LO-5

Example #1 Calculating Piece Rate Gross Pay FACTS: 4,812 units inspected in a hour week (600 of those units produced in extra hours). Employee is paid.12 per unit. Calculate gross pay using both methods. Method A  4,812 x.12 = $ regular piece rate earnings  /47.25 hours = $12.22 hourly rate  $12.22 x.5 = $6.11 OT premium  $ ($6.11 x 7.25 hrs.) = $ gross Method B  (4,212 x.12) + [600 x (.12)(1.5)] = $ gross LO-5

FACTS: Inspection rate = $.08/unit. An EE inspected 6,897 units in 43.5 hours. She inspected 423 of these in overtime. Calculate using both methods. Method A  (6,897 units x.08) = $ regular piece rate earnings  $551.76/43.5 hours = $12.68 hourly rate  $12.68 x.5 = $6.34 OT premium  $ ($6.34 x 3.5 hours) = $ gross Method B  (6,474 x.08) + [423 x (.08)(1.5)] = $ gross Example #2 Calculating Piece Rate Gross Pay LO-5

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 2,000 units/week .24/unit for units inspected between 2,001-3,500 units/week .36/unit for units inspected over 3,500 units/week LO-5

Commissions  Commission can be used in many combinations  With base salary or stand alone  As 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; calculate his total gross pay. LO-5  $30,000/26 = $1, base earnings  ($40,000 - $31,500) x.02 = $170 commission  $1, $ = $1, gross

Nondiscretionary Bonuses  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 FACTS: Jamil earns $13.50/hour and also earned a safety performance bonus of $ He worked 44 hours this week, his gross pay would be: LO-5  $13.50 x 44 hours = $ $85.00 = $  $679.00/44 hours = $15.43 regular rate  $15.43 x.5 = $7.72 x 4 hours = $30.88  $ $30.88 = $709.88