Payroll Accounting 2009
Bernard J. Bieg and Judith A. Toland
COMPUTING WAGES & SALARIES
Developed by Lisa Swallow, CPA CMA MS
Federal Wage & Hour Law provides 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, public agencies, etc.) regardless of annual
sales volume
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OR
Individual employee coverage
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EE whose company may not meet enterprise coverage, but are in a fringe
occupation
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For example: drive for fleet that transports goods, but annual revenues =
$225,000
Many family businesses are exempt!
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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
 IRS
test based on
Behavioral control
Financial control
Relationship between two parties
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Statutory nonemployees considered selfemployed
 Direct
sellers and licensed real estate agents
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Domestic help includes nannies, gardeners,
chauffeurs, etc.
These employees must earn minimum wage
and overtime if:
 Work
more than 8 hours/week or if
 Earn at least $1,000 in a calendar year

Live in domestics need not be paid overtime
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Includes all rates of pay including, but not limited to
Commissions
 Bonuses and severance pay
 On-call or differential
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Exceptions to minimum wage
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Training wage for first 90 calendar days of employment for newly hired
EE under age 20
Retail or service establishments and farms employing FT
students - 85%
 FT students employed at their own university - 85%
 Student learners at Vocational/Technical school - 75%
 Physically or mentally impaired employees with certification
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Minimum wage
 $6.55
until July 24, 2009 then to
 $7.25 [This text uses $7.25 in all calculations!]
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Living wage
 100+
cities have local laws requiring Employers that
do business with government to pay a ‘living wage’
Attempts to keep working poor’s wages on track with
cost of living
“Tipped employee” regularly averages $30/month in tips
 Small Business Job Protection Act froze minimum tipped wages at
$2.13/hour, therefore tip credit = $5.12/hour
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EE still must make $7.25/hour when combining tips/wages (7.25 x 40 =
$290 minimum weekly gross)
Examples of tips received for 40-hour work week
 #1. Reported tips = $43
Is $85.20* (minimum tipped wage) + $43 > $290
No - ($290 - 43 = $247) so ER must pay additional wages
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#2. Reported tips = $1189
Is $85.20 + $1189 > $290
Yes - so ER pays $85.20 wages
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*40 hours x
$2.13/hour = $85.20
#3. Reported tips = $111
Is $85.20 + $111 > $290
No - ($290 - 111 = $179) so ER must pay additional wages
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Credit card tips must be paid out to the employee by
the next payday
If employee works more than one job, tip credit can
only be applied to job that qualifies as ‘tipped’
If a state’s tip credit differs from the federal tip credit,
employer must calculate and pay their employees the
higher cash wage
Tip credit is same in overtime hours ($5.12/hour)
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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
FLSA sets OT at 1.5 times regular pay
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Exception 1 - Hospital EE, overtime for 80+ hours in 14 days or over 8
hours in a day
Exception 2 - Retail workers earning commission (special rules)
Exception 3 - EE in public safety or emergency response can accumulate
320 hours x 1.5 = 480 hours compensatory time instead of OT

Exception 4 - EE whose work doesn’t include activities from exception 3,
can accumulate 160 hours x 1.5 = 240 hours compensatory time instead of OT
“Exempt” means exempt from overtime provisions of FLSA
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White-collar workers
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Executives
Professional
Administrative
Highly compensated employees
Computer professionals
Outside sales (no salary test for this category)
To be considered
exempt, must be paid
at least $455/week
Test of exemption
Employee must be paid on salary basis
 See Figure 2-2 (p. 2-10) in text - certain “primary duty” requirements must be
met
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Blue collar workers are always entitled to overtime pay
Putting someone on salary
doesn’t mean he/she is exempt!!
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Amended the FLSA
Requires men and women performing equal
jobs receive equal pay
Applies to white-collar workers and outside
salespeople as well as nonexempt workers
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Minimum age for most jobs is 16
Under age 18 cannot work in hazardous jobs
Employees age 16 and 17 may work unlimited number of hours each
week in nonhazardous 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
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In agricultural occupations an employee as young as 10 can work
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Only from 6/1 - 10/15
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Hand harvest laborers outside school hours only
Subject to many strict limitations
 ER needs to have Certificate of Age on file
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Violations can result in up to $10,000/offense – can’t discharge an EE whom has filed a
wage-hour complaint!
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Employers are not required to
Pay extra for weekend/holiday work
 Pay for holidays or vacation
 Limit number of hours of work for persons 16
years of age or over
 Give holidays off
 Grant vacation time
 Grant sick leave
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Prep at work station is principal activity
 In some situations changing in/out of protective gear may be part of
workday
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Idle time
Travel (when part of principal workday) is compensable
On call time is not principal activity if employee can spend time as
he/she chooses
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 if nonexempt employee
Sleep time is principal activity if required to be on duty less than
24 hours
Training (when for ER benefit/required) is compensable
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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
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Absences due to illness
Tardiness may result in ‘docked’ time, based
upon system in place
Must be paid for fractional parts of an hour
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FLSA requires employers to retain time/pay records
Employer in traditional office environment can use
Time sheet
 Time cards
 Computerized time/attendance records, main kinds include
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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)
 Internet; wireless transmission (cell phones, Personal Digital
Assistants)
 Biometrics – unique characteristic such as iris scan or whole
face
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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!
There are two methods
 Most common method
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Calculate gross pay (40 hrs. x employee’s regular rate)
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OT rate then calculated by multiplying 1.5 x employee’s regular
rate 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)
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 Hourly rate x ½ = overtime premium rate
These methods result in same total gross pay!
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Annualize salary
Calculate “regular” gross
Calculate hourly pay
Calculate overtime (OT) rate
 (1.5

x hourly rate)
Add OT pay to “regular” gross
FACTS: Salary quoted is $1,500/month - paid weekly - 43
hours in one pay period
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$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
$346.15 + ($12.98 x 3) = $385.09 gross
FACTS: Salary quoted is $2,000/month – paid
semimonthly - 4 hours OT in one pay period
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$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
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.
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$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 + ($12.15 x 4) + ($18.23 x 12) = $1,267.36 gross
*Denominator is always number of hours in full time year
(may be different between companies)
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.
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$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) = $1,000.48
gross
FACTS: Salary quoted is $2,200/month paid biweekly - 11.5 hours OT in one pay period
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$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 + ($19.04 x 11.5) = $1,234.34 gross
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EE and ER may have an agreement that a fluctuating schedule on a fixed
salary is acceptable
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Overtime is calculated by dividing normal salary by total hours worked – same
rate each week
Then an extra .5 rate is paid for all hours worked over 40
or
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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
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FLSA requires piecework earners to get paid for
nonproductive time
Must equal minimum wage with OT calculated one of
two ways
Note: two methods don’t give same results!!
Method A
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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
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(Units produced in 40 hours x piece rate) +
[(Units produced in OT) x (1.5 x piece rate)]
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
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(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
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(4,212 x .12) + [600 x (.12)(1.5)] = $613.44 gross
Example #2 - Calculating Piece Rate
Gross Pay
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
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(6897 units x .08) = $551.76 regular piece rate earnings
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$551.76/43.5 hours = $12.68 hourly rate
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$12.68 x .5 = $6.34 OT premium
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$551.76 + ($6.34 x 3.5) = $573.95 gross
Method B
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(6474 x .08) + (423 x .08 X 1.5) = $568.68 gross
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Special incentive plans are modifications of
piece-rate plans
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Used to entice workers to produce more
Computation of payroll is based on differing
rates for differing quantities of production
Example:
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.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
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Commission can be used in many combinations
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With base salary or stand alone
As long as minimum wage provisions are met
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Exception 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
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$30,000/26 = $1,153.85 base earnings
($40,000 - $31,500) x .02 = $170 commission
$1,153.85 + $170.00 = $1323.85 gross
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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 work to get regular pay
 OT calculated based upon this rate
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Profit Sharing Plans
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EE shares in corporate profits – receives his/her share
in the form of
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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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Wage and Hour Division oversees
employees’ complaints of minimum wage or
OT violations
Statute of limitation is two years
However, if violation was willful
 Statute
is three years
 “Liquidated damages” can be assessed equal to
back pay and OT awards