Business Math/Excel - - Chapter 3 Notes - -PAYROLL
Section 1
Payroll is usually one of the largest operating expenses a company has. Employers must maintain
accurate payroll records for three reasons.
1. The company must keep accurate
records because wages and salaries are income tax
deductions for the employer.
2. Data must be
collected in order to compute earnings for each employee for each payroll
period.
3. Information must be provided to complete federal
and state payroll reports that
employers are required by law to keep.
As an employee, you should understand how your employer makes the computations pertaining to
employee paychecks.
Gross Earnings
Terms
Compensation
Double Time
Fair Labor Standards Act
Gross Earnings
Hourly Wage (hourly Rate)
Overtime
Straight Time
Time and One-Half
Salary, wage, pay or benefits received for the performance of
a service.
Twice an employee’s hourly rate.
An act of law (sometimes called the Wage and Hour Law)
establishing minimum wages and requiring employers whose
firms are involved in interstate commerce (sale of goods from
state to state) to pay their employees time and one-half for
all hours worked in excess of 40 hours per week. The act also
provides that certain employees (management and
supervisory) are exempt from its regulation.
The total amount of an employee’s pay before deductions.
Wages paid according to the number of hours worked.
All time worked in excess of straight time.
Usually the first 40 hours worked per week. However, this
number may vary from company to company. In this chapter,
40 hours is used to represent straight time. Straight time is
often referred to as regular time.
One and one-half times an employee’s hourly rate.
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Business Math/Excel - - Chapter 3 Notes - -PAYROLL
Calculate gross pay for common pay periods.
Employees receive compensation as salary, wage, pay or benefits for the performance of a service. In
your work experience or when searching for employment, you may have found employers that pay their
employees at different times. The following table shows the common pay periods.
Salary Paid
Weekly
Biweekly
Semimonthly
Monthly
COMMON PAY PERIODS
Period
Once per week
Every 2 weeks
Twice a month
Once a month
Number of Paychecks
52 paychecks each year
26 Paychecks each year
24 paychecks each year
12 paychecks each year
Calculate gross earning for straight time, overtime, and double time.
The calculations for gross earnings (the total amount of an employee’s pay before deductions) vary
depending on several factors. Examples of these factors include:

How many hours an employee works

Whether the company is required to pay time
and one-half for all hours over a regular
time.
Compensation by Hourly Wage: Straight Time
The wage paid for each hour worked is called hourly wage. As previously mentioned, straight time (also
called regular time or regular earnings) in most companies is 40 hours per week. However, companies
such as Hewlett Packard and Digital Equipment Corporation are experimenting with shorter work hours.
Example: To compute Juan Olivar’s weekly salary (gross earnings) at $9.50 per hour, multiply the
number of hours worked by the hourly rate.
40 x $9.50 = $380 per week (gross salary)
Compensation by Hourly Wage: Overtime
When a company is engaged in interstate commerce where its products move from state to state, it is
required by the Fair Labor Standards Act to pay its employees time and one-half for all hours worked
over 40 hours. All hours over 40 hours are considered overtime.
Example: Tomoki Ryomoto worked 48 hours this week operating a press for the ZIP Printing Company.
Tomoki receives $12.75 per hour straight time, but what does he make for his 8 hours of overtime?
Determine Tomoki’s gross earnings by following the steps on the next page.
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Business Math/Excel - - Chapter 3 Notes - -PAYROLL
1.
Steps: Multiply straight time (40 hours) by hourly
rate.
2.
Subtract 40 hours (straight time) from hours
worked.
Multiply overtime hours by time and one-half by
hourly rate.
3.
4.
Add straight time and overtime earnings to
calculate gross earnings.
40 x $12.75 = $510 - -
straight time
earnings
48-40 = 8 hours
overtime
8 x 1.5 x $12.75=$153
overtime
earnings
$510 + $153 = $663
gross earnings
Compensation by Hourly Wage: Double Time
Some companies need workers on the job every day of the year. A utility company is an example. Many
of these companies offer an added compensation to those employees who work on Sundays and
holidays. This compensation is in the form of double time, that is, double the worker’s hourly wage.
Example: Shawn Williams worked 52 hours in one week – 8 hours each weekday, 8 hours on Saturday,
and 4 hours on Sunday, which was New Year’s Day (a holiday). His hourly rate is $7.05. Shawn’s gross
earnings would be computed using the following steps.
1.
Compute straight time by multiplying straight
time hours by the hourly rate
2. Compute overtime by multiplying the number
of overtime hours by time and one-half, then
by the hourly rate.
3. Compute double time by multiplying the
number of hours worked by 2, then by the
hourly rate.
4. Determine total earnings (gross earnings) by
adding straight time, overtime, and double
time amounts.
Straight time:
Overtime:
40 x $7.05 = $282
8 x 1.5 x $7.05 = $84.60
Double time:
4 x 2 x $7.05 = 56.40
Solution: Total earnings this week = $423
Complete Practice Problem Ch03Pr01
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Business Math/Excel - - Chapter 3 Notes - -PAYROLL
Section 2
Gross Pay for Various Compensation Methods
Terms
Compensation in the form of a percentage of total sales.
Commission
Piecework
Compensation based on the number of pieces completed during a
pay period.
Goods returned by the customer due to defects, errors in orders, or
other reasons.
Returned
Merchandise
Salaried
An employee who is paid yearly or monthly. Salaried employees
usually work until the job is done and usually do not receive
overtime for any hours over 40 hours per week.
Calculate compensation by salary
Compensation is salary, wage, pay or benefit for the performance of a service. When an employee is
salaried pay is usually based on a yearly or monthly salary. Most salaried employees do
not
receive compensation for time worked over 40 hours.
Example: Nadia Manez is an elementary school teacher working for the Lakemont Independent School
District. Nadia signed a contract with LISD for an annual salary of $29,800, to be paid in 12 equal
payments. What is Nadia’s monthly gross earnings?
To compute Nadia’s monthly salary (gross earnings), divide the annual salary by 12 (months). Round to
the nearest dollar.
$29,800/12 = $2,483 per month gross earnings, rounded.
Calculate compensation by salary plus commission
Often sales personnel receive compensation in the form of a salary plus a percentage of their total sales,
called a
commission.
Usually, the commission is paid for sales over as set quota or amount less
any returned merchandise. Follow these steps to determine this week’s gross earnings for Gary Parsons.
Example: Gary’s straight-time salary is $500 per week. This week his total sales were $2,500 and $75
was returned merchandise (goods returned by customers). His quota is set at $1,700. His commission is
based on 6% of sales minus his returned merchandise after he has met his quota. Steps to take:
Determine the amount of actual sales by subtracting the
amount of returned merchandise from this week’s total
sales.
Determine the amount of sales above quota on which Gary
will receive a commission by subtracting the quota from
$2,500 - $75 = $2,425 actual
sales
$2,425 - $1,700 = $725 sales
above quota
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Business Math/Excel - - Chapter 3 Notes - -PAYROLL
his actual sales.
Multiply sales above quota by percent to determine Gary’s
commission.
Add weekly salary to commission to obtain this week’s
gross earnings.
$725 x 0.06 = $43.50 commission
$43.50 + $500 = $543.50 this
week’s gross earnings
Complete Practice Problem Ch03Pr02
Section 3
Payroll Deductions
Earlier in this chapter, you learned how to compute gross earnings. The various deductions that are
taken from your paycheck were not mentioned. You will now learn about these deductions. Some of
the deductions are required by federal law. Others may be deducted from your pay at your request.
Terms
Accumulated Earnings
Employee’s Earnings
Record
Employee’s Withholding
Allowance Certificate
Federal Income Tax
Federal Insurance
Contributions Act (FICA)
The accumulation or collection of earnings each pay period for
an employee.
A record showing an employee’s personal payroll information,
yearly earning, and deductions.
This form specifies the number of withholding allowances
claimed by an employee for tax purposes. This certificate is Form
W-4.
The requirement that federal income tax be withheld from your
paycheck came into being in 1943 with the passage of the
Current Tax Payment Act. The act also requires that employers
pay the tax withheld to the IRS and keep records of the names
and addresses of persons employed, their earnings and
withholdings, and the amounts and dates of payment.
Employers much submit reports to the IRS on a quarterly (every
three months) basis and to employees on an annual (yearly)
basis.
This law was passed in 1935 and provides for retirement funds
after an employee reaches the age of 62, disability benefits for
any employee who becomes disabled (and for his or her
dependents) and a health insurance program after an employee
reaches the age of 65. The funds (taxes) to support these
programs are provided by workers through deductions withheld
from their paychecks, with the equal amounts also paid by
employers. These taxes are shown on your payroll stub as
Social Security and Medicare.
Net Pay
The total amount of an employee’s pay after deductions; that is,
gross pay minus deductions.
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Business Math/Excel - - Chapter 3 Notes - -PAYROLL
A summary of payroll information for a particular pay period.
Payroll Register
Percentage Method
State Income Tax
Wage Bracket Method
A method to calculate federal income tax withholding using
tables in publication Circular E, Employers Tax Guide.
A state tax imposed on an employee’s gross earnings.
A method to look up deferral income tax withholding using
tables provided in publication Circular E, Employers Tax Guide.
Calculate Social Security and Medicare
The federal government has established by law the percentage of total earnings that will be withheld
from your paycheck for FICA tax. Below are the percentages we will use with the examples and
problems in this chapter.
Tax
2002 Tax Rate
Social Security
6.2%
Medicare
1.45
TOTAL
7.65%
Steps to figure FICA deductions
1. Social Security tax
Tax Base
$84,900
Unlimited
Multiply gross earnings per pay period times 6.2% on the
first $84,900 earned.
2. Medicare tax
Multiply gross earnings per pay periods times 1.45%.
Find the federal income tax using the wage bracket method
The amount of federal income tax withheld is based on a person’s:
 total gross earnings
 marital status
 number of allowances claimed
Each employee must complete Form W-4, which states the number of allowances claimed.
To make it easy for an individual to calculate withholdings, the IRS provides a Withholding Calculator
online at www.irs.gov. This easy to use calculator can help you figure your federal income tax
withholdings so your employer withholds the correct amount from your pay.
Once the payroll clerk knows an employee’s gross earnings, number of withholding allowances, and
marital status, he or she can determine the amount of federal income tax to be withheld. To determine
the tax to be withheld from an employees’ gross earnings, most payroll clerks use the wage
and
bracket withholding table contained in the IRS’s publication Circular E, Employer’s Tax Guide.
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Business Math/Excel - - Chapter 3 Notes - -PAYROLL
Worksheet
And
W-4 Form
Finding the amount of Federal Income Tax to be withheld from an employee’s paycheck using the
Wage Bracket Method:
Example: Assume Paula Russell’s gross earnings are $534.25 per week, and she has claimed one
withholding allowance. Also assume she is married. Follow these steps to use the federal income tax
table shown on the following pages.
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Business Math/Excel - - Chapter 3 Notes - -PAYROLL
Find the state income tax using the state income tax rate.
Most states have state income tax collected by withholding. However, ten
states do not have state
income tax- -Alaska, Florida, Nevada, New Hampshire, New Mexico, South Dakota, Tennessee, Texas,
Washington, and Wyoming. Be warned, though, that just because a state has no state income tax,
doesn’t mean there is no tax. A “tax-free” state may charge a higher-than-normal state tax on
interest and dividends or sales and property. State income tax is paid in addition to federal income tax.
Example: Terri Adams has gross earnings for the month of $3,100. If her state has a 4.5% income tax
rate, find the sate withholding tax.
Step: To calculate state withholding tax, multiply the amount of gross earnings by the state withholding
tax rate.
$3,100 x 0.045 = $139.50.
Finding the amount paid to the IRS each payroll period.
Each payroll period employers send to the IRS the amount of employees’ social security withheld, a
matching amount, and the amount of federal income tax withheld from employees’ gross pay. As an
example, if an employee paid $34.91 in social security and Medicare taxes and $139.80 in federal
income tax, the employer would send the IRS the following amount:
$34.91
$34.91
$139.80
$209.62
Employee social security and Medicare withheld
Employer matching social security and Medicare
Employee federal income tax withheld
TOTAL sent to the IRS (money is actually deposited into the Federal Treasury
Absolute Cell Referencing in Excel
To keep the cell reference constant when it copies a formula or function, Excel uses an absolute
cell reference. When a dollar sign precedes the letter or number of a cell address, such as
$D$5, the reference is absolute.
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Business Math/Excel - - Chapter 3 Notes - -PAYROLL
Section 4
Employee’s Earnings Record and payroll Register
An employee may have additional
deductions taken from his or her gross earnings other than
those required by law. Examples are deductions for:
medical insurance
life insurance
union dues
savings bonds
credit union savings or payments
The employer is responsible for maintaining accurate records of such deductions and keeping the
necessary information on file authorizing the deductions. The employer keeps an earnings record on file
for each employee that summarizes all necessary information, including that required by the federal
government.
Accumulated Earnings Column
The accumulated
earnings column of the employee’s earnings record is the listing of gross
wages the employee has earned to date. Each week the gross earnings amount is added to the previous
gross earnings amount to show the current total earnings as of the end of that payroll period. This
information is used by the employer to determine whether certain taxes must be paid by the employee
and employer. Also, the employee’s W-2
form is completed from this information and reported to
the employee and the IRS at the end of the year.
To compute accumulated earnings you would add as follows:
Accumulated earnings as of 2/7
This week’s gross earnings, 2/14
$2,214.00
$468.00
Accumulated earnings to date
$2,682.00
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Use Excel to create a Payroll Register
Some payroll registers contain more information that others, but basically they all summarize payroll
information for a pay period.
=ROUND formula
When multiplying or dividing numbers that result in numbers with more decimal places that the format
allows, when dealing with currency you run the risk of the column totals
so off.
being a penny or
You should use the =ROUND function on formulas that can result in more decimal places than
the format displays.
1. Enter =ROUND to begin the formula.
2. Key two left parentheses – ((. Then point to the formula for calculating social security (gross
earnings times 6.2%). Be sure to use an absolute cell reference for the social security percent.
3.
Key a right parenthesis to enclose your social security formula, key a comma, key a 2 to instruct
Excel to round to two places, and key another right parenthesis. As an example, the formula
might look like this:
=ROUND((A78$D$5),2)
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