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Payroll Accounting 2010 Bernard J. Bieg and Judith A. Toland. CHAPTER 5 CHAPTER 2. CHAPTER 2 . COMPUTING WAGES & SALARIES. Developed by Lisa Swallow, CPA CMA MS. 0. Fair Labor Standards Act (FLSA). Federal Wage & Hour Law provides for two types of coverage

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Chapter 5 chapter 2

Payroll Accounting 2010

Bernard J. Bieg and Judith A. Toland

CHAPTER 5 CHAPTER 2

CHAPTER 2

  • COMPUTING WAGES & SALARIES

Developed by Lisa Swallow, CPA CMA MS


Fair labor standards act flsa

0

Fair Labor Standards Act (FLSA)

Federal Wage & Hour Lawprovides for

two types of coverage

  • 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

      Manyfamily businesses are exempt!


Employee employer defined

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, partners in partnerships and statutory employees


Flsa domestics

0

FLSA & Domestics

  • Domestic help includes nannies, gardeners, chauffeurs, etc.

    • Casual baby sitter and companions for aged/informed not covered

  • These employees must earn minimum wage and overtime if:

    • Work more than 8 hours/week or if

    • Earn at least $1,700 in a calendar year

  • Live-in domestics need not be paid overtime


What is minimum wage

0

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

    • 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 wage
Minimum Wage vs. “Living Wage”

  • Minimum wage

    • $7.25 after July 23, 2009

  • “Living wage”

    • Law that attempts to keep working poor’s wages on track with cost of living

    • 100+ cities have local laws requiring employers that do business with government to pay a calculated living wage

    • Some states now include private industry


Tipped employees

0

Tipped Employees

  • “Tipped employee” regularly averages $30/month in tips

  • Minimum tipped wages is $2.13/hour, therefore tip credit = $5.12/hour

    • EE must make $7.25/hour when combining tips/wages ($7.25 x 40 = $290 minimum weekly gross)

    • ER must notify affected employee in order to take the tip credit

  • 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 exceptions

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

  • FLSA sets OT at 1.5 times regular pay

  • Exceptions follow:

    • Hospital EE, overtime for 80+ hours in 14 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 off
Compensatory Time Off

  • In specific situations employers may grant employees compensatory time off in lieu of overtime

    • EE in public safety or emergency response can accumulate 320 hours x 1.5 = 480 hours compensatory time instead of OT

    • 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 employees

0

Exempt vs. Nonexempt Employees

“Exempt” means exempt from some, or all, of FLSA provisions

  • White-collar workers

    • Executives

    • Administrators

    • Professionals

    • Highly compensated employees

    • Computer professionals

    • Outside sales

  • Test of exemption

    • Employee must be paid on salary basis

    • See Figure 2-2 (p. 2-10) in text - certain salary and “primary duty” requirements must be met

  • Blue collar workers are always entitledto overtime pay

    Note: Putting someone on salary

    doesn’t mean he/she is exempt!!


Child labor restrictions

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

      • 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


What the flsa does not cover

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


Determining employee s work time

0

Determining Employee’s Work Time

  • 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

    • Rest periods under 20 minutes are principal activities (can’t make EE “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 activities
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


Timekeeping

0

Timekeeping

  • FLSA requires employers to retain time/pay records

  • Traditional types of records used to collect payroll data

    • Time sheets

    • Time cards

    • Computerized time/attendance records, main kinds include

      • Card-generated systems (computerized totals)

      • Badge systems (microchips or bar codes)

      • Cardless or badgeless system - EE enters identification number

      • PC-based system

  • Next generation technology

    • Touch screen (PC screen reads touch input)

    • Web-based time accounting systems (internet, wireless devices such as PDAs)

    • Biometrics (unique characteristic such as iris scan)


Methods of computing wages salaries

0

Methods of Computing Wages/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 pay
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 regularrate 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 converting period wage rates to hourly rates

0

Steps to Follow When Converting Period Wage Rates to Hourly Rates

Used to calculate pay for salaried nonexempt employees

  • Annualize salary

  • Calculate regular gross

  • Calculate hourly pay

  • Calculate overtime (OT) rate - (1.5 x hourly rate)

  • Add OT pay to regular gross


Example 1 calculating gross paycheck

0

Example #1 - Calculating 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 calculating gross paycheck

0

Example #2 - Calculating Gross Paycheck

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 calculating gross paycheck

0

Example #3 - Calculating 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 calculating gross paycheck

0

Example #4 - Calculating 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

  • $19,000/52 = $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 5 calculating gross paycheck

0

Example #5 - Calculating Gross Paycheck

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

  • $26,400/52 = $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 fluctuating workweek

0

Salaried Employees - Fluctuating 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 rate 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 rate

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!!


Example 1 calculating piece rate gross pay

0

Example #1 - Calculating 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 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


Example #2 - Calculating Piece Rate Gross Pay

0

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 X 1.5) = $568.68 gross


Special incentive plans

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 2000 units/week

    • .24/unit for units inspected between 2001-3500 units/week

    • .36/unit for units inspected over 3500 units/week


Commissions

0

Commissions

  • Commission can be used in many combinations

    • 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

      • $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 overtime
Bonuses 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 plans

0

Profit-Sharing Plans

  • Profit Sharing Plans

    • EE 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


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