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CHAPTER 2

Payroll Accounting 2004 Bernard J. Bieg. CHAPTER 2. COMPUTING & PAYING WAGES AND SALARIES. Developed by Lisa Swallow, CPA CMA MS. Fair Labor Standards Act. Federal Wage & Hour Law provides for two types of coverage: Enterprise Coverage All EE of interstate commerce

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CHAPTER 2

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  1. Payroll Accounting 2004 Bernard J. Bieg CHAPTER 2 COMPUTING & PAYING WAGES AND SALARIES Developed by Lisa Swallow, CPA CMA MS

  2. Fair Labor Standards Act Federal Wage & Hour Lawprovides for two types of coverage: • Enterprise Coverage • All EE of interstate commerce • And $500,000 or more annual gross sales OR • Individual Coverage • EE whose company may not meet enterprise coverage, but are in a fringe occupation are covered individually (for example packaging corp. with annual revenues = $225,000) • Plus many nonprofits (schools, public agencies et al) Manyfamily businesses are exempt!

  3. FLSA & Domestic Help • Domestic help includes nannies, gardeners, chauffeurs, etc. • These employees must earn minimum wage and overtime if they: • work more than 8 hours/week or • earn $1,000 in a calendar year • “Live-in” help need not be paid overtime

  4. What is Minimum Wage? • Includes all rates of pay including, but not limited to: • Commissions • Bonuses and severance pay • On-call or differential • Exceptions to minimum wage – • FT students employed at their own university - 85% • Student learners at Vocational Technical school - 75% • Retail or service establishments and farms employing FT students - 85% • Physically or mentally impaired employees with certification *Minimum wage is very different from ‘living wage’. Over 75 cities and counties now have local ordinances mandating employers who have local government contracts pay a wage to their employees at an amount minimally necessary to live on.

  5. Tipped Employees • Anyone averaging $30/month is a “tipped employee” • Small Business Job Protection Act froze minimum tipped wages at $2.13/hour, but EE still must make $5.15/hour when combining tips/wages (5.15 x 40 = $206 minimum weekly gross) • ER gets credit for tips received between $2.13 and $5.15 • Examples of tips received for 40-hour work week • #1. Reported tips = $43 • Is $85.20* (minimum tipped wages) + $43 > $206 • No - ($206 - 43 = $163) so ER must pay additional wages ($163 - 85.20) • #2. Reported tips = $1189 • Is $85.20 + $1189 > $206 • Yes- so ER pays $85.20 wages • #3. Reported tips = $111 • Is $85.20 + 111 > $206 • No - ($206 - 111 = $95) so ER must pay additional wages ($95 - 85.20) *40 hours x $2.13/hour = $85.20

  6. 40 Hour Work Week • Established by corporate policy (for example 12:01 a.m. Saturday - 11:59 p.m. Friday) • Seven consecutive 24-hour periods • Some states require daily overtime (OT) over 8 hours (not FLSA) • FLSA sets OT at 1.5 times regular pay • Exception 1 - Hospital EE, overtime for 80+ hours in 14 days • Exception 2 - EE receiving remedial education • Exception 3 – Retail workers earning commission (special rules) • Exception 4 - Emergency public safety EE -can accumulate 320 hrs x 1.5 = 480 hours compensatory time instead of OT • Exception 5 - EE of state or interstate governmental agency – can accumulate 160 x 1.5 = 240 hours compensatory time instead of OT

  7. Exempt vs. Nonexempt Putting someone on salary doesn’t mean they’re exempt!! “Exempt” means exempt from overtime provisions of FLSA • 1. Executives • discretionary and supervisory powers • nonexempt work cannot exceed 20% • 2. Professional • creativity and intellectual work • uses independent judgment • nonexempt work cannot exceed 20% • 3. Administrative • discretionary work • directly assists executive • nonexempt work cannot exceed 20% • 4. Outside sales • primary sales work is away from the employer’s place of business and no more than 20% non-sales work To be considered exempt, must be paid on a salary basis and gross at least $250/week

  8. Child Labor Laws • Under age 16 cannot work in construction, mining, manufacturing, etc. • Under age 18 cannot work in hazardous jobs • Under 16 years old limited to employment in retail and food/gas service: • only 7 a.m. - 7 p.m. (until 9 p.m. allowed in summer) • 3 hours per day - 18 hours per week – school year • 8 hours per day - 40 hours per week – summer • In agricultural occupations an employee as young as 10 can work • only from 6/1 - 10/15 • Hand harvest laborers outside school hours only • subject to many strict limitations • ER needs to have certificate of age on file Violations can result in up to $10,000/offense

  9. What the FLSA Does Not Cover • No requirement for employers to: • Pay extra for weekend/holiday work • Pay for holidays or vacation • Grant vacation time • Limit hours for persons 16 years of age or over

  10. Compensable vs. Noncompensable Time • Travel (when part of principal workday) is considered work time • Training (when for ER benefit/required) is compensable • Rest periods under 20 minutes are compensable (can’t make EE ‘check out’) • Prep at work station (but not clothes changing, shower) is compensable • Meal periods are not considered compensable unless employee must perform some tasks while eating • On call time is not compensable if employee can spend time as he/she chooses • Work at home is compensable if nonexempt employee • Sleep time is compensable if required to be on duty less than 24 hours

  11. Timekeeping • FLSA requires employers to retain time/pay records • Employer in traditional office environment can use: • Time sheet • Time cards • Computerized time/attendance records • card-generated systems (computerized totals) • badge systems (microchips or bar codes) • cardless/badgeless system - EE enters PIN • PC-based system • Employer in nontraditional office environment can use: • Touch screen technology (PC screen reads touch input) • Internet • Wireless transmission (cell phones, personal digital assistants (PDAs)) • Biometrics - iris scan, fingerprint or some other unique characteristic to ensure security

  12. Pay Periods • 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!

  13. Steps to Follow when Calculating Gross Pay • Annualize Salary • Calculate “regular” gross • Calculate hourly pay • Calculate OT rate (1.5 x hourly rate) • Add overtime pay to “regular” gross

  14. Examples - Calculating Gross Paycheck (#1) 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 • $18,000/2,080 hours = $8.65 regular rate • $8.65 x 1.5 = $12.98 OT rate • ($12.98 x 3) + $346.15 = $385.09 gross

  15. Practice Calculating Gross Paycheck (#2) FACTS: Salary quoted is $2,000/month - paid semi monthly - 4 hours OT in one pay period • $2,000 x 12 = $24,000 annual • $24,000/24 = $1,000 semimonthly gross • $24,000/2080 = $11.54 regular rate • $11.54 x 1.5 = $17.31 OT rate • ($1,000) + ($17.31 x 4) = $1,069.24 gross

  16. Practice Calculating Gross Paycheck (#3) FACTS: Salary quoted is $2,000/month for 38 hour work week - paid semimonthly. OT - regular pay between 38-40 hours/week; 1.5 after 40. 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/ (38 x 52)* = $12.15 regular rate • $12.15 x 1.5 = $18.23 OT rate • $1,000 + (4 x $12.15) + (12 x $18.23) = $1267.36 gross *Denominator is always number of hours in full time year - may be different between companies

  17. Practice Calculating Gross Paycheck (#4) 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/(35 hours x 52 weeks) = $10.55 regular rate • $10.55 x 1.5 = $15.83 OT rate • $800 + ($10.55 x 10) + ($15.83 x 6) = $1000.48 gross

  18. Practice Calculating Gross Paycheck (#5) FACTS: 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 • $26,400/2080 = $12.69 regular rate • $12.69 x 1.5 = $19.04 OT rate • $1,015.38 + (11.5 x $19.04) = $1,234.34 gross

  19. Salaried with Fluctuating Workweek • Some employees may work a fluctuating schedule on a fixed salary • Not applicable to hourly employees • Employee must agree to this system • Overtime is calculated by dividing normal salary by total hours worked • Then an extra .5 rate is paid for all hours worked over 40 • Not allowed in all states

  20. Piece Rate • FLSA requires piecework earners to get paid for nonproductive time • Must equal minimum wage with OT calculated one of two ways: Method 1 • units produced x unit piece rate = piece rate earnings • piece rate earnings/total hours = hourly rate • hourly rate x 1/2 = OT premium • piece rate earnings + (OT premium x OT hours) = gross pay or Method 2 • (units produced in 40 hours x piece rate) + (units produced in OT) x (1.5)(piece rate)

  21. Practice Calculating Piece Rate (#1) FACTS: 4,812 units inspected in a 47.25 hour week (600 of those units produced in extra hours). Employee is paid .12/each.Calculate using both methods. Method 1 • (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 2 • (4,212 x .12) + (600 x [.12][1.5]) = $613.44 gross

  22. Practice Calculating Piece Rate (#2) 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 1 • (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 2 • (6474 x .08) + (423 x .12) = $568.68 gross

  23. Special Incentive Plans • Some piece rates systems may be modified to entice workers to produce more • Computation of payroll is based on differing rates for differing quantities of production • Example: • .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 3501 units/week

  24. Commission • Commission can be used in many combinations (with base salary or stand alone) - as long as minimum wage provisions are met • For example: • 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 gross paycheck: • $30,000/26 = $1153.85 base earnings • (8500 x .02) = $170 commission • $1153.85 + 170.00 = $1323.85 gross

  25. Profit-Sharing Plans • Profit Sharing Plans • EE shares in corporate profits – receives his/her share in the form of • Cash payment • Profits distributed into retirement or savings account • Profits distributed as stock • These payments must meet standards established by Department of Labor

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