Mastering Payroll

MASTERING PAYROLL

SOLUTIONS TO HOMEWORK EXERCISES

Section 1EMPLOYEES V. NONEMPLOYEES

  1. ABC Corporation uses different categories of workers. In the table below, list the six categories and indicate with a Yes or No whether the worker’s pay is subject to FITW, FICA and/or FUTA.

Type of Worker / FITW / FICA tax / FUTA tax
Common-law employee / Yes / Yes / Yes
Statutory employee / No / Yes / Yes
Statutory nonemployee / No / No / No
Independent contractor / No / No / No
Temp agency referral* / No / No / No
Leased employee* / No / No / No

* These workers are employees of the agency, and therefore FITW, FICA withholding and FUTA tax are the responsibility of the agency, not ABC. In some states, the client employer and not the temp/leasing agency is responsible for paying state unemployment insurance.

  1. In the table below, list the six categories of workers. If the company pays the tax on the right, circle “Employer” and the percentage of wages paid; if the worker pays the tax, circle “Worker” and the percentage of wages paid in taxes. If neither the employer nor the worker pays a particular tax, overwrite “N/A” (not applicable).

Type of worker / FICAtax / FUTA tax
Common-law employee / 7.65% employer
7.65% employee / Employer
Statutory employee / 7.65% employer
7.65% employee / Employer
Statutory nonemployee / 15.3% worker / N/A
Independent contractor / 15.3% worker / N/A
Temp agency referral* / 7.65% employer (agency)
7.65% employee / Employer (agency)
Leased employee* / 7.65% employer (agency)
7.65% employee / Employer (agency)

* These workers are employees of the agency that hires them (and assigns them to firms where they perform their services). Accordingly, FICA tax is shared by the employee and the employer (the agency). Similarly, FUTA tax on these workers is borne by the agency. In some states, the client employer and not the temp/leasing agency is responsible for paying state unemployment insurance.

© American Institute of Professional Bookkeepers, 2010

  1. Every August, Breckim, Inc.’s secretary Amy, goes on vacation for two weeks and her brother Jim fills in for her.
  1. For payroll purposes, which category of worker is Jim?

Jim is classified as acommon-law employee. The short length of employment has no bearing on this determination.

  1. Should Breckim withhold any taxes from Jim? If yes, which taxes?

Yes. Because Jim is a common-law employee, Breckim must withhold FIT SIT as well as anyapplicable local income taxes andFICA (6.2% Social Security; 1.45% Medicare).

  1. Does Breckim owe any taxes on the amounts it pays Jim?

Breckim owes 7.65% employerFICA (6.2% Social Security, 1.45% Medicare) plus FUTA and SUI.It may also owe SDI and other state/local taxes.

  1. Sotto Industry’s receptionist, Hector, goes on vacation for one week in the summer and a second week in the fall. During Hector’s absence, Sotto calls a temp agency, which sends Barbara to fill in for him.
  1. For payroll purposes, which category of worker is Barbara?

Barb’s replacement is classified as a temporary help agency referral.

  1. Should Sotto withhold any taxes from the temp’s pay? If yes, which taxes?

No. Sotto should not withhold any taxes from the temp. The agency is the temp’s employer and therefore responsible for withholdingFIT and FICA from its employees’ wages. However, if the agency fails either to pay its employees or to pay or withhold employment taxes, Sotto may be liable for unpaid amounts.(Some states may require that the temp agency, rather than Sotto, pay SUI.)

  1. Does Sotto owe any taxes on the amounts it pays the temp?

No. Sotto is not responsible for either employment or unemployment taxes on the temp’s wages. The temp agency is responsible for employer FICA and FUTA. However, if the agency fails to pay its employee’s wages or any of the related taxes, Sotto may be liable for these amounts. In some states, the client rather than the temp or leasing agency is responsible for SUI.

  1. Kwan, a licensed real estate agent, works for the HomeCo real estate agency. Kwan is compensated solely by a commission, which is 60% of the commission on the properties she sells.
  2. For payroll purposes, which category of worker is Kwan?

As a licensed real estate agent, Laura is classified as a statutory nonemployee.

  1. Should HomeCo withhold any taxes from Kwan? If yes, which taxes?

No. Payments to statutory nonemployees are exempt from FITW.

  1. Does HomeCo owe any taxes on the amounts it pays Kwan?

No. Payments to statutory nonemployees are exempt from FICA and FUTA. State law varies concerning state unemployment insurance tax.

  1. Lashawn’s father, James, broke his hip and requires 24-hour in-home assistance. Lashawn hires Allison, a certified personal nurse, to take care of James.
  1. For payroll purposes, which category of worker is Allison?

A companion sitter is classified as a statutory nonemployee.

  1. Should Lashawn withhold any taxes from Allison? If yes, which taxes?

No. A companion sitter not employed by an agency is generally considered self-employed for federal employment and withholding tax purposes.The amounts that Lashawn pays Allison are not subject to FITW, FICA or other federal withholding.

  1. Does Lashawn owe any taxes on the amounts she pays Allison?

No. Lashawn is not responsible for any employment or unemployment taxes on amounts paid Allison. Instead, Allison is responsible for the entire 15.3% of FICA (referred to as “self-employment taxes”), as well as FIT and SIT (on self-employment income).

  1. Eric worked for Xyleen Industries for years before being laid off early this year. Currently self-employed, Eric occasionally fills in at Xyleen, doing the same work he did before he was terminated.
  1. For payroll purposes, which category of worker is Eric?

The IRS considers him to be an employee of Xyleen, because he continues to provide the same services to Xyleen as he did before being laid off earlier in the year.

  1. Should Xyleen withhold any taxes from Eric’s pay? If yes, which taxes?

Yes. Because Eric is an employee, Xyleen should withhold FIT, SIT and employee FICA (6.2% for Social Security and 1.45% Medicare) from amounts it pays to Eric.

  1. Does Xyleen owe any taxes on the amounts it pays Eric?

Yes. Xyleenowesemployer FICA of 7.65% (6.2% Social Security and 1.45% Medicare),FUTA and SUI, if applicable.

Section 2FEDERAL AND STATE WAGE-HOUR LAW

  1. Define mom and pop shop for under federal law. How are mom and pop shops covered by federal wage-hour law?

Mom and pop shops are family-owned-and-operated businesses that employ only family members. They are exempt from the federal wage-hour law, regardless of size.

  1. Calculate the required pay for each employee under FLSA.
  1. One week in February 2010, Andy works 40 hours. His state’s minimum wage is $6.00 an hour.

Andy’s must be paid the greater minimum wage of federal ($7.25) v. or state ($6.00). His required pay is $290 ($7.25 × 40 hours).

  1. One week in April 2010, Ronnell works 38 hours. Her state’s minimum wage is $6.75 an hour.

Beth’s employer must pay the greater of the federal minimum wage ($7.25) or state minimum wage ($6.75). Her required pay is $275.50 ($7.25 × 38 hours).

  1. One week in May 2010, Christie works 30 hours. Her state’s minimum wage is $8.00 an hour.

Christie’s employer must pay the greater of the federal minimum wage ($7.25) or state minimum wage ($8.00). Her required pay is $240 ($8.00 × 30 hours).

  1. One week in June2010, Jamie works 40 hours. His state has no minimum wage.

Jamie employer must pay the federal minimum wage ($7.25). His required pay is $290 ($7.25 × 40 hours).

  1. One week in August 2010, Cho works 30 hours. Her state’s minimum wage is $7.00 an hour.

Cho’s employer must pay the greater of the federal minimum wage ($7.25) or state minimum wage ($7.00). Her required pay is $217.50 ($7.25 × 30 hours).

  1. One week in February 2010, Frank works 40 hours. His state’s minimum wage is $7.95 an hour.

Frank’s employer must pay the greater of the federal minimum wage ($7.25) or state minimum wage ($7.95). His required pay is $318 ($7.95 ×40 hours).

  1. One week in March 2010, Gina works 40 hours. Her state has no minimum wage.

Gina’s employer must pay the federal minimum wage ($7.25). Her required pay is $290 ($7.25 ×40 hours).

  1. Calculate the pay for each of the following under federal wage-hour law:
  1. Andrea, a waitress, earns $2.13 an hour, plus tips. One week in January 2010, Andrea works 40 hours and earns $210, including $85.20 in wages and $124.80 in tips. How much must Andrea’s employer pay her for the week?

Because Andrea’s pay for the week of $210 does not equal the federal minimumwage ($7.25 × 40 = $290), her employer must pay her the $80 difference ($290  $210), or a total $165.20 ($2.13 × 40 hours = $85.20 + $80) in wages.

  1. Jose, a waiter, is paid $2.13 an hour, plus tips. One week in March 2010,he works 30 hours and earns $240, including $63.90 in wages and $176.10 in tips. How much must Jose’s employer pay him for the week?

Because Jose earned at least the minimum wage for the week ($7.25 × 30 hours =217.50 and Jose earned $240), his employer needs to pay him only the tipped employee minimum wage of $2.13 an hour, which comes to $63.90 ($2.13 × 30 hours) in wages.

  1. Cameron, a waitress, is paid $2.13 an hour, plus tips. One week in March 2010, she works 30 hours and earns $200, including $63.90 in wages and $136.10 in tips. How much must Cameron’s employer pay her for the week?

Because Cameron did not earn a $217.50 minimum wage for a 30-hour workweek ($7.25 × 30 = $217.50), Cameron’s employer must pay her the $17.50 difference ($217.50  $200). The total amount the employer must pay Cameron is $81.40 ($2.13 × 30 hours = $63.90 + $17.50) in wages.

  1. Darrell, a valet parker, is paid $2.13 an hour, plus tips. One week in April 2010, he works 32 hours and earns $250, including $68.16 in wages and $181.84 in tips. How much must Darrell’s employer pay him for the week?

Darrell need not be paid additional wages because his average hourly wage rate for the workweek exceeded the federal minimum wage ($250 ÷ 32=$7.81).

  1. Is escheat law a federal or state law? What does escheat law cover? What does it require of employers?

State law.Escheat law governs what employers must do with unclaimed paychecks.It requires thatthe employer turn over unclaimed wages to the appropriate state agency after a specified period of time.

Section 3PAYING EMPLOYEES UNDER FEDERAL LAW

1.MadCo’s policy is to deduct 1 hour of pay when an employee punches in 5 or more minutes late. One week in April 2010, Employee Bob, who is paid $7.25 an hour, punches in 5 minutes late one day and 10 minutes late another, but is on time the other 3 days. Bob works 40 hours that week and MadCo docks him 3 hours pay. How much must MadCo pay Bob for the week?

Bob actually worked 40 hours during the week, but MadCo intends to pay him $268.25 ($7.25 × 37 hours), after docking him 3 hours of pay. Because $268.25 is less than $290 ($7.25 minimum hourly wage in effect for April 2010 × 40 actual hours worked), Bob’s employer must pay him gross wages for the workweek of $290.

2.For each of the following, give the number of hours the employee must receive straight pay and overtime pay for the week and total pay for the week.

a.On Monday and Thursday, Plumbing Inc. employee Ramon drives home in the company van so that he can respond to emergency calls. He works 46 hours for the workweek, including 4 hours travel from his home to emergency calls.

Andy should be compensated for 46 hours during the workweek, including 6 hours of overtime (premium) pay. When an employee is on 24-hour call and takes home a company vehicle to be able to respond to emergencies, the employee must be compensated for time spent traveling between home and the job site when responding to such emergencies.

b.Grace’s 40-hour workweek is M–F. On Sunday she eats a bad clam, so she stays home on Monday and works a half-day on Tuesday, for which she is paid 12 hours sick leave. On Friday, she works an extra 3 hours.

Tammy should be paid for 43 hours (12 hours sick time plus31 hours worked TuesdayFriday). However, no overtime pay is required because her actual hours worked are 31, which does not exceed 40.

c.One Friday, Harold, who works a 40-hour, M–F week, leaves early to pick up his daughter, having worked 37 hours for the week. The following week he works 43 hours.

For the first week, Haroldshould be paid for 37 hours of work. For the second week, he should be paid for 43 hours, of which 3 hours should be paid at the overtime rate.

3.Compute gross wages due to each of the following employees under federal wage-hour law:

a.Ryan’s pay is $1,000 for a 40-hour workweek. One week, he works 46 hours.

$1,000  40 = $25 hourly pay rate x 1.5 = $37.50 premium pay rate.

(40 hours × $25) + (6 hours × $37.50) = $1,225 gross wages.

b.Derrick’s pay is $414 for a 36-hour workweek. One week, he works 42 hours.

$414  36 = $11.50 hourly pay rate x 1.5 = $17.25 premium pay rate.

(40 hours × $11.50) + (2 hours × $17.25) = $494.50 gross wages.

c.Lisa’s pay is $900 for a 30-hour workweek. One week, she works 40 hours.

$900  30 = $30 hourly pay rate.

(40 hours × $30) = $1,200 gross wages.

No overtime pay is included because actual hours worked do not exceed 40.

4.Compute gross wages due to each of the following employees underfederal wage-hour law:

a.Latisha’s is normally paid $1,200 for a 40-hour workweek. One Monday she is out sick but receives 8 hours sick pay. She then works 40 hours Tuesday–Friday.

$1,200  40 = $30 hourly pay rate.

(48 hours × $30) = $1,440 gross wages.

No overtime pay is included because actual hours worked do not exceed 40.

b.Al’s is normally paid $500 for a 40-hour workweek. One week, he works 45 hours.

$500  40 = $12.50 hourly pay rate x 1.5 = $18.75 premium pay rate.

(40 hours × $12.50) + (5 hours × $18.75) = $593.75 gross wages.

c.Lee’s is normally paid $1,500 for a 40-hour workweek. To make up for leaving early one Friday, he works 44 hours this week.

$1,500  40 = $37.50 hourly pay rate × 1.5 = $56.25 premium pay rate.

(40 hours × $37.50)+ (4 hours × $56.25) = $1,725 gross wages.

Section 4EMPLOYMENT RECORDS AND PAYROLL RECORDKEEPING

1. What are the five types of documents employers must inspect at time of hiring or obtain from the employee after hiring?

  1. Social Security number
  2. Form W-4, Employee’s Withholding Allowance Certificate
  3. State withholding allowance certificate
  4. Age certificates (for minors)
  5. Form I-9

2. What is the purpose of Form I-9, and who completes it?

Form I-9 is required under the Immigration Reform and Control Act of 1986, which was designed to reduce the number of undocumented workers in the U.S. All employees must complete and sign the first part of the I-9. Then, all employers complete their portion, which substantiates the employee’s sworn statement. Employers must also request documents that prove both the employee’s identity and authorization to work in the U. S.

3. Which documents provide both an employee’s proof of identity and authorization to work in the United States?

U.S. passports (expired or unexpired), certain foreign passports, permanent residence cards, and alien registration receipt cards are all types of documents that employers can use to substantiate both the employee’s identity and the authorization to work in the U.S. (See the Form I-9 for a complete list of documents.)

4.Which documents provide proof of identity, but not the authorization to work in the United States?

A driver’s license, school ID card with photo, voter registration card, and U.S. military card or draft record are all types of documents employers can use to substantiate the employee’s identity (but not the authorization to work in the U.S.) (See the Form I-9 for a complete list of documents.)

5.Which documents substantiate an employee’s authorization to work in the United States but not proof of identity?

A Social Security card, birth certificate, and U.S. citizen identification card are all types of documents employers can use to substantiate the employee’s authorization to work in the U.S. (but not the employee’s identity). (See the Form I-9 for a complete list of documents.)

6.On August 6, 2009, Becky completes a W-4. On February 15, 2010, she submits a new W-4 claiming 3 additional exemptions. Until what date must Becky’s employer retain the new W-4?

Her employer must retain Becky’sAugust 6, 2009 W-4 untilApril 15, 2014(4 years after April 15, 2010). Her 2010 W-4 must be retained the later of 4 years from her termination, or 4 years after she submits another revised W-4.

7.Until what date must an employer retain the following documents?

  1. W-2s issued to employees for2009

W-2sshould be retained for 4 years from April 15 following the tax year to which the document pertains. These W-2s should be retained until April 15, 2014.

  1. A 2009 Form 940 filed on January 31, 2010

Form 940should be retained for 4 years from the filing due date (January 31, 2014).

  1. A 2008 Form W-2 for a former employee that was returned to the employer as undeliverable

The IRS requires that a returned W-2 be retained for 4 years from April 15 following the tax year to which the document pertains. Thus, the employer should retain this returned W-2 until April 15, 2013.

  1. A W-4 submitted on March 12, 2009

Although Federal wage and hourlaw only requires employers to hold onto W-4s for 3 years, the IRS requires that W-4s be retained for 4 years from April 15 following the tax year to which the document pertains. Thus, the employer should retain this W-4the later of 4 years from her termination, or 4 years after a revised W-4 is submitted

  1. Employment applications

Although under Federal wage and hourlaw and the EEOC require employers to hold onto employment applications for 3 years, the IRS requires that the applications be retained for 4 years from April 15 following the tax year to which the document pertains.

  1. A cancelled check remitting payroll taxes for September 2005

Although federal wage andhour law requires employers to retain cancelled checks for 3 years, the IRS requires that voided and cancelled checks be retained for 4 years from April 15 following the tax year to which the document pertains. Thus, a cancelled check for the 2005 tax year would need to be retained until April 15, 2010.