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Payroll Accounting 2013 Bernard J. Bieg and Judith A. Toland

Payroll Accounting 2013 Bernard J. Bieg and Judith A. Toland. CHAPTER 2. CHAPTER 2 COMPUTING WAGES & SALARIES. Developed by Lisa Swallow, CPA CMA MS. Learning Objectives. Explain the major provisions of the Fair Labor Standards Act Define hours worked

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Payroll Accounting 2013 Bernard J. Bieg and Judith A. Toland

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  1. Payroll Accounting 2013Bernard J. Bieg and Judith A. Toland CHAPTER 2 • CHAPTER 2 • COMPUTING WAGES & SALARIES Developed by Lisa Swallow, CPA CMA MS

  2. Learning 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

  3. 0 Fair Labor Standards Act • Enterprise coverage includes all employees 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 • Employee 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 Federal Wage & Hour Law provides for both these types of coverage. Note: Many family businesses are exempt! LO-1

  4. 0 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 • Independent contractor defined by “ABC test” LO-1

  5. 0 FLSA & Domestics • Domestic help includes nannies, gardeners, chauffeurs, etc. • Casual baby sitter and companions for aged/infirmed not covered • These employees must earn minimum wage and overtime if they • Work 8 hours/week or more or • Earn at least $1,000 in a calendar year • Live-in domestics need not be paid overtime LO-1

  6. 0 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

  7. Minimum Wage vs. “Living Wage” • Current minimum wage is $7.25/hour • Proposal to increase wage rate in series of steps to $9.50 per hour proposed by Obama Administration • Certain exceptions to minimum wages • “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

  8. 0 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 workweek • #1. Reported tips = $43 • Is $85.20 (40 x $2.13 minimum tipped wage) + $43 > $290 - (No - so employer must pay additional wages of $290 - $43 = $247) • #2. Reported tips = $1,189 • Is $85.20 + $1,189 > $290 - (Yes – so employer pays $85.20 wages) Note: states’ tip credit percentages may differ from federal law *40 hours x $2.13/hour = $85.20 LO-1

  9. 0 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 • Employer can require employees to work overtime • 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

  10. 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

  11. 0 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 means employee must meet ‘primary duty’ requirements listed in Figure 2-2 • Employee must be paid on salary basis at least $455/week • Blue collar workers are always entitledto overtime pay – includes police officers, EMTs, firefighters, paramedics and LPNs Note: Putting someone on salary doesn’t mean he/she is exempt!! LO-1

  12. Equal Pay Act • Men and women performing equal work must receive equal pay • Applies to any employer with workers subject to minimum pay provisions • Wage differentials allowed only if based on a seniority system, merit system or factor other than sex • If found to have differential pay, must raise the lower rate to equal the higher rate LO-1

  13. 0 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

  14. 0 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

  15. 0 Determining Employee’s Work Time • Principal activities require exertion, and are required by the employer and for the employer’s benefit • 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 (with certain caveats) • Waiting for doctor’s appointment on site LO-2

  16. 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 – different courts issued diverse rulings on smallest increments of time LO-2

  17. Records Used for Timekeeping • 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 badgelesssytems 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 IVR (interactive voice response) LO-3

  18. 0 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

  19. 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

  20. Calculating Overtime – Different Rates for Different Jobs • Employer may calculate overtime in one of three ways: • Pay overtime at higher rate • Calculate total earnings for all jobs, divide by total hours and apply overtime premium based on that weighted average • Use overtime rate for job performed after 40th hour LO-4

  21. 0 Steps to Follow When Converting Period Wage Rates to Hourly Rates Used to calculate pay for salaried and nonexempt employees • Annualize salary • Calculate regular weekly gross • Calculate hourly pay • Calculate overtime (OT) rate - (1.5 x hourly rate) • Add OT pay to regular gross LO-4

  22. 0 Example #1 Calculating Gross Paycheck FACTS: Salary quoted to nonexempt employee 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 LO-4

  23. 0 Example #2 Calculating Gross Paycheck FACTS: Salary quoted to nonexempt employee 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 LO-4

  24. 0 Example #3 Calculating Gross Paycheck FACTS: Salary quoted to nonexempt employee 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 LO-4

  25. 0 Example #4 Calculating Gross Paycheck FACTS: Salary quoted to nonexempt employee 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 LO-4

  26. 0 Example #5Calculating Gross Paycheck FACTS: Salary quoted nonexempt employee 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 LO-4

  27. 0 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 overtime premium 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

  28. 0 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

  29. 0 Example #1Calculating 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 pay using both methods. Method A • 4,812 x .12 = $577.44 regular piece rate earnings • 577.44/47.25 hours = $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 LO-5

  30. Example #2 Calculating Piece Rate Gross Pay 0 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) = $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 hours) = $573.95 gross Method B • (6,474 x .08) + [423 x (.08)(1.5)] = $568.68 gross LO-5

  31. 0 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

  32. 0 Commissions • Commission can be used in many combinations – is a stated percentage of revenue paid for each transaction • 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. • $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 LO-5

  33. 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 $85.00. He worked 44 hours this week, his gross pay would be: • $13.50 x 44 hours = $594.00 + $85.00 = $679.00 • $679.00/44 hours = $15.43 regular rate • $15.43 x .5 = $7.72 x 4 hours = $30.88 • $679.00 + $30.88 = $709.88 LO-5

  34. 0 Profit-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 LO-5

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