Business Math/Excel - - Chapter 3 Notes - -PAYROLL
Section 1
Payroll is usually one of the largest operating expenses a company has. Employers must maintain accurate payroll records for three reasons.
1. The company must keep accurate records because wages and salaries are income tax deductions for the employer.
2. Data must be collected in order to compute earnings for each employee for each payroll period.
3. Information must be provided to complete federal and state payroll reports that employers are required by law to keep.
As an employee, you should understand how your employer makes the computations pertaining to employee paychecks.
Gross Earnings
TermsCompensation / Salary, wage, pay or benefits received for the performance of a service.
Double Time / Twice an employee’s hourly rate.
Fair Labor Standards Act / An act of law (sometimes called the Wage and Hour Law) establishing minimum wages and requiring employers whose firms are involved in interstate commerce (sale of goods from state to state) to pay their employees time and one-half for all hours worked in excess of 40 hours per week. The act also provides that certain employees (management and supervisory) are exempt from its regulation.
Gross Earnings / The total amount of an employee’s pay before deductions.
Hourly Wage (hourly Rate) / Wages paid according to the number of hours worked.
Overtime / All time worked in excess of straight time.
Straight Time / Usually the first 40 hours worked per week. However, this number may vary from company to company. In this chapter, 40 hours is used to represent straight time. Straight time is often referred to as regular time.
Time and One-Half / One and one-half times an employee’s hourly rate.
Calculate gross pay for common pay periods.
Employees receive compensation as salary, wage, pay or benefits for the performance of a service. In your work experience or when searching for employment, you may have found employers that pay their employees at different times. The following table shows the common pay periods.
COMMON PAY PERIODSSalary Paid / Period / Number of Paychecks
Weekly / Once per week / 52 paychecks each year
Biweekly / Every 2 weeks / 26 Paychecks each year
Semimonthly / Twice a month / 24 paychecks each year
Monthly / Once a month / 12 paychecks each year
Calculate gross earning for straight time, overtime, and double time.
The calculations for gross earnings (the total amount of an employee’s pay before deductions) vary depending on several factors. Examples of these factors include:
· How many hours an employee works
· Whether the company is required to pay time and one-half for all hours over a regular time.
Compensation by Hourly Wage: Straight Time
The wage paid for each hour worked is called hourly wage. As previously mentioned, straight time (also called regular time or regular earnings) in most companies is 40 hours per week. However, companies such as Hewlett Packard and Digital Equipment Corporation are experimenting with shorter work hours.
Example: To compute Juan Olivar’s weekly salary (gross earnings) at $9.50 per hour, multiply the number of hours worked by the hourly rate. 40 x $9.50 = $380 per week (gross salary)
Compensation by Hourly Wage: Overtime
When a company is engaged in interstate commerce where its products move from state to state, it is required by the Fair Labor Standards Act to pay its employees time and one-half for all hours worked over 40 hours. All hours over 40 hours are considered overtime.
Example: Tomoki Ryomoto worked 48 hours this week operating a press for the ZIP Printing Company. Tomoki receives $12.75 per hour straight time, but what does he make for his 8 hours of overtime? Determine Tomoki’s gross earnings by following the steps on the next page.
1. Steps: Multiply straight time (40 hours) by hourly rate. / 40 x $12.75 = $510 - - straight time earnings2. Subtract 40 hours (straight time) from hours worked. / 48-40 = 8 hours overtime
3. Multiply overtime hours by time and one-half by hourly rate. / 8 x 1.5 x $12.75=$153 overtime earnings
4. Add straight time and overtime earnings to calculate gross earnings. / $510 + $153 = $663 gross earnings
Compensation by Hourly Wage: Double Time
Some companies need workers on the job every day of the year. A utility company is an example. Many of these companies offer an added compensation to those employees who work on Sundays and holidays. This compensation is in the form of double time, that is, double the worker’s hourly wage.
Example: Shawn Williams worked 52 hours in one week – 8 hours each weekday, 8 hours on Saturday, and 4 hours on Sunday, which was New Year’s Day (a holiday). His hourly rate is $7.05. Shawn’s gross earnings would be computed using the following steps.
1. Compute straight time by multiplying straight time hours by the hourly rate / Straight time: 40 x $7.05 = $2822. Compute overtime by multiplying the number of overtime hours by time and one-half, then by the hourly rate. / Overtime: 8 x 1.5 x $7.05 = $84.60
3. Compute double time by multiplying the number of hours worked by 2, then by the hourly rate. / Double time: 4 x 2 x $7.05 = 56.40
4. Determine total earnings (gross earnings) by adding straight time, overtime, and double time amounts. / Solution: Total earnings this week = $423
Complete Practice Problem Ch03Pr01
Section 2
Gross Pay for Various Compensation Methods
TermsCommission / Compensation in the form of a percentage of total sales.
Piecework / Compensation based on the number of pieces completed during a pay period.
Returned Merchandise / Goods returned by the customer due to defects, errors in orders, or other reasons.
Salaried / An employee who is paid yearly or monthly. Salaried employees usually work until the job is done and usually do not receive overtime for any hours over 40 hours per week.
Calculate compensation by salary
Compensation is salary, wage, pay or benefit for the performance of a service. When an employee is salaried pay is usually based on a yearly or monthly salary. Most salaried employees do not receive compensation for time worked over 40 hours.
Example: Nadia Manez is an elementary school teacher working for the Lakemont Independent School District. Nadia signed a contract with LISD for an annual salary of $29,800, to be paid in 12 equal payments. What is Nadia’s monthly gross earnings?
To compute Nadia’s monthly salary (gross earnings), divide the annual salary by 12 (months). Round to the nearest dollar. $29,800/12 = $2,483 per month gross earnings, rounded.
Calculate compensation by salary plus commission
Often sales personnel receive compensation in the form of a salary plus a percentage of their total sales, called a commission. Usually, the commission is paid for sales over as set quota or amount less any returned merchandise. Follow these steps to determine this week’s gross earnings for Gary Parsons.
Example: Gary’s straight-time salary is $500 per week. This week his total sales were $2,500 and $75 was returned merchandise (goods returned by customers). His quota is set at $1,700. His commission is based on 6% of sales minus his returned merchandise after he has met his quota. Steps to take:
Determine the amount of actual sales by subtracting the amount of returned merchandise from this week’s total sales. / $2,500 - $75 = $2,425 actual salesDetermine the amount of sales above quota on which Gary will receive a commission by subtracting the quota from his actual sales. / $2,425 - $1,700 = $725 sales above quota
Multiply sales above quota by percent to determine Gary’s commission. / $725 x 0.06 = $43.50 commission
Add weekly salary to commission to obtain this week’s gross earnings. / $43.50 + $500 = $543.50 this week’s gross earnings
Complete Practice Problem Ch03Pr02
Section 3
Payroll Deductions
Earlier in this chapter, you learned how to compute gross earnings. The various deductions that are taken from your paycheck were not mentioned. You will now learn about these deductions. Some of the deductions are required by federal law. Others may be deducted from your pay at your request.
TermsAccumulated Earnings / The accumulation or collection of earnings each pay period for an employee.
Employee’s Earnings Record / A record showing an employee’s personal payroll information, yearly earning, and deductions.
Employee’s Withholding Allowance Certificate / This form specifies the number of withholding allowances claimed by an employee for tax purposes. This certificate is Form W-4.
Federal Income Tax / The requirement that federal income tax be withheld from your paycheck came into being in 1943 with the passage of the Current Tax Payment Act. The act also requires that employers pay the tax withheld to the IRS and keep records of the names and addresses of persons employed, their earnings and withholdings, and the amounts and dates of payment. Employers much submit reports to the IRS on a quarterly (every three months) basis and to employees on an annual (yearly) basis.
Federal Insurance Contributions Act (FICA) / This law was passed in 1935 and provides for retirement funds after an employee reaches the age of 62, disability benefits for any employee who becomes disabled (and for his or her dependents) and a health insurance program after an employee reaches the age of 65. The funds (taxes) to support these programs are provided by workers through deductions withheld from their paychecks, with the equal amounts also paid by employers. These taxes are shown on your payroll stub as Social Security and Medicare.
Net Pay / The total amount of an employee’s pay after deductions; that is, gross pay minus deductions.
Payroll Register / A summary of payroll information for a particular pay period.
Percentage Method / A method to calculate federal income tax withholding using tables in publication Circular E, Employers Tax Guide.
State Income Tax / A state tax imposed on an employee’s gross earnings.
Wage Bracket Method / A method to look up deferral income tax withholding using tables provided in publication Circular E, Employers Tax Guide.
Calculate Social Security and Medicare
The federal government has established by law the percentage of total earnings that will be withheld from your paycheck for FICA tax. Below are the percentages we will use with the examples and problems in this chapter.
Tax 2002 Tax Rate Tax Base
Social Security 6.2% $84,900
Medicare 1.45 Unlimited
TOTAL 7.65%
Steps to figure FICA deductions1. Social Security tax / Multiply gross earnings per pay period times 6.2% on the first $84,900 earned.
2. Medicare tax / Multiply gross earnings per pay periods times 1.45%.
Find the federal income tax using the wage bracket method
The amount of federal income tax withheld is based on a person’s:
· total gross earnings
· marital status
· number of allowances claimed
Each employee must complete Form W-4, which states the number of allowances claimed.
To make it easy for an individual to calculate withholdings, the IRS provides a Withholding Calculator online at www.irs.gov. This easy to use calculator can help you figure your federal income tax withholdings so your employer withholds the correct amount from your pay.
Once the payroll clerk knows an employee’s gross earnings, number of withholding allowances, and marital status, he or she can determine the amount of federal income tax to be withheld. To determine the tax to be withheld from an employees’ gross earnings, most payroll clerks use the wage and bracket withholding table contained in the IRS’s publication Circular E, Employer’s Tax Guide.
Finding the amount of Federal Income Tax to be withheld from an employee’s paycheck using the Wage Bracket Method:
Example: Assume Paula Russell’s gross earnings are $534.25 per week, and she has claimed one withholding allowance. Also assume she is married. Follow these steps to use the federal income tax table shown on the following pages.
Find the state income tax using the state income tax rate.
Most states have state income tax collected by withholding. However, ten states do not have state income tax- -Alaska, Florida, Nevada, New Hampshire, New Mexico, South Dakota, Tennessee, Texas, Washington, and Wyoming. Be warned, though, that just because a state has no state income tax, doesn’t mean there is no tax. A “tax-free” state may charge a higher-than-normal state tax on interest and dividends or sales and property. State income tax is paid in addition to federal income tax.
Example: Terri Adams has gross earnings for the month of $3,100. If her state has a 4.5% income tax rate, find the sate withholding tax.
Step: To calculate state withholding tax, multiply the amount of gross earnings by the state withholding tax rate. $3,100 x 0.045 = $139.50.
Finding the amount paid to the IRS each payroll period.
Each payroll period employers send to the IRS the amount of employees’ social security withheld, a matching amount, and the amount of federal income tax withheld from employees’ gross pay. As an example, if an employee paid $34.91 in social security and Medicare taxes and $139.80 in federal income tax, the employer would send the IRS the following amount:
$34.91 / Employee social security and Medicare withheld$34.91 / Employer matching social security and Medicare
$139.80 / Employee federal income tax withheld
$209.62 / TOTAL sent to the IRS (money is actually deposited into the Federal Treasury
Absolute Cell Referencing in Excel