Fundamental Payroll Certification 2009 Payroll Fundamentals Chapter 1

Payroll Fundamentals Payroll –the process used by an organization to pay its employees accurately and on time. 2

Payroll Tasks Pay employees Verify data integrity Collect/Input data New hire info Recordkeeping Reporting PR data Distributing PR Create ACH files Deposit/Report taxes Communicate to employees Balance input Reconcile Paydata Process deductions Research Fed/State regulations 3

Payroll Challenges C-C-T-A Complexity Monitor and implement federal, state and local tax laws that regulate the way employees can and must be paid. FPC Testing is based on federal law. 4

Payroll Challenges C- C- T-A Communication Paychecks, Paycards, Vouchers– must be accurate, timely and easily understood. Benefits the employee and the payroll department– if clear and concise 5

Payroll Challenges C-C-T-A Technology Software, equipment and web-based applications enhance the process of PR Products can Automate time keeping Record storage Record retrieval 6

Payroll Challenges C-C-T-A Accuracy Success of payroll and an organization is required. Tax filing Management reports Paychecks Deductions (i.e. Garnishments) 7

The Payroll Process Employee New Hire data W4 W5 Birth Date Worker status Maintain changes Payroll Inputs data Verifies data Processes data Distributes Reconciles 8

The Payroll Process Government Tax deposits Monthly and quarterly reports Annual Returns Compliance is a main focus for payroll! Federal, state and local tax laws must be followed 9

Concepts Worker Status Workers can be : Employee—SSN number Exempt- salary, no overtime Nonexempt-subject to FLSA standards Taxes are withheld and paid by employer Independent contractors- TIN Number Pays all own taxes Not regulated by FLSA 10

Employee vs. Independent Contractors Common Law Test Employee independence Control over the employee The main distinction is the employers ability and right to control the worker. Study the chart on page

Employee vs. Independent Contractors Reasonable Basis Test Treatment is consistent-filed appropriately Recognized practice in the industry Precedent has been established Published rulings by IRS Private Letter Ruling issued to company IRS past audit acceptable 12

Temporary vs. Leased Employees Temporary and leased workers: Agency bears the employer burden of: Paying, withholding, reporting, benefits The company has a contractual agreement with the agency. Workers are thus employees to the agency, but follow the policy of the company at which they are performing the job functions. 13

Worker Status Classification When in doubt– pay it out If status is unclear— Seek Public ruling information Request Private ruling from IRS Withhold taxes to avoid non-compliance and penalties should the ruling state the worker has employee status 14

Employment Eligibility (New) Immigration Reform and Control Act of verify employee is eligible to work in the US Key Provisions of Act: Sanctions – Fines and Criminal Penalties Ensures employers do not discriminate - National origin or citizenship Verification of eligibility – Form I-9 Employment Eligibility Verification 1) identity; 2) right to work Process On Date of Hire – New Hire completes Section 1 Within 3 days of hire ER must review documents & complete Section 2 Retain for the longer - 3 yrs or 1 yr after termination 15

Social Security Numbers Name and number must match Mismatches carry penalties Verify W4 accuracy Employees Provide if requested Do not carry to avoid ID theft If discrepancy: ER shows request at hiring-proof of document If IRS notifies: Must request & correct within year notice was given Homeland Security has proposal pending for new procedures with mismatches 16 Social Security Administration (SSA)

Social Security Number Verification System- SSNVS Employers request via: Internet, Phone, Paper list, Mag Tape, Diskette Employer provides verification of company and validity of verification request by supplying: FEIN-Federal Employer ID Number EE last name, first name EE Social Security Number Date of birth Sex 17

SSN Compliance Tips to Stay Compliant Request & Record new hire SSN Keep accurate records Remind ees to report life changes Validate by means of SSNVS Remind ees to verify data Numbers that start with “9” are ITIN 18

Fair Labor Standards Act of 1938 FLSA FLSA guarantees: Minimum wage Overtime premium Minor work limits Equal Pay Protection Administer by Wage & Hour Division of US Dept of Labor (DOL) 19

Exempt Employees Based on responsibilities not titles White collar exemptions Executives Administrative Employees Professionals Outside salespeople 20

Exempt Employees Executives Direct work of at least two full time workers Hiring/Firing authority Discretionary powers Minimum weekly salary of $ I.E. Managers/ Supervisors 21

Exempt Employees Administrative Primary duty: Work related to management School system Must: Exercise independent judgment Weekly minimum salary of $455 I.E. Executive secretary, admin with little supervision 22

Exempt Employees Professionals Learned or Creative Work must be distinctive not standard Earn minimum of $455 weekly salary I.E. Teachers, engineers, attorneys, *Computer professionals *Computer Professionals must earn $27.63 hourly 23

Exempt Employees Outside Salespeople Engaged in the selling of the company’s product/service Work off premises State wage laws may supercede the federal rate—stay informed. 24

Exempt Employees Special Exemption Status Below status may be exempt by FLSA Nonexempt status must be paid minimum wage and overtime Categories Transportation Workers Agricultural workers Healthcare facility workers Public Sector 25

FLSA Federal Minimum Wage Federal minimum wage 1/01/2009 – 7/23/2009 $6.55 per hour 7/24/2009 – 12/31/2009 $7.25 per hour Employees under age of 20 -$4.25 For the first 90 days of employment State minimum wage must be paid if higher than the federal law- whatever benefits the employee! 26

FLSA Tip Credit Employers may pay less than Minimum wage. Wage is $2.13+Tip credit $5.12= $7.25 EE must have tips of $30 monthly State laws must permit use of Federal Tip Credit 27

FLSA Additional Earnings Tips Subject to taxation if =/> $20 monthly Supplemental wage –can be taxed at 25% Shift Premiums Also known as shift differentials Additional compensation for schedules Must be considered in calculation of Regular Rate of Pay 28

FLSA Additional Earnings Paid Time Off ER’s need not pay sick, holiday or vacation Time need not be part of calculation for regular pay If worked need not pay a premium Companies have policies for Paid time off Bonuses Incentive payments to increase productivity Supplemental wages 25% Commission, bonus May be considered in regular rate of pay calculation 29

FLSA Overtime Defined FLSA requires nonexempt ees to be paid 1 ½ times regular rate of pay for hours worked over 40 in a workweek. Worked hours: Required work hours Permitted work hours Waiting to work hours- On call Traveling hours 30

Overtime pay Special note Overtime pay is for hours “worked” that exceed 40 in a workweek Calculation is 50% of hourly wage = premium overtime rate 31

Test Your Knowledge A biweekly employee works the following hours. What hours must be paid as OT under FLSA? 32 SunMonTueWedThuFriSat Sick 810 ANSWER: Week 1: 40 Regular and 6 OT = 46 Week 2: 54 Regular and 0 OT = 54 Only hours subject to OT under FLSA are the 6 hours in Week 1

Overtime Defined Workweek- fixed recurring 168 consecutive hours – (7 X 24) Companies may have multiple workweek frequencies.. But all are based on a “workweek” and are considered as such for OT. Paid on the next payroll processed 33

Overtime defined Workweek Exception Fluctuating workweek Varied schedule that cannot be anticipated Hospital-Healthcare- 8/80 Rule 14 Consecutive 24 Hours Periods OT Calculated on 14 Day Period not 7 Day Period Public safety employees Firefighters -212 hrs/ 28 days Law enforcement 171 hrs/ 28 days See chart for reference 34

Overlapping Workweek Changing Workweeks Steps to be taken when changing workweeks and calculating overtime (Example Page 1-25) Add overlapping days to old week & calculate OT hours & pay for both the old and new workweek Add overlapping day to the new week & calculate OT hours & pay for both old and new workweek Pay the employee the greater amount from step 1 or Step 2 35

Calculating Overtime Payments Regular rate of pay: Pay for all hrs worked less exceptions divided by all hrs worked 36

Regular Rate Includes Base pay for hrs worked Nondiscretionary bonuses FMV of noncash items Shift premiums Production bonuses Cost of living adjustments Retroactive pay All payments not excluded by law 37

Regular rate excludes Reimbursed expenses Overtime in excess of FLSA requirement Employer benefit plan contributions Vacation, Holiday, Sick pay for un- worked hours Special Occasion gifts Discretionary bonuses Stock options 38

Bonuses Nondiscretionary- contractual agreement for pay based on established performance goal Allocated for allotted period accordingly Discretionary- incentive, not contractual Not considered in reg rate calculation - supplemental income. 39

Regular rate Excess of requirement Company policy for weekends, holidays, special work incentives 40

Regular Rate of Pay  Noncash Payments  Fair market value of an item or service  Benefit Contributions  Payment by ER to retirement/insurance  Retroactive pay  Prorated and included in calculation of new regular rate of pay 41

Calculating Overtime Need to Know !!! Nonexempt hourly 1.Total pay for workweek – exclusions= regular pay 2.Regular pay/hrs worked=regular rate of pay 3.Regular rate of pay x.5 = Overtime premium rate 4.Overtime premium rate X hrs of overtime= premium pay for OT 5.Total pay for workweek + premium pay for overtime= total weekly compensation 42

Test Your Knowledge A biweekly employee who is paid $10/hr works the following hours in a pay period. What must the employee be paid under FLSA? 43 SunMonTueWedThuFriSat Sick 810 ANSWER: Week 1: 40 Regular and 6 OT = 46 x = Week 2: 54 Regular and 0 OT = 54 x = $1,000 1.$1,000 - $160 = $840 = Regular Pay 2.$840 / 84 hours = $10 = Regular Rate of Pay 3.$10 x.5 = $5.00 = Overtime Premium 4.$5.00 x 6 hours = $30 5.$1,000 + $30 = $1,030 must be paid under FLSA

Calculating Overtime Need to Know !!! Pieceworkers 1.Rate per piece x amount= regular pay 2.Regular pay / hours= regular rate 3.Regular rate x.50 = OT premium rate 4.OT premium rate x hrs over 40 = premium OT 5.Regular pay + premium OT = compensation 44

Test Your Knowledge A weekly garment employee is paid various rates for the number of garment pieces they create in a day. Over 500 pieces in a week they are paid a production bonus. What must the employee be paid under FLSA? 45 DayHoursPiecesRateTotal Pay Mon Tue Wed Thu Fri Sat Prod Bonus Wkly Totals

Test Your Knowledge 46 ANSWER: 1.$ $125 = $ = Regular Pay 2.$ / 46 hours = $14.47 = Regular Rate of Pay 3.$14.47 x.5 = $7.24 = Overtime Premium 4.$7.24 x 6 hours = $ $ $43.44= $ must be paid under FLSA

Calculating Overtime Need to Know !!! Salaried Nonexempt Employees- Fixed Workweek 1.Salary x frequency= annual /52 weeks= regular pay 2.Regular pay/ 40 hrs = regular rate of pay 3.Regular rate x 1.5 = OT premium rate 4.OT premium rate x hrs over 40= premium OT pay 5.Regular pay + Premium OT pay = compensation 47

Pay frequency Weekly = 52 Biweekly= 26 Semimonthly =24 Monthly = 12 48

Test Your Knowledge A non-exempt accounting clerk is paid $2, a month. Calculate the employee’s weekly compensation under FLSA. They worked 50 hours last week. The clerk’s boss gave the clerk an extra $100 for volunteering to help a co-worker meet a project deadline. 49 SunMonTueWedThuFriSat ANSWER: 1. $2, x 12 months = $33,800 / 52 weeks = $650/week 2. $650/40 hours = $16.25 Regular Rate of Pay 3. $16.25 x 1.5 = $24.38 = Overtime Premium Rate 4. $24.38 x 10 hours = $ $650 + $ $100 = $ Total Weekly Compensation

Defining Time Worked Portal to Portal Act of 1947 — beginning and ending are based on when the principle activities cease. Call back and show–up pay —case by case basis – if additional work after end of day—show up and no work... 50

Defining Time Worked Cont… Waiting to work- no personal activity- engaged to work –includable hours On call – not on premises- not includable in hour calculation Preparing to work- individual desk arrangement, sign on... Not included State laws may vary-- 51

Defining Time Worked Cont… Travel time Home to work– not compensable Home to work in different locale- compensable-(may exclude usual travel time) Travel as part of daily duty- compensable Travel away – must be overnight paid if during work hours not paid if passenger and not during work hours 52

Defining Time Worked Cont… Seminars/ Meetings Employer not obligated to compensate employee if all four conditions apply: 1.Attendance outside normal work hours 2.Attendance is voluntary 3.Not directly job related 4.No productive work performed 53

Remedial Education Company may employ a worker for an additional 10 hours for reading and GED skills.. That will not affect the overtime premium rate. 54

Record Keeping & Systems Major Payroll Tasks Compliance- Federal, State & Local regulations Timely & accurate paychecks Periodic reporting Record retention Control & Security 55

Masterfile Employee data Name Address Sex Birth Date Social Security Number Occupation State where services are rendered 56

Masterfile Employment Data Hire date Termination date Payment date Basis/ Hourly rate if pay Additions/deductions Frequency of payment Hrs. worked/day Hrs. worked/week Workweek Straight time hrs/pay OT hrs/ pay Shift bonus 57

Masterfile Tax & Payroll Data Allowances claimed Marital Status 58

Masterfile Data for period and calendar year Total wages subject to FIT,SIT & local tax Total wages subject to SS & Medicare tax Total FIT withheld Total SS withheld Total Medicare withheld Tax paid by ER but not deducted from wages 59

Masterfile Maintained in many formats Legible, retrievable Microfiche, microfilm, hard copy, CD, diskette Update and balance frequently Ensures good audits Internal & External from DOL Combined Database- HR/ Payroll –deferrals, affirmative action plans 60

Record Retention 4 years = 3 Types Tax Records IRS/ SSA/ FUT 3 years = 3 Types FLSA/IRCA /FMLA 5 years = Think work OSHA 2 years = Think additional Supplemental records Review and learn chart; Also pages 1-44 to 1-45! 61

Safeguard- Retention Protection against lawsuits and audits Maintain consistency Abide by Federal and State requirements Develop concise policy 62

The “W” Forms W4- Federal Employee Withholding Allowance Certificate When hired, life changes Default is Single and 0 exemptions Notification by December 1-DOL poster Invalid-alterations, flat dollar, percentage Exempt status-filed annually, dependent, earns less than tax exemption (chart) No IRS notification unless requested Retain for 4 yrs from last 1040 filing or 1 yr from termination 63

The “W” Forms W4P- Withholding Certificate for Pension or Annuity Payments Default is Married w/ 3 exemptions Additional amount allowed 64

The “W” Forms W4S- Request for Federal Income Tax Withholding from Sick Pay 3 rd Party wage payment for illness or injury that is non-job related Minimum withholding $20 per week Must be adjusted to net $10 Many states require tax withholding 65

The “W” Forms W5- Advance Earned Income Credit Reduction in taxes paid per pay period Filled out annually –Expires XX Wage Limits: Single/HOH- $35,463 Married/Jointly- $38,583 Maximum reduction $1,826 Must notify employees in writing of AEIC Easiest- back of W2 form Own statement with wording from Notice

Child Labor Age guidelines for Minors Under 14 - only on family farm Minors 14 & 15 – While school is in session 3 hrs a day or 18 hrs a week Between 7a.m. and 7 p.m. School not in session Maximum 8 hrs a day / 40 hrs a week Between 7 a.m. and 7 p.m. May not be in hazardous job as defined by DOL Retail, Food Service, Gasoline Service Establishments Entertainment and newspaper carries exempt 67

Child Labor Minors 16 & 17 Only limited by hazardous job stature Child Labor Laws violations fined up to $11,000 per violation $50,000 for violations resulting in injury or death of a minor 68

Family and Medical Leave Act (FMLA) Guarantees employees up to 12 weeks of unpaid leave within a 12 month period Newborn, newly adopted, or foster child Child, Spouse or Parent serious medical conditions of family members Employee with a serious medical condition Military member or active or pending duty Eligible employees up to total 26 weeks in single 12 month period 69

Family and Medical Leave Act (FMLA) Eligibility Applies to all public and private companies with 50 or more employees Must be employed by the employer for at least 12 months (does not have to be consecutive months) Worked at least 1,250 hours within the previous 12 months Exempt employees deemed to have met hours criteria unless can be proven otherwise 70

Practice – Practice- Practice Chapter 1 holds the foundation to success...Calculations! Learn the formulas and practice over and over. Remember Autographs ?? 2 Good 2 Be gotten 71