Chapter 2 Payroll Accounting 2018

Payroll Accounting 2018
Chapter 2
COMPUTING WAGES &
SALARIES
© 2019 Cengage. All rights reserved.

Learning Objectives
1. Explain the major provisions of the Fair Labor

Standards Act.
2. Define hours worked.
3. Describe the main types of records used to collect
payroll data.
4. Calculate regular and overtime pay.
5. Identify distinctive compensation plans.
Introduction
© 2019to Cost management
Cengage. All rights reserved.
Fair Labor Standards Act (1 of 2)
• Enterprise coverage includes all employees if

– Two or more are working 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
Introduction
Fair Labor Standards Act (2 of 2)
• Individual employee coverage

– Employee whose company may not meet enterprise
coverage, but in fringe occupation
 For example: drive for fleet that transports goods
interstate, with annual revenues equal to $225,000
• Federal Wage & Hour Law provides for both these
types of coverage
Note: Many family businesses are exempt!
Introduction
Employee (EE) & Employer (ER)
Defined (1 of 2)
• An employer is an individual who “acts
directly/indirectly in the interest of an employer” in
relation to an employee
– Courts broadly interpret
• 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 EE and ER
Introduction
Employee & Employer Defined (2 of 2)
• Specific rules apply to employees of corporations,

domestic employees, partners in partnerships and
statutory employees
• Independent contractor defined by “ABC test”
Introduction
FLSA & Domestics
• Domestic help includes nannies, gardeners, chauffeurs, etc.
• These employees must earn minimum wage and overtime if they
– Work 8 hours/week or more or
– Earn at least $2,000 in a calendar year
• Live-in domestics need not be paid overtime
• Direct care workers (in care assistance to elderly/disabled/etc.)
subject to minimum wage and OT rules if employed by third-party
employer
• Interns in not-for-profit sector may be exempt if not compensated
or in for-profit sector if training is for own educational benefit
Introduction
What is Minimum Wage? (1 of 2)
• Includes all rates of pay including

– Commissions
– Nondiscretionary bonuses and severance pay
– On-call or differential pay
– Reasonable cost of housing, meals and transportation to
work
• Discretionary bonus (one which is not agreed upon
or promised before hand) is not included in an
employee’s regular rate of pay
Introduction
What is Minimum Wage? (2 of 2)
• 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
Introduction
Paying More Than or Less Than Minimum
Wage
• Current minimum wage is $7.25/hour – established
with Fair Minimum Wage Act of 2007
– Certain exceptions to minimum wage
 Training wage $4.25/hour for first consecutive 90 days of
employment if <20 years old
 Institutes of higher education, retail or service establishments
and farms may pay full-time students 85% of minimum wage
 Complete list found on p 2-5
– Situations where wages higher than federal minimum must be
paid include
 States with higher minimum wage
 Employees of federal contractors
Introduction
Minimum Wage vs. “Living Wage”
• “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
Introduction
Tipped Employees (1 of 2)
– “Tipped employee” regularly averages > $30/month in
tips
– Minimum tipped wage is $2.13/hour; therefore, tip credit
that employer may take = $5.12/hour
 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 ($5.12/hour) for OT pay
calculation purposes (see example below)
Facts: Raquel works 47 hours at Christchurch Bar as a tipped employee. She
averages $750 tips/week. If her employer takes the maximum tip credit
($5.12/hour), Raquel’s gross pay will be calculated as:
(40 hours x $2.13) + (7 hours x ($10.88* - $5.12)) = $125.52
*$7.25 minimum wage x 1.5 = $10.88 OT minimum wage
Introduction
Tipped Employees (2 of 2)
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
Notes: (a) states’ tip credit percentages may differ from federal
law, (b) if employees must share tips w/dishwashers, etc., then
credit is lost
Introduction
Overtime Provisions & Exceptions (1 of 2)
• 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
Introduction
Overtime Provisions & Exceptions (2 of 2)
• 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
Introduction
Compensatory Time Off
– In specific situations, employers may grant employees

compensatory time (called ‘comp time’) off in lieu of
overtime
 A state or its political subdivisions and interstate
governmental agencies may grant comp time
 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 comp time instead of OT
– FLSA provides for payment of cash for unused comp
time when employee leaves organization
Introduction
Exempt vs. Nonexempt Employees
• “Exempt” means exempt from some, or all, of FLSA

provisions
– White-collar workers as outlined in Figure 2.2 are
exempt
– Executives, administrators, professionals
– Business owners, highly compensated employees
– Computer professionals, creative professionals, outside
salespeople
Note: As of 12/1/16, salary threshold changed from $455/week to
$913/week. This change is currently held up in court, so prior
number ($455/week) in effect.
Introduction
Figure 2.2 Indications of Exempt
Status (1 of 3)
Executive Administrative Professional Business Owner
1. Primary duty- 1. Primary duty- 1. Work requires 1. Owns at least 20
Managing performs office advanced percent of equity
work knowledge
(science or
learning)
2. Supervises two or 2. Regularly uses 2. Knowledge 2. Actively manages
more employees discretion and acquired by business operation
independent prolonged course
judgment of instruction
3. Authority to
hire,fire,promote
*Also held up in court, the old threshold of $100,000 is still in effect.

**The old threshold of $455/week is in effect until the courts decide.

Figure 2.2 Indications of Exempt
Status (2 of 3)
Highly Compensated Computer Professionals Creative Professional Outside Salespeople
1. Earns $134,004* or 1. Salary of at least 1. Requires 1. Primary duties-makes
more $913week/** or invention,imagination,ori sales or obtains order
$27.63/hour ginality,or talent in an for services or use of
artistic or a creative facilities
endeavour
2. Performs nonmanual 2. Duties consist of 2. Regularly away from the
work system analysis employer’s place of
techniques,design of business
computer systems or
programs
3. Regularly perfoms one 3. No salary test
of the exempt duties of
an
executive,professional,o
r administrative
employee
*Also held up in court, the old threshold of $100,000 is still in effect.

**The old threshold of $455/week is in effect until the courts decide.

Exempt vs. Nonexempt Employees (3 of 3)
• Blue collar workers are always entitled to overtime pay

– includes police officers, EMTs, firefighters,
paramedics and LPNs
Note: Putting someone on salary doesn’t mean he/she is
exempt!!
• Proportionate share of exempt employee’s salary for
time actually worked is allowed only for employee’s
first or last week of employment
Introduction
Equal Pay Act
• Amended FLSA
• Prohibits discrimination by paying wages to employees
of one sex at a lower rate than those of opposite sex
• If unlawful pay differential exists, employer must raise
the lower rate to equal the higher rate
Introduction
Child Labor Restrictions (1 of 2)
• 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/employment conditions
Introduction
Child Labor Restrictions (2 of 2)
• 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 - 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
Introduction
Wage Theft & Penalties
• Employees have recourse through states when their

employer does not pay them according to the law or
misclassifies them
• US government may bring civil/criminal suits against
employers who violate FLSA
• Penalties can result from
– Misclassifying workers, willfully violating wage/hour
provisions or providing false data
– Repeated violations and child-labor provision violations
Introduction
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
Introduction
Determining Employee’s Work Time (1 of 2)
• Principal activities require exertion, and are required by

the employer and for the employer’s benefit, and
include
– 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)
Introduction
Determining Employee’s Work Time (2 of 2)
– Rest periods 20 minutes or less 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, even if not told to take work home
 ER should have clear statement n policy manual on e-
mail work outside of ‘clocked in hours’ for hourly staff
– 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
Introduction
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
Introduction
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 badgeless systems 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)
Introduction
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!
Introduction
Calculating Overtime) Pay (1 of 2)
There are two methods

• Most common method
– Calculate gross pay (40 hours x employee’s regular rate)
– OT rate then calculated and multiply by hours in excess
of 40
 (1.5 x employee’s regular rate) = OT rate
 OT rate x hours > 40 hours = OT pay
Introduction
Calculating Overtime Pay (2 of 2)
• 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!
Introduction
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
Introduction
Example - Calculating Gross Pay at Two
Different Pay Rates
FACTS: Oshiko worked for Tinto Inc. in two capacities. Job “A” paid
$14.50/hour (he worked 37 hours at this) and Job “B” paid $11.00/hour
(6 hours). 3 hours overtime.
Method (1)
Regular pay ($14.50 x 37 hrs) + ($11.00 x 6 hrs) = $602.50
OT premium on higher rate ($14.50 x .5) x 3 hours = $21.75
Total pay = $602.50 + $21.75 = $624.25
Method (2)
Start with same regular pay ($602.50) divided by total hours:
$602.50/43 hours = $14.01 regular rate and OT premium = $14.01 x
.5 = $7.01. $602.50 + ($7.01 x 3) = $623.53
Method (3)
Start with same regular pay ($602.50) and add OT premium at Job B rate.
[$602.50 + ($11.00 x .5 x 3 hours)] = $619.00
Introduction
Steps: Converting Period Wage Rates to
Hourly Rates
1. Annualize salary
2. Calculate regular weekly gross
3. Calculate hourly pay
4. Calculate overtime (OT) rate - (1.5 x hourly rate)
5. Add OT pay to regular gross
Introduction
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
Introduction
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 weekly rate
• $461.54/40 = $11.54 regular hourly rate
• $11.54 x 1.5 = $17.31 OT rate
• $1,000 + ($17.31 x 4) = $1,069.24 gross
Introduction
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 hourly rate
• $12.69 x 1.5 = $19.04 OT rate
• $1,015.38 + ($19.04 x 11.5) = $1,234.34 gross
Introduction
Salaried Nonexempt Employees
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
Introduction
Salaried Nonexempt Employees -
Fluctuating Workweek (1 of 2)
• 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 0.5 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 0.5 overtime premium is paid for all hours
worked over 40
Introduction
Salaried Nonexempt Employees -
Fluctuating Workweek (2 of 2)
• 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
Introduction
Piece Rate (1 of 2)
• The piece-rate system is used for workers that are paid

according to their output
• FLSA requires piecework earners to get paid for
nonproductive time
• Must equal minimum wage with OT calculated one of
two ways
Introduction
Piece Rate (2 of 2)
• 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
payor
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!!
Introduction
Example #1 Calculating Piece Rate Gross
Pay (1 of 2)
Facts: 4,812 units inspected in a 47.25 hour week (600 of
those units produced in extra hours). Mustafa is paid
$.12 per unit. Calculate gross pay using both piece rate
methods.
Introduction
Pay (2 of 2)
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
Method B
• (4,212 x $.12) + [600 x ($.12)(1.5)] = $613.44
Introduction
Pay (1 of 2)
Facts: Roisin is paid to inspect shellfish and is paid
$.08/case. Roisin inspected 6,897 cases in 43.5 hours;
she inspected 423 cases in overtime. Calculate gross pay
using both methods.
Introduction
Pay (2 of 2)
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
Method B
• (6,474 x $.08) + [423 x ($.08)(1.5)] = $568.68
Introduction
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
– 0.18/unit for units inspected up to 2,000 units/week
– 0.24/unit for units inspected between 2,001-3,500
units/week
– 0.36/unit for units inspected over 3,500 units/week
Introduction
Commissions (1 of 2)
• Commission is a stated percentage of revenue paid for

each transaction
• Numerous ways to apply commission
– With base salary or stand alone
– Compliant with FLSA as long as minimum wage
provisions are met
 Exceptions are outside salespeople who are exempt from
FLSA
Introduction
Commissions (2 of 2)
Facts: Sam sold $40,000 of product. His quota is $31,500. He
gets 2% in excess of quota and 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
Introduction
Nondiscretionary Bonuses (1 of 2)
• 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
Introduction
Nondiscretionary Bonuses (2 of 2)
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 OT rate x 4 hours = $30.88
 $679.00 + $30.88 = $709.88 total gross pay
Introduction
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
Introduction

Chapter 2 Payroll Accounting 2018

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Chapter 2 Payroll Accounting 2018

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Payroll Accounting 2018

© 2019 Cengage. All rights reserved.

1. Explain the major provisions of the Fair Labor

• Enterprise coverage includes all employees if

• Individual employee coverage

• Specific rules apply to employees of corporations,

• Includes all rates of pay including

• Other types of compensation not included in regular

• “Living wage” refers to local ordinances that vary

• Workweek established by corporate policy

• Employer can require employees to work overtime

– In specific situations, employers may grant employees

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

*Also held up in court, the old threshold of $100,000 is still in effect.

© 2019 Cengage. All rights reserved.

*Also held up in court, the old threshold of $100,000 is still in effect.

© 2019 Cengage. All rights reserved.

• Blue collar workers are always entitled to overtime pay

• Employees have recourse through states when their

• Employers are not required to

• Principal activities require exertion, and are required by

• Preliminary and postliminary activities

Most common pay periods are as follows

There are two methods

FACTS: Salary quoted nonexempt employee is

• The piece-rate system is used for workers that are paid

• Special incentive plans are modifications of piece-rate

• Commission is a stated percentage of revenue paid for

• Bonuses that are part of employees’ wage rates must

FACTS: Jamil earns $13.50/hour and also earned a safety

– Profit-sharing plans are ones in which an employee

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