Payroll Accounting 2011Payroll Accounting 2011Bernard J. Bieg and Judith A. TolandBernard J. Bieg and Judith A. Toland

CHAPTER 2

CHAPTER 2CHAPTER 2

COMPUTING WAGES & SALARIESCOMPUTING WAGES & SALARIES

Developed by Lisa Swallow, CPA CMA MSDeveloped by Lisa Swallow, CPA CMA MS

Learning ObjectivesLearning Objectives

Explain the major provisions of the Fair Labor Standards Act

Define hours worked Describe the main types of records used to

collect payroll data Calculate regular and overtime pay Identify distinctive compensation plans

Fair Labor Standards Act Fair Labor Standards Act (FLSA)(FLSA)Federal Wage & Hour Law provides for two types of coverage. Note: Many family businesses are

exempt!

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

Employee & Employer Employee & Employer DefinedDefined 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, partners in partnerships and statutory employees

FLSA & DomesticsFLSA & Domestics

Domestic help includes nannies, gardeners, chauffeurs, etc. Casual baby sitter and companions for

aged/infirmed not coveredThese employees must earn

minimum wage and overtime if theyWork more than 8 hours/week or ifEarn at least $1,700 in a calendar year

Live-in domestics need not be paid overtime

What is Minimum What is Minimum Wage?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

Minimum Wage vs. “Living Minimum Wage vs. “Living Wage”Wage”

Minimum wage is $7.25/hour“Living wage” refers to local

ordinances that vary between citiesLaw that attempts to keep working

poor’s wages on track with cost of living100+ cities have local laws requiring

employers that do business with government to pay a calculated living wage

Some states now include private industry

Tipped EmployeesTipped Employees “Tipped employee” regularly average smore 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 EE 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 (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

Overtime Provisions & Overtime Provisions & ExceptionsExceptions

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 FLSA sets OT at 1.5 times regular pay Exceptions follow:

Hospital EE, overtime for 80+ hours in14 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

Compensatory Time OffCompensatory 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 (“comp time”)

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

Exempt vs. Nonexempt Exempt vs. Nonexempt EmployeesEmployees

“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!!

Child Labor RestrictionsChild 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 fines

What the FLSA Does Not What the FLSA Does Not CoverCover 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

Determining Employee’s Work Determining Employee’s Work TimeTime

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 less

than 24 hours Training time is generally compensable

Noncompensable ActivitiesNoncompensable Activities

Preliminary and postliminary activitiesPortal-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 hourTime for nursing mothers to breast feed

and/or express milk (part of HCERA)

Methods of Computing Methods of Computing Wages/SalariesWages/Salaries Most common pay periods are as follows

Biweekly (26) - same hours each pay period Semi-monthly (24) - different hours each pay

period Monthly (12)- different hours each pay period Weekly (52) - same hours each pay period

ER can have different pay periods for

different groups within same company!

Calculating Overtime PayCalculating 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!

Steps to Follow When Steps to Follow When Converting Period Wage Converting Period Wage Rates to Hourly RatesRates 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

Example #1 Example #1 Calculating Gross PaycheckCalculating 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

Example #2 Example #2 Calculating Gross Calculating Gross PaycheckPaycheck

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

Example #3 Example #3 Calculating Gross PaycheckCalculating 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 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

Example #4 Example #4 Calculating Gross PaycheckCalculating 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 $19,200/52 = $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

gross

Example #5Example #5Calculating Gross PaycheckCalculating Gross PaycheckFACTS: 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

Salaried Employees – Salaried Employees – Fluctuating WorkweekFluctuating 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 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

Piece RatePiece 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!!

Example #1Example #1Calculating Piece Rate Gross Calculating Piece Rate Gross PayPay

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

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)(1.5)] = $568.68 gross

Example #2 Calculating Piece Rate Gross Pay

Special Incentive PlansSpecial 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/week

CommissionsCommissions

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; calculate his total gross pay.

$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

Bonuses and OvertimeBonuses 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

Profit-Sharing PlansProfit-Sharing Plans

Profit-sharing plans are ones in which an employee 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