Chapter 6 Payroll

Section 1 Gross Earnings: Wages

Payroll Process Gross Earnings Deductions Net Pay Salaries and Wages (Section 1) Piecework and Commission (Section 2) Deductions Social Security, Medicare, and other Taxes (Section 3) Income Tax Withholding (Section 4) Net Pay

Section 1 - Intro Gross pay: determined by time. Ledger (electronic or paper) is used to organize time worked. Employee Hours Worked Total Hours Rate Gross Earnings S M T W Th F Petty, R. --- $7.59 Dean, D. $8.01

Payroll Ledger Gross Earnings = Number of Hours Worked x Rate per hour Employee Hours Worked Total Hours Rate Gross Earnings S M T W Th F Petty, R. --- $7.59 Dean, D. $8.01 Employee Hours Worked Total Hours Rate Gross Earnings S M T W Th F Petty, R. --- 8 6.5 6 4 32.5 $7.59 $246.68 Dean, D. 7 35 $8.01 $280.35 Employee Hours Worked Total Hours Rate Gross Earnings S M T W Th F Petty, R. --- 8 6.5 6 4 32.5 $7.59 Dean, D. 7 35 $8.01 x x Gross Earnings = Number of Hours Worked x Rate per hour

Overtime Fair Labor Standards Act For most full-time workers… 0 hr 40 hour workweek Work above and beyond 40 hours results in higher than normal pay: 1 1/2 or 1. 5 times the normal rate “Time-and-a-half” regular pay OT pay 0 hr 40 hr

Example Compute the gross pay for this employee: 47 hr total hours -40 hr regular hours 7 hr overtime hours Compute the gross pay for this employee: Regular Pay Rate: $9.18 per hour Hours worked this week: 47 hours Overtime, if applicable is paid at time-and-a-half. Regular Pay + Overtime Pay = Gross Pay + = $463.59 Regular Pay $9.18/hr x 40 hours = $367.20 Overtime Pay 1st Establish overtime rate of pay: 1.5 x $9.18/hr = $13.77/hr 2nd compute overtime pay: $13.77/hr x 7 hr = $96.39

Payroll Ledger with overtime Gross Earnings = Regular Pay + OT Pay Gross Earnings (Petty, R.) = 40 hr x $9.50 + ($9.50 x 1.5 x 4.5 hrs) Gross Earnings (Dean, D.) = 40 hr x $8.85 + ($8.85 x 1.5 x 3 hrs) Employee Hours Worked Total Hours Regular Rate Gross Earnings S M T W Th F Reg OT Reg. OT Total Petty, R. -- 10 8.5 8 12 6 40 4.5 $9.50 Dean, D. 9 5 3 $8.85 Employee Hours Worked Total Hours Regular Rate Gross Earnings S M T W Th F Reg OT Reg. OT Total Petty, R. -- 10 8.5 8 12 6 $9.50 Dean, D. 9 5 $8.85 44.5 hrs $380.00 $64.13 $441.13 43 hrs $354.00 $39.83 $393.83

Practice Payroll Ledger 6.1 Exercises #2 – 4 #7 – 9 #12, 13

Overtime Premium Method p. 184 Straight-time earnings 47 hr x $15.50 $728.50 (Total Hours x Regular Pay Rate 7 hr x $7.75 $54.25 + ________________ Overtime Premium (Overtime Hours x 1/2 Regular Pay Rate Gross Earnings $782.75 EXAMPLE Katrina Ware’s regular pay rate is $15.50 per hour. This week she worked 40 regular hours and 7 overtime hours. Determine her gross earnings using the overtime premium method.

Practice Overtime Premium Method 5.1 Exercises #17, 18

Overtime Per Workday (reference page 219) CONCEPT Overtime is paid for all work beyond 8 hours in any given day. It is paid whether you reach 40 hours for the week or not. regular pay OT pay EXAMPLE On Monday, Kim works 13 hours. Her regular pay rate is $12.00 per hour. What is her pay on Monday if the company uses the “overtime for over 8 hrs of work per day” method? 0 hr 8 hr Regular Pay: 8 hours at $12.00 per hour = $96.00 Overtime Pay: 1st Overtime Rate = $12.00 x 1.5 = $18.00 per hour 2nd Overtime Pay = $18.00 x 5 hrs = $90 Gross Earnings: $96.00 + $90.00 = $186.00

Overtime for over 8 hrs of work/day method example Determine this worker’s pay if their regular pay rate is $9.90 per hour. M T W Th F 11.5 hr 6 hr 9.5 hr 8   S M T W Th F Total Hours Reg. --- 8 6 O.T. 3.5 1.5 36 5 Regular Pay $9.90 x 36 hours $356.40 OT Pay 1st $9.90 x 1.5 = $14.85 2nd $14.85 x 5 hours $74.25 Gross Earnings $356.40 + $74.25 $430.65

Practice OT Paid on Work > 8 hrs per day 6.1 Exercises #22, 23

Section 1 Gross Earnings: Salaries

Salary Our 2nd method of computing Gross Pay Fixed amount for each pay period. Common Pay Periods Monthly Semimonthly Biweekly Weekly 12 paychecks per year Twice each month (24 paychecks/year) Every two weeks (26 paychecks/year) 52 paychecks per year

Salary Equivalents $1,580 $3,160 $37,920  12 checks  26 checks Done in order to compare different salaried workers. Weekly Biweekly Semimonthly Monthly Annual $1,580 $729.23 $1,458.46 $3,160 $37,920  12 checks  26 checks  52 checks x 24 checks

Practice Salary Equivalents 6.1 Exercises #30 – 33 Application Problems #41, 43, 45 END of Section 1

Salary Computing Overtime Under the Fair Labor Standards Act, requires that overtime be paid to certain salaried employees. Overtime is computed at time-and-a-half

Salary Computing Overtime A supervisor is paid $692.31 per week and is expected to work 40-hour weeks. How much should she be paid for a 46 hour week? Determine hourly pay: $692.31 = $17.31 per hour 40 hr Determine gross earnings: $692.31 + ($17.31 x 1.5 x 6 hr) = $848.10

Practice Salary Overtime 5.1 Exercises #35 – 37 Additional Practice #41, 43, 45

Section 2 Gross Earnings: Piecework and Commissions

Introduction Section 1 – Salaries and wages are “time rates”. Pay depends upon actual time on the job Section 2 – Methods of pay are “incentive rates”. Pay depends upon actual performance on the job. Piecework Commission

Piecework Gross Earnings = $120 A piecework rate is the pay per item produced. Gross Earnings = $120 Gross Earnings = $20/bicycle x 6 bicycles Gross Earnings = Pay per Item x Number of Items $20 per bicycle assembled

Gross Earnings = Pay per Item x Number of Items EXAMPLE Truck drivers are typically paid based on the number of miles driven. The pay for a truck driver who logs 588 miles at a pay rate of $0.38/mile is: Gross Earnings = Pay per Item x Number of Items Gross Earnings = $223.44 Gross Earnings = $0.38 per mile x 588 miles

Practice Piecework 6.2 Exercises #2 -4

Piecework overtime Overtime rate is 1.5 times the regular rate per piece. Regular Pay Rate $20 per bicycle assembled Overtime Pay Rate $20/bicycle x 1.5 = $30/bicycle

Practice Piecework - Overtime Quick Check 4 (p. 229) An assembler is paid $0.84 per each child care seat assembled. In a week, 400 car seats were made on regular time and 138 were made on overtime. Compute the gross earnings for this worker. Regular Pay 400 x $0.84 = $336.00 Overtime piecework rate $0.84 x 1.5 = $1.26 per seat Overtime Pay 138 x $1.26 = $173.88 Gross Earnings = $336.00 + $173.88 Gross Earnings = $509.88

Practice Piecework with Overtime 6.2 Exercises #16 - 18

Differential Piecework page 228 Quotas determine the minimum amount of work to be done. Incentives (i.e. differential piecework) offer higher pay when the quota is exceeded. Packaging Department Pay Scale 1 – 60 boxes $0.80 per box 61 – 80 boxes $0.90 per box 80 or more boxes $1.10 per box Quota Incentives What is the pay for an employee who fills 84 boxes?

Packaging Department 1 – 60 boxes $0.80 per box 61 – 80 boxes $0.90 per box 81 or more boxes $1.10 per box 84 60 60 24 60 boxes x $0.80 = $48.00 20 20 4 20 boxes x $0.90 = $18.00 4 boxes x $1.10 = $4.40 4 Pay = $70.40

$1.10 per box 84 - 80 4 boxes x $1.10/box = $4.40 80 80 - 60 $0.90 per box 20 boxes x $0.90/box = $18.00 60 $0.80 per box 60 boxes x $0.80/box = $48.00 Gross Pay = $70.40 Pay Scale

Practice Differential Piecework Quick Check 2 (p. 228) Scooter Frame Company pays welders as follows: 1 – 150 frames $2.85 each 151 – 250 $3.20 each 251 or more $3.45 each Find the gross earnings of a worker who welds 282 frames. 150 100 150 x $2.85 = $427.50 100 x $3.20 = $320.00 32 x $3.45 = $110.40 Gross Earnings = $857.90

Practice Differential Piecework 6.2 Exercises #6 - 8

Piecework with Guaranteed Hourly Wage Employee is paid either the minimum wage or the piecework earnings…whichever is higher.

Practice Piecework with Guaranteed Hourly Wage Quick Check 3 (p. 229) A cabinet door finisher is paid $14.70 per hour for an 8-hr day or $0.95 per cabinet door, whichever is higher. Find the gross earnings for a worker who output was: Monday: 106 doors Tuesday: 127 doors Wednesday: 152 doors Thursday: 120 doors Friday: 138 doors Minimum Daily Pay = Minimum Daily Pay = $14.70 x 8 hr Minimum Daily Pay = $14.70 x 8 hr = $117.60 Piecework Pay 106 x $0.95 = $100.70 127 x $0.95 = $120.65 152 x $0.95 = $144.40 120 x $0.95 = $114.00 138 x $0.95 = $131.10 $117.60 $117.60 Gross Earnings = $631.35

Practice Piecework with Guaranteed Hourly Wage Quick Check 3 (p. 229) A cabinet door finisher is paid $14.70 per hour for an 8-hr day or $0.95 per cabinet door, whichever is higher. Minimum Daily Pay = Minimum Daily Pay = $14.70 x 8 hr Minimum Daily Pay = $14.70 x 8 hr = $117.60 Find the gross earnings for a worker who output was: Monday: 106 doors Tuesday: 127 doors Wednesday: 152 doors Thursday: 120 doors Friday: 138 doors x $0.95 = $100.70 x $0.95 = $120.65 x $0.95 = $144.40 x $0.95 = $114.00 x $0.95 = $131.10 $117.60 $117.60 Gross Earnings = $631.35

Practice Piecework with Guaranteed Hourly Wage 6.2 Exercises #12 - 14

Commission Commission is often used for salespeople. Pay is usually expressed as a percent of sales. A real estate agent earns a 6.5% commission rate on all residential homes sold. Earn $6.50 for every $100 sold.

Commission Example Compute the commission for a real estate agent who just sold a $142,500 home. Her commission rate is 5.25%. Your commission is based upon your sales. Part = Base x Rate Commission = $142,500 x 0.0525 Commission = $7,481.25

Commission Example (including Returns) A sporting goods store salesperson had sales of $14,500 one month, with returns and allowances of $825. Determine her gross earnings if she is paid a 20% commission. Net Sales = $14,500 - $825 $13,675 Commission = $13,675 x 0.20 Commission = $2,735.00

Practice Commission 6.2 Exercises #20 - 22

Commission Variable Commission Rate Variable commission rate (sliding scale) is used by companies to keep their top salespeople. Sales Rate Up to $20,000 6% $20,001 to $3o,000 8% $30,001 and up 9%

Commission Variable Commission Rate Quick Check 7 (p. 231) What is the commission earned on sales of $38,400? Sales Rate Up to $20,000 6% $20,001 to $3o,000 8% $30,001 and up 9%

Sales Rate Up to $20,000 6% $20,001 to $3o,000 8% $30,001 and up 9% $38,400 20,000 20,000 $18,400 $20,000 x 6%= $1,200 10,000 10,000 $8,400 $10,000 x 8% = $800 $8,400 x 9%= $756 8,400 Gross Earnings = $2,756

Practice Commission (Variable or Sliding Scale) 6.2 Exercises #24 - 26

Salary plus Commission Salesperson is paid a fixed sum per pay period plus a commission on all sales. Gross Earnings = Fixed Amount/period + Commission Amount

Salary plus Commission Quick Check 8 (p. 231) Salesperson is paid a salary of $290 a week, plus a 4% commission on all sales over $750. Compute his gross earnings for a week where his total sales were $1870. Gross Earnings = $290 + $44.80 Gross Earnings = $334.80 Gross Earnings = $290 + Commission Gross Earnings = Salary + Commission $1870 - $750 = $1,120 $1,120 x 4% = $44.80

Practice Salary plus Commission 6.2 Exercises #28 - 30 15,000 Sales Percent Commission $0 - $15,000 No Commission (o%) $15,001 - $25,000 0.9% $25,001 – up 1.1% 10,000 The animation on this slide gives you another (hopefully better) way to communicate the pay scale used in problems 28 through 30.

Problem 28.) Page 234 Sales Rate Up to $15,000 0% $15,001 to $25,000 0.9% $25,001 and up 1.1% $36,300 15,000 15,000 $21,300 $15,000 x 0%= $0.00 10,000 10,000 $11,300 $10,000 x 0.9% = $90.00 Using the reworded pay scale from the previous slide on problem #28.) in the homework. $11,300 x 1.1%= $124.30 11,300 Commission = $214.30 Gross Earnings = $452 + $214.30 Gross Earnings = $666.30

Ch 6 Payroll Section 3 - Social Security, Medicare, and other Taxes

Introduction Deductions Social Security (FICA) Medicare State Disability Insurance (SDI)

Social Security FICA – Federal Insurance Contributions Act Tax rate is 6.2% This rate is applied on all earnings up to $110,000 * Both employee and employer pay into it. Your employer matches your contribution dollar for dollar. The cut-off point for FICA changes from one year to the next. Our textbook is going with $110,000 and that’s what we are to use for the homework problems.

Social Security How much is paid into Social Security if your paycheck is $855.00? Your contribution: $855 x 6.2% $855 x.062 = $53.01 Your employer’s contribution: $53.01

Maximum Annual Contribution What is the most you will pay into Social Security in one year? Textbook (page 236): Pay on the first $110,000 only. $110,000 x 6.2% = $6,820

Approaching the FICA Threshold 7% To date, a salesperson has earned $108,350.00 Her next paycheck is $3,795.00 How much will be withheld for Social Security? 110,000 110,000 1,650 $1,650 x 6.2% $1,650 x .062 = $102.30 108,350 108,350

Medicare Medicare tax is 1.45% of all earnings. The employer matches the employee’s contributions.

Self Employed No employer to match employee’s contribution… Pay double the FICA rate and the Medicare rate: 12.4% FICA 2.9% Medicare (2 x 6.2%) (2 x 1.45%)

State Disability Insurance For states that have SDI, a typical deduction is 1% of gross earnings on the first $31,800. On a paycheck of $568.00 the SDI deduction is: $568.00 x 1% = $5.68

Practice Social Security, Medicare, and Other Taxes Exercises 6.3 (pages 239 – 240) #4 – 6, 9 – 12, 14, 15, 18 #20, 21, 23, 26, 28

Ch 6 Payroll Income Tax Withholding

Personal Income Tax Amount of Income Tax Paid: Amount of Gross Earnings Married or Single Withholding Allowances (W-4)

W-4 Form Allowances: Married person with three children. 5 Allowances: Married person with three children. Could claim 5 allowances (one for the employee, spouse, and three children)

Gross Earnings Amount of tax withheld is based on the gross earnings for the pay period. Methods used to determine tax: 1.) Wage Bracket 2.) Percentage Method

Wage Bracket Method Tables are made with weekly, biweekly, semimonthly, and daily pay periods. There are different sets of tables for single and married tax payers. Pages 242 - 243

Example Wage Bracket Method Quick Check 2 (page 244) Bob Martinez has monthly earnings of $2839.78. He is married and claims four withholding allowances. Find his withholding tax using the wage bracket method. At Least But Less Than 2,800 2,840 Allowances (4) Amount withheld is $29 Refer to the bottom table on page 243…

Practice Wage Bracket Method Exercises 6.4 (page 251) #3, 5, 7, 11

State Income Tax

State Income Tax Some states have no income tax… …some have a flat tax rate (% of income)… …and most issue tax tables to help determine tax owed.

Example Quick Check 6 (page 247) An optometrist assistant working in Michigan has gross earnings of $3,225 for the month. Determine the state withholding tax (refer to the table on 247). State withholding tax = $3,225 x 4.35% $3,225 x .0435 $140.29

Practice State Income Tax Exercise 6.4 (page 251) #16 - 18

Federal Withholding Tax Percentage Method

One Withholding Allowance Percentage Method Advantages: Don’t need the pages of tables Lends itself to computer processing Payroll Period One Withholding Allowance Weekly $70.19 Biweekly $140.38 Semimonthly $152.08 Monthly $304.17 Quarterly $912.50 Semiannually $1,825.00 Annually $3,650.00 $2,000 - 2(140.38) = 1719.24 1719.24 $33.40 + 15% x (1719.24 - $940) Gross pay = $2000 biweekly Married with 2 allowances. $150.29

Percentage Method Withholding Allowance Payroll Period One Withholding Allowance Weekly $70.19 Biweekly $140.38 Semimonthly $152.08 Monthly $304.17 Quarterly $912.50 Semiannually $1,825.00 Annually $3,650.00 Page 244

Page 245

Example Quick Check 3 (page 246) Sadie Simms is married and claims three withholding allowances. Use the percentage method to find her withholding tax in a week where her earnings were $1263. Payroll Period One Withholding Allowance Weekly $70.19 Biweekly $140.38 Semimonthly $152.08 Monthly $304.17 Quarterly $912.50 Semiannually $1,825.00 Annually $3,650.00 $70.19 x 3 = $210.57 $1263 - $210.57 = $1,052.43 $1,052.43 is the taxable earnings.

Table 1 Weekly Payroll Period (b) MARRIED person - x Taxable earnings: $1,052.43 Withholding tax = $16.70 + 15% x $582.43 $16.70 + 15% x ($1,052.43 - $470) $16.70 + $87.36 Withholding tax = $104.06

Example Quick Check 4 (page 246) Howard Martin has earnings of $5735 for the month. He is married and claims four withholding allowances. Use the percentage method to find his withholding tax. Payroll Period One Withholding Allowance Weekly $70.19 Biweekly $140.38 Semimonthly $152.08 Monthly $304.17 Quarterly $912.50 Semiannually $1,825.00 Annually $3,650.00 $304.17 x 4 = $1,216.68 $5735 - $1,216.68 = $4,518.32 $4,518.32 is the taxable earnings.

Table 1 Monthly Payroll Period (b) MARRIED person - If the amount of wages (after subtracting withholding allowances) is: The amount of income tax to withhold is: Not over $1313 . . . $0 Over - But Not Over - of excess over - $1313 $2038 10% - $1313 $6304 $72.50 plus 15% - $2038 $9844 $712.40 plus 25% - $6304 x Taxable earnings: $4518.32 Withholding tax = $72.50 + 15% x ($4518.32 - $2038) $72.50 + 15% x $2480.32 $72.50 + $372.05 Withholding tax = $444.55

Example Quick Check 5 (page 246) Carol Dixon has biweekly earnings of $4350, is single, and claims two withholding allowances. Use the percentage method to find her withholding tax. Payroll Period One Withholding Allowance Weekly $70.19 Biweekly $140.38 Semimonthly $152.08 Monthly $304.17 Quarterly $912.50 Semiannually $1,825.00 Annually $3,650.00 $140.38 x 2 = $280.76 $4350 - $280.76 = $4069.24 $4069.24 is the taxable earnings.

Table 1 Biweekly Payroll Period (b) SINGLE person - If the amount of wages (after subtracting withholding allowances) is: The amount of income tax to withhold is: Not over $276 . . . $0 Over - But Not Over - of excess over - $276 $400 10% - $276 $1,392 $12.40 plus 15% - $400 $2,559 $161.20 plus 25% - $1,392 $6,677 $452.95 plus 28% - $2,559 $14,423 $1,605.99 plus 33% - $6,677 x Taxable earnings: $4069.24 Withholding tax = $452.95 + 28% x $1,510.24 $452.95 + 28% x ($4,069.24 - $2,559) $452.95 + $422.87 Withholding tax = $875.82

Net Pay

Determine Net Pay after Deductions Gross Earnings – FICA tax – Medicare tax – Federal Withholding tax – State Withholding tax – Other Deductions Net Pay

Practice Exercise 6.4 (page 252) #21 – 24, 27

Amount owed to the IRS Money paid by companies

Amount owed to the IRS Example (page 253, #36) $265.36 $61.24 $4111.68 FICA Tax Collected from Employees Medicare Tax Collected from Employees Total Federal Withholding Amount Due the IRS Atlasta Ranch $265.36 $61.24 $4111.68 2 x $265.36 2 x $61.24 $530.72 + $122.48 + $4111.68 = $4764.88

Practice Amount owed to the IRS by a Company Exercise 6.4 (page 253) #37 , 40 END of UNIT Practice Test Graded Chapter Test

Wrap up Determine Net Pay

Example – Determine Net Pay #42, page 223 $1147 -71.11 -16.63 -156.40 -11.47 -39 -15 -100 Earnings of $1147 (weekly) Single, 4 withholding allowances Deductions: FICA ______________ Medicare _______________ Federal withholding ___________________ State disability insurance ____________ State withholding __________ United Way($15.00), and savings bond($100) $1147 x 6.2% = $71.11 $1147 x 1.45% = $16.63 $737.39 $156.40 $943 $1147 – (4 x $51) $81.90 + 25% x ($943 – $645) $1147 x 1% = $11.47 $1147 x 3.4% = $39

Practice Net Pay Exercise 5.4 (page 223) #42 – 44 *Practice Test pages 229 – 230 (*DELETE) (substitute with new practice test which is handed-out in class)