Math 109 – Spring, 2011 Chapter 5: Payroll. 5.1: Gross Earnings (Wages/Salaries) For any non-volunteer work, a person is paid for what they do Payment

Math 109 – Spring, 2011

Chapter 5: Payroll

5.1: Gross Earnings (Wages/Salaries)

For any non-volunteer work, a person is paid for what they do

Payment options could be: Hourly (Wages) Salary ($/Period) Commision (Sect. 5.2) Piecework (Sect. 5.3)

5.1: Gross Earnings (Wages/Salaries)

Objectives for Section 5.1 Use hourly rate to find gross earnings Find overtime earnings using

> 40 hrs of work in a week The Premium Method > 8 hrs of work in a single day

Understand double time, shift differential, split-shift Find gross earnings when overtime is paid to

salaried employees

5.1: Gross Earnings (Wages/Salaries)--Objective 1--

First, the difference between gross and net earnings:

Gross Earnings = # of hrs worked x Rate per hour Net Earnings = Gross – Deductions

A simple example: If Gloria makes $11.30 an hour, and she works 10

hours, then her Gross Earnings would beGE = H x R

= 10 x $11.30

= $113.00


Now, suppose we have the following time sheet:

Find the gross earnings for each employee.

Employee

Hours Worked

Total Hours Rate

GrossEarningsS M T W TH F S

Smith, J. 0 5 8 8 4 5 4 $9.50

Brown, M. 7 0 0 8 8 8 4 $10.25


Sometimes, an employee will work more than the standard 40 hours per week

In this case, we call all hours greater than 40 overtime

While not all are required, most companies pay time-and-a-half for hours over 40

Thus, Gross Earnings are found by (if H > 40)GE = 40xR + (H – 40)x1.5xR


Let's see this in an example by modifying our previous example:

Find the Gross Earnings for each employee

Employee

Hours Worked

Total Hours Rate


Smith, J. 0 5 8 8 8 5.5 8 $9.50

Brown, M. 7 0 9.75 8 8 8 4 $10.25


Another way of finding overtime gross earnings is by using the Premium Method:

GE = HxR + (H – 40)x.5xR This method produces the same result (try it on

the previous example) as Objective 2, but shows the extra cost of overtime pay more easily


Sometimes an employee is paid overtime pay if they work more than 8 hours in a day

The calculation is done the same way, but the overtime hours are found day-by-day

Example:

Find their gross pay using the daily overtime method

Employee

Hours Worked

Total Hours Rate


Smith, J. 0 4 8 8 12 0 8 $9.50

Brown, M. 7 0 9.75 10 0 8 4 $10.25


Other types of Premium Pay Double Time: Hours worked at twice the normal

rate of pay (holidays, weekends, etc.) Shift Differential: An increase on the normal

hourly rate for working undesirable shifts (3rd, swing, etc.)

Split Shift: Increase in pay for working staggered shifts that accomodate for busy times (splitting an 8 hour day into 2, not connected, 4 hour shifts)

Comp Time: Instead of extra money for overtime, time off is given


If an employee is salaried (paid for performance/tasks instead of hours worked), overtime is paid in the following way:

GE = Weekly Salary + (1.5 x Avg. Hrs x Hourly Rate) Example: If Glenn earns $780 per week as an event

coordinator, and usually works 38 hours a week, find his gross earnings for working a 50 hour week.

5.1: Gross Earnings (Wages/Salaries)--Final Remarks--

One important thing to remember is that overtime is often a sign of inefficient management

Objective 6 in Section 5.1 (Finding Equivalent Earnings) was skipped in this lecture

Suggested homework exercises: 1 – 30 (p. 168, 169); 50 – 55 (p. 170, 171)

5.2: Gross Earnings (Commission)

We will only cover objectives 1 through 3 from this section

Some workers like salespeople are paid with commission instead of an hourly wage

Loosely defined, commission is a percentage of sales/revenue

5.2: Gross Earnings (Commission)

Objectives for Section 5.2 Find gross earnings using commision rates Determine commission using variable rates Use salary and commission to determine gross pay

5.2: Gross Earnings (Commission)--Objective 1--

Recall that commission was defined as a percentage of sales/revenue

Thus, the formula for finding it is the PBR Method:

P = B x R (Pay = Sales x Rate) This formula will show up repeatedly in areas

like payroll, taxes, and business analysis with different meanings for the variables


Example:

Suppose Mike earns 6.3% commission on each radio ad spot he sells. If Mike sells $32,000 in ad space one month, find his gross pay for the month. How would his pay change if a client who purchased $4,200 in space backed out before his ad ran?

Note: employees who are paid straight commission never earn overtime, double time, etc. pay


Some companies pay their commissioned employees better rates as they sell more

To find such an employee's GE we simply have to take it bracket by bracket

Let's see this with an example:

Suppose Kristy sells paper for Dunder Mifflin and is paid commission based upon Table 1. Find her gross pay if she sells $38,549 in supplies in one month.

SALES RATE

Up to $15,000 6%

$15,001 - $30,000 8%

More than $30,000 10%Table 1


Obviously, not all people are comfortable with straight commission jobs, so many employers offer salary plus commission

In this case, gross pay is found by

GE = Salary for the Period + Commission for the Period

5.2: Gross Earnings (Commission)--Final Remarks--

Commission jobs can be both very lucrative and very stressful

Make sure that you properly budget and save if you work such a job so that you are able to survive the up and down pattern of sales

Suggested homework exercises: 1 – 18 (p.176, 177)

5.3: Gross Earnings (Piecework)

Finding gross pay with piecework is similar to the process of finding pay with commission, except pay is determined by production and pay per item produced

The formula:

P = B x R (Pay = Quantity Produced x Pay per item) Many companies also dock pay for poor quality or

wasted resources. These deductions are called dockings or chargebacks

Gross earnings which include such reductions are found with the following formula:

P = B x R – (Spoiled Items x Penalty per Item)

5.3: Gross Earnings (Piecework)

Let's see an example that covers all of section 5.3Suppose Chris makes electronic switches on assembly line

and has a piecework pay determined by Table 2. Find his pay for the week if he produced 1054 switches, 850 on regular time and the rest on overtime, and 23 were found to be defective.

Quantity Pay per Item Return Dock per

return

Up to 400 $1.25 Up to 10 $.40

401 - 800 $1.35 11 - 20 $.60

> 800 $1.50 > 20 $.75

Table 2

5.3: Gross Earnings (Piecework)--Final Remarks--

Suggested homework exercises: 1 – 32 (p. 183, 184)

5.4: Social Security, Medicare, and other Taxes

Finding gross pay is the first step in payroll After it is found, deductions such as taxes,

FICA, and withholdings are taken away The leftover amount is called the Net Pay


What is FICA? Stands for Federal Insurance Contributions Act Now referred to as Social Security Pays out benefits to retired persons and Medicare

recipients In this class we will use the 2011 rates:

SSA: Employee pays 4.2% for the first $106,800 Medicare: Employee pays 1.45% uncapped

Previously, SSA was 6.2% for employees Approximately 7% of income earners reach the SSA

cutoff


Examples:

Find the SSA and Medicare deductions for the following workers: (a) Rich had gross earnings of $2,130.45 this pay period and has earned $64,345.28 this year; (b) Kelly had gross earnings of $6,876.78 this pay period and has earned $103,495.05 this year.


If a person is self-employed, they still have to contribute to FICA and Medicare

For 2011, their contribution rate is FICA: 13.3% of earnings up to $106,800 Medicare: 2.9% of earnings uncapped

Another payroll tax is State Disability Insurance (SDI)

This tax is usually (and will be for our purposes) 1% of earnings up to $31,800


Example:

Find the FICA, Medicare, and SDI deductions for each of the following persons: (a) Jon earned $3,456.09 this pay period from his employer and has earned $23,109.13 this year; (b) Maria is a self-employed private investigator and earned $7,500 from her most recent job. She has earned $29,253.02 this year so far.

Suggested homework exercises: 1 – 32 (p. 191, 192) (Use the rates we used in

these slides)

5.5: Income Tax Withholding

In this section we will discuss the amount withheld from gross income, section 6.3 will discuss filing personal income tax returns

Personal income tax is the single largest source of revenue for the US government

For this section, and problems related to it, we will utilize the tables and figures within Section 5.5 unless otherwise stated

5.5: Income Tax Withholding--Objective 1--

When filling out the Employee's Withholding Allowance Certificate (W-4), fewer allowances means more will be withheld from a check

At most, a person can claim as many allowances as persons within the household under their care and providence

Example: A married individual with 2 children could claim 4 allowances, or could claim less and have a refund at the end of the year


One method of determining the amount withheld for federal taxes is the wage bracket method

Which bracket (how much is withheld) depends on the filing status, frequency of pay, withholding allowances, and gross earnings

Example: Use Fig 5.9 and 5.10 to determine the federal witholding for Susan who is married, claiming 4 allowances, and has a gross monthly income of $3,188.


The other method of determining the amount withheld by the federal government is the percentage method (what we will use for our projects/homeworks)

All one needs for the percentage method is Fig 5.11 on page 198

First, determine the amount for one withholding allowance (top of p. 198)

Then, locate your bracket based on pay frequency, filing status, and pay after withholdings


It may seem like the same procedure as the bracket method, but it is in fact much easier

Consider the example we did previously–find Susan's withholding using the percentage method

There may slight differences between the bracket and percentage method, but these discrepancies are resolved when taxes are filed

One main benefit of this method is the ease with which computer based payroll systems can calculate withholding


State tax is determined differently from state to state

We will use the following table

Use gross income without withholdings for state tax


Now we can determine net pay (what a person gets to keep of their gross income)

The formula for net pay is

Net Pay = Gross – FICA – Medicare – Fed. Withholding – State Withholding – Other Deductions (Union dues, etc.)

Example: Find the net income of Kaci who is single, claims 2 withholdings, lives in Ohio, and grosses $938.40 weekly from her employer

5.5: Income Tax Withholding--Final Remarks--

Much of what we do in this class will follow a similar pattern: we find lots of little things to in turn find something much larger

Don't be worried about all the formulas–some will become ingrained through usage, others can be easily learned by doing the suggested problems

Suggested homework exercises: 1 – 5 (p. 201), 19 – 24 (p. 202), 35 – 40 (p. 203)

Documents

Math 109 – Spring, 2011 Chapter 5: Payroll. 5.1: Gross Earnings (Wages/Salaries) For any non-volunteer work, a person is paid for what they do Payment