Payroll Accounting 2006
Bernard J. Bieg
CHAPTER 2
COMPUTING & PAYING
WAGES AND SALARIES
Developed by Lisa Swallow, CPA CMA MS
Fair Labor Standards Act [FLSA]
Federal Wage & Hour Law provides for
two types of coverage
 Enterprise Coverage
 All EE of interstate commerce
 And $500,000 or more annual gross sales
 Individual Coverage
OR
 EE whose company may not meet enterprise coverage, but are in
a fringe occupation are covered individually
 for example packaging corp. with annual revenues = $225,000
 Plus many nonprofits (schools, public agencies, etc.)
Many family businesses are exempt!
Employee & Employer Defined
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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
FLSA & Domestic Help
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Domestic help includes nannies,
gardeners, chauffeurs, etc.
These employees must earn
minimum wage and overtime if
they:
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work more than 8 hours/week or
earn $1,000 in a calendar year
“Live-in” help need not be paid
overtime
What is Minimum Wage?

Includes all rates of pay including, but not limited to:

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Commissions
Bonuses and severance pay
On-call or differential
Exceptions to minimum wage –
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FT students employed at their own university - 85%
Student learners at Vocational Technical school - 75%
Retail or service establishments and farms employing FT
students - 85%
Physically or mentally impaired employees with certification
*Minimum wage is very different from ‘living wage’. Over
100 cities and counties now have local ordinances
mandating employers who have local government
contracts pay a wage to their employees at an amount
minimally necessary to live on.
Tipped Employees
o “Tipped employee” regularly averages $30/month in tips
o Small Business Job Protection Act froze minimum tipped wages
at $2.13/hour,
o EE still must make $5.15/hour when combining tips/wages
(5.15 x 40 = $206 minimum weekly gross)
o ER gets credit for tips received between $2.13 and $5.15
o Examples of tips received for 40-hour work week
#1. Reported tips = $43
*40 hours x
$2.13/hour =
$85.20
o Is $85.20* (minimum tipped wages) + $43 > $206
o No - ($206 - 43 = $163) so ER must pay additional wages ($163 85.20)
#2. Reported tips = $1189
o Is $85.20 + $1189 > $206
o Yes - so ER pays $85.20 wages
#3. Reported tips = $111
o Is $85.20 + 111 > $206
o No - ($206 - 111 = $95) so ER must pay additional wages ($95 - 85.20)
40 Hour 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
 not FLSA
 FLSA sets OT at 1.5 times regular pay
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Exception
Exception
Exception
Exception
1
2
3
4
-
Hospital EE, overtime for 80+ hours in 14 days
EE receiving remedial education
Retail workers earning commission (special rules)
Emergency public safety EE
 can accumulate 320 hours x 1.5 = 480 hours compensatory time instead
of OT
 Exception 5 - EE of state or interstate governmental agency –
 can accumulate 160 hours x 1.5 = 240 hours compensatory time instead
of OT
Exempt vs. Nonexempt
Putting someone on salary
doesn’t mean they’re exempt!!
“Exempt” means exempt from overtime provisions of FLSA
 White-collar workers
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Executives
Professional
Administrative
Highly compensated employees
Computer professionals
Outside sales ($455/week doesn’t apply)
 Test of exemption
 Employee must be paid on salary basis
 Must meet “primary duty” requirements
 see Figure 2-2 in text
To be considered
exempt, must be
paid at least
$455/week
Child Labor Laws
 Under age 16 cannot work in construction, mining,
manufacturing, etc.
 Under age 18 cannot work in hazardous 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
 In agricultural occupations an employee as young as 10
can work
 only from 6/1 - 10/15
 Hand harvest laborers outside school hours only
 subject to many strict limitations
 ER needs to have certificate of age on file
Violations can result in up to $10,000/offense
What the FLSA Does Not Cover
 Employers are not required to
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Pay extra for weekend/holiday work
Pay for holidays or vacation
Grant vacation time
Limit hours for persons 16 years of age or
over
Compensable vs.
Noncompensable Time
o Travel (when part of principal workday) is compensable
o Training (when for ER benefit/required) is compensable
o Rest periods under 20 minutes are compensable (can’t
make EE “check out”)
o Prep at work station (but not clothes changing, shower) is
compensable
o Meal periods are not considered compensable unless
employee must perform some tasks while eating
o On call time is not compensable if employee can spend
time as he/she chooses
o Work at home is compensable if nonexempt employee
o Sleep time is compensable if required to be on duty less
than 24 hours
o Preliminary/postliminary activities
o Not compensable unless required by contract/custom
Timekeeping
 FLSA requires employers to retain time/pay records
 Employer in traditional office environment can use
 Time sheet
 Time cards
 Computerized time/attendance records
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card-generated systems (computerized totals)
badge systems (microchips or bar codes)
cardless/badgeless system - EE enters PIN
PC-based system
 Employer in nontraditional office environment can use
 Touch screen technology (PC screen reads touch input)
 Internet
 Wireless transmission (cell phones, personal digital
assistants [PDAs])
 Biometrics - iris scan, finger print or some other unique
characteristic to ensure security
Pay Periods

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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!
Steps to Follow when Calculating
Gross Pay
 Annualize
Salary
 Calculate “regular” gross
 Calculate hourly pay
 Calculate OT rate (1.5 x hourly
rate)
 Add overtime pay to “regular” gross
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
 $18,000/2,080 hours = $8.65 regular
rate
 $8.65 x 1.5 = $12.98 OT rate
 ($12.98 x 3) + $346.15 = $385.09 gross
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
 $24,000/2080 = $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
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/ (38 x 52)* = $12.15 regular rate
 $12.15 x 1.5 = $18.23 OT rate
 $1,000 + (4 x $12.15) + (12 x $18.23) =
$1267.36 gross
*Denominator is always number of hours in full time year
[may be different between companies]
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.
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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) =
$1000.48 gross
Example #5 - Calculating Gross Paycheck
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 + (11.5 x $19.04) =
$1,234.34 gross
Salaried Employees - Fluctuating Workweek

Some employees may work a fluctuating
schedule on a fixed salary
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Employee must agree to this system
Overtime is calculated by dividing normal
salary by total hours worked
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Not applicable to hourly employees
Then an extra .5 rate is paid for all hours
worked over 40
Not allowed in all states
Piece Rate
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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:
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

(units produced in 40 hours x piece rate) +
(units produced in OT) x (1.5)(piece rate)
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
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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

(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
 (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
 Some piece rates systems may be
modified to entice workers to produce
more
 Computation of payroll is based on
differing rates for differing quantities of
production
 Example:
 .18/unit for units inspected up to 2000
units/week
 .24/unit for units inspected between 20013500 units/week
 .36/unit for units inspected over 3500
units/week
Commission
 Commission can be used in many combinations
(with base salary or stand alone) - as long as
minimum wage provisions are met
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 = $1153.85 base earnings
 (8500 x .02) = $170 commission
 $1153.85 + 170.00 = $1323.85 gross
Profit-Sharing Plans
 Profit Sharing Plans
 EE shares in corporate profits – receives his/her
share in the form of
 Cash payment
 Profits distributed into retirement or savings
account
 Profits distributed as stock
 These payments must meet standards
established by Department of Labor