1. Payroll
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2. PERFORMANCE OBJECTIVES
Section I Employee’s Gross Earnings and Incentive Pay Plans 9-1: Prorating annual salary on the basis of weekly, biweekly, semimonthly, and monthly pay periods 9-2: Calculating gross pay by hourly wages, including regular and overtime rates 9-3: Calculating gross pay by straight and differential piecework schedules 9-4: Calculating gross pay by straight and incremental commission, salary plus commission, and drawing accounts Section II Employee’s Payroll Deductions 9-5: Computing FICA taxes, both social security and Medicare, withheld from an employee’s paycheck
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3. PERFORMANCE OBJECTIVES
continued
Section II Employee’s Payroll Deductions 9-6: Calculating an employee’s federal income tax withholding (FIT) by the percentage method 9-7: Determining an employee’s total withholding for federal income tax, social security, and Medicare using the combined wage bracket tables Section III Employer’s Payroll Expenses and Self-Employed Person’s Tax Responsibility 9-8: Computing FICA tax for employers and self- employment tax for self-employed persons 9-9: Computing the amount of state unemployment tax (SUTA) and federal unemployment tax (FUTA) 9-10: Calculating employer’s fringe benefit expenses 9-11: Calculating quarterly estimated tax for self-employed persons
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4. Employee Gross Earnings and Incentive Pay Plans
gross pay, or gross earnings
Total amount of earnings due an employee for work performed before payroll deductions are withheld.
net pay, or net earnings, or take-home pay
The actual amount of the employee’s paycheck after all payroll deductions have been withheld.
salary
A fixed gross amount of pay, equally distributed over periodic payments, without regard to the number of hours worked.
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5. Pay Schedules Net pay = Gross pay – Total deductions Pay schedules:
Weekly
52 paychecks per year
Annual salary ÷ 52
Biweekly
26 paychecks per year
Annual salary ÷ 26
Semimonthly
24 paychecks per year
Annual salary ÷ 24
Monthly
12 paychecks per year
Annual salary ÷ 12
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6. Pay Schedules Example
What is the weekly, biweekly, semimonthly and monthly amount of gross pay for an engineer with an annual salary of $78,000?
Weekly
Annual salary ÷ 52
Biweekly
Annual salary ÷ 26
Semimonthly
Annual salary ÷ 24
Monthly
Annual salary ÷ 12
1,500
3,000
3,250
6,500
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7. Employee Wages: Hourly, Regular, Overtime
Earnings for routine or manual work, usually based on the number of hours worked.
hourly wage, or hourly rate
The amount an employee is paid for each hour worked.
overtime
According to federal law, the amount an employee is paid for each hour worked over 40 hours per week.
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8. To calculate an employee’s gross pay by hourly wages
Step 1 Calculate an employee’s regular gross pay for working 40 hours or less.
Regular pay = Hourly rate × Regular hours worked
Step 2 Calculate an employee’s overtime pay by chain multiplying the hourly rate by the overtime factor by the number of overtime hours.
Overtime pay = Hourly rate × Overtime factor × Overtime hours worked
Step 3 Calculate total gross pay.
Total gross pay = Regular pay + Overtime pay
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9. Calculating Hourly Pay
Jim works in a factory for $7.50 per hour, with time-and-a-half for overtime and double time on Sundays. What is his total gross pay for last week if he worked 45 hours on Monday through Saturday, plus a 4-hour shift on Sunday?
Regular pay = Hourly rate x Regular hours worked
Regular pay =
OT pay = Hourly rate x OT factor x OT hours worked
OT pay (Saturday) =
OT pay (Sunday) =
Total gross pay = Regular pay + Overtime pay
Total gross pay =
7.50 x 40 =
$300
7.50 x 1.5 x 5 =
$56.25
7.50 x 2 x 4 =
$60 =
$416.25
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10. Calculating Gross Pay By Straight and Differential Piecework Schedules
Pay rate schedule based on an employee’s production output, not hours worked.
straight piecework plan
Pay per unit of output, regardless of output quantity.
differential piecework plan
Greater incentive method of compensation than straight piecework, where pay per unit increases as output goes up.
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11. To calculate gross pay by piecework
Straight piecework:
Step 1 Multiply the number of pieces or output units by the rate per unit.
Total gross pay = Output quantity × Rate per unit
Differential Piecework:
Step 1 Multiply the number of output units at each level by the rate per unit at that level.
Step 2 Find the total gross pay by adding the total from each level.
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12. Straight Piecework Pay Example
Chelsea James works at a manufacturing plant. She is on straight piecework rate of $.43 per piece. What is Chelsea’s total gross pay for last week if she produced 937 units?
Total gross pay = Output quantity x Rate per unit
Total gross pay = 937 x .43 =
$402.91
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13. Differential Piecework Pay Example
Your production workers are on a differential piecework schedule as follows:
Pay level
Units produced
Rate ($) per unit 1
1-300
.68 2
.79 3
.86 4
Over 750
.94
Calculate last week’s total gross pay for the following employees:
G. Jordan produced 361 units
J. Kelley produced 789 units
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14. Differential Piecework Pay Example
continued
Pay level
Units produced
Rate ($) per unit 1
1-300
.68 2
.79 3
.86 4
Over 750
.94
G. Jordan (361 units)
J. Kelley (789 units)
300 x .68 =
200 x .79 =
250 x .86 =
39 x .94 =
Total gross pay =
204.00
300 x .68 =
61 x .79 =
Total gross pay =
204.00
158.00
48.19
215.00
$252.19
36.66
$613.66
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15. incremental commission
Straight and Incremental Commission, Salary Plus Commission, and Drawing Accounts
commission
Percentage method of compensation primarily used to pay employees who sell a company’s goods and services.
straight commission
Commission based on a specified percentage of the sales volume attained by an employee.
incremental commission
Greater incentive method of compensation than straight commission, whereby higher levels of sales earn increasing rates of commission.
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16. To calculate gross pay by commission
Straight Commission:
Step 1 Multiply the total sales by the commission rate.
Total gross pay = Total sales × Commission rate
Incremental Commission:
Step 1 Multiply the total sales at each level by the commission rate for that level.
Step 2 Find the total gross pay by adding the total from each level.
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17. Calculating Straight Commissions
Jean is paid a straight commission of 2.5%. If her sales volume last month was $253,211, what is her total gross pay?
Total gross pay = Total sales x Commission rate
Total gross pay = 253,211 x .025 =
$6,330.28
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18. Calculating Incremental Commissions
Carl is on an incremental commission schedule of 1.7% of sales up to $100,000 and 2.5% on sales greater than $100,000. What is Carl’s total gross pay for last month if his sales volume was $132,400?
Level Pay 1 =
Level Pay 2 =
Total gross pay =
Level pay = Sales per level x Commission rate
100,000 x .017 =
$1,700
32,400 x .025 =
810
$2,510
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19. Salary Plus Commission
A guaranteed salary plus a commission on sales over a certain specified amount.
drawing account, or draw against commission
Commission paid in advance of sales and later deducted from the commission earned.
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20. Calculating Salary Plus Commission
Caron is paid a salary of $1,325 per month plus a commission of 4% on all sales greater than $20,000. If she sold $47,000 last month, what was her total gross earnings?
Commission = Commission rate x Sales subject to commission
Commission =
Total gross pay = Salary + Commission
Total gross pay =
4%(47,000 – 20,000) = .04(27,000) =
$1,080
1, ,080 =
$2,405
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21. Calculating Draw Against Commission
Darrell is on a 3.5% straight commission with a $2,000 drawing account. If he is paid the draw at the beginning of the month and then sells $135,000 during the month, how much commission is owed to Darrell?
Commission = Total sales x Commission rate
Commission =
Commission owed = Commission – Amount of draw
Commission owed =
135,000 x 3.5% =
$4,725
4,725 – 2,000 =
$2,725
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22. Employee’s Payroll Deductions
deductions, or withholdings
Funds withheld from an employee’s paycheck.
mandatory deductions
Deductions withheld from an employee’s paycheck by law: social security, medicare, and federal income tax.
voluntary deductions
Deductions withheld from an employee’s paycheck by request of the employee, such as insurance premiums, dues, loan payments, and charitable contributions.
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a publicly accessible website, in whole or in part.

23. Deductions Required by Law
Federal Insurance Contribution Act (FICA)
Federal legislation enacted in 1937 to provide retirement funds and hospital insurance for retired and disabled workers.
Wage base: the amount of earnings up to which an employee must pay social security tax.
social security tax
Old Age, Survivors, and Disability Insurance (OASDI)—a federal tax, based on a percentage of a worker’s income up to a specified limit or wage base; provides monthly benefits to retired and disabled workers and to the families of deceased workers.
Medicare tax
A federal tax used to provide health care benefits and hospital insurance to retired and disabled workers.
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a publicly accessible website, in whole or in part.

24. Calculating Social Security and Medicare Withholdings
What are the withholdings for social security and Medicare for an employee with gross earnings of $4,300 per month?
Social security tax = Gross earnings x 6.2%
Social security tax =
Medicare tax = Gross earnings x 1.45%
Medicare tax =
4,300 x .062 =
$266.60
4,300 x =
$62.35
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25. Calculating Social Security with Wage Base Limit
Maria has year-to-date earnings of $92,300. If her next paycheck is for $6,000, what will be the amount of the social security deduction on that paycheck?
Social Security (OASDI) = 6.2% tax rate until $113,700
Earnings subject to tax = Wage base – Year-to-date earnings
Earnings subject to tax =
Social security tax = Earnings subject to tax × 6.2%
Social security tax =
113,700 – 92,300 =
$21,400
6,000 × .062 =
$899.00
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26. Federal Income Tax federal income tax (FIT)
A graduated tax, based on gross earnings, marital status, and number of exemptions.
withholding allowance, or exemption
An amount that reduces an employee’s taxable income.
percentage method
An alternative method to the wage bracket tables, used to calculate the amount of an employee’s federal income tax withholding.
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a publicly accessible website, in whole or in part.

27. To calculate the income tax withheld by the percentage method
Step 1 Using the proper payroll period, multiply one withholding allowance, Exhibit 9-1, by the number of allowances claimed by the employee.
Step 2 Subtract that amount from the employee’s gross earnings to find the wages subject to federal income tax.
Step 3 From Exhibit 9-2, locate the proper segment (Table 1, 2, 3, or 4) corresponding to the employee’s payroll period. Within that segment, use the left side (a) for single employees and the right side (b) for married employees.
Step 4 Locate the “Over—” and “But not over—” brackets containing the employee’s taxable wages from Step 2. The tax is listed to the right as a percent or a dollar amount and a percent.
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28. Percentage Method Amount for One Withholding Allowance
EXHIBIT 9-1
Percentage Method Amount for One Withholding Allowance
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29. Tables for Percentage Method of Withholding
EXHIBIT 9-2
Tables for Percentage Method of Withholding
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30. Tables for Percentage Method of Withholding
EXHIBIT 9-2
continued
Tables for Percentage Method of Withholding
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31. Calculating FICA Taxes Example
Samuel is married, claims five exemptions, and earns $3,850 per month. Use the percentage method to calculate the amount of income tax that must be withheld from his paycheck.
From Exhibit 9-1:
Withholding allowance = 1 allowance × 5 exemptions
Withholding allowance =
Taxable income = Gross pay – Withholding allowance
Taxable income =
$ × 5 =
$1,625.00
3,850 – 1, =
$2,225.00
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32. Calculating FICA Taxes Example
continued
From Exhibit 9-2, Table 4 (b):
Category $2,179 to $6,733
Withholding tax = $ % of amount greater than $2,179
Withholding tax =
$ (2, – 2,179.00)
$ (46.00)
$ = $155.60
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a publicly accessible website, in whole or in part.

33. To find the total income tax, social security, and Medicare withheld using the combined wage bracket table
Step 1 Based on the employee’s marital status and period of payment, find the corresponding table (Exhibit 9-3 or 9- 4).
Step 2 Note that the two left-hand columns, labeled “At least” and “But less than,” are the wage brackets. Scan down these columns until you find the bracket containing the gross pay of the employee.
Step 3 Scan across the row of that wage bracket to the intersection of the column containing the number of withholding allowances claimed by the employee.
Step 4 The number in that column on the wage bracket row is the amount of combined tax withheld.
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34. Payroll Deductions—Married, Paid Weekly
EXHIBIT 9-3
Payroll Deductions—Married, Paid Weekly
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35. Calculating FICA Taxes Example
Using the combined wage bracket tables, what is the total amount of income tax, social security, and Medicare that should be withheld from an employee’s weekly paycheck of $812 if the employee is married and claims two withholding allowances?
From Exhibit 9-3: $812 weekly, married, 2 allowances = $121.35
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36. Computing FICA Tax for Employers and Self-Employment Tax for Self-Employed Persons
tax responsibilities
Employers are responsible for the payment of social security, Medicare, state unemployment tax (SUTA), and federal unemployment tax (FUTA).
Employers are required to match all FICA tax payments (social security and Medicare) made by each employee.
fringe benefits
Employer-provided benefits and service packages, over and above an employee’s paycheck.
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a publicly accessible website, in whole or in part.

37. Calculating Payroll Taxes
A firm has 18 employees, 12 with gross earnings of $350 per week and 6 with gross earnings of $425 per week. What are the employee’s share and the employer’s share of the social security and Medicare tax for the first quarter of the year?
12 $350
Social security =
Medicare =
Total FICA per employee =
Total FICA per week =
Total FICA per quarter =
350 × .062 =
21.70
350 × =
5.08 =
26.78
26.78 × 12 employees =
$321.36
× 13 weeks =
$4,177.68
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38. Calculating Payroll Taxes
continued
6 $425
Social security =
Medicare =
Total FICA per employee =
Total FICA per week =
Total FICA per quarter =
Total FICA per quarter:
Employees’ share =
Employer’s share =
425 x .062 =
26.35
425 x =
6.16 =
32.51
32.51 x 6 employees =
$195.06
x 13 weeks =
$2,535.78
4, , =
$6,713.46
4, , =
$6,713.46
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39. Self-Employment Tax
Self-employed persons are responsible for social security and Medicare taxes at twice the rate deducted for employees. They must pay both the employee and the employer portions.
Tax Rate
Wage Base
Social Security
12.4% (6.2% × 2)
$113,700
Medicare
2.9% (1.45% × 2)
No limit
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40. Self-Employment Tax Example
Andie, a self-employed writer, had total gross earnings of $50,000 last year. What is the amount of the social security and Medicare taxes that Andie was required to send the IRS each quarter?
Quarterly earnings = Annual earnings/4 =
Social security =
Medicare tax =
Tax Rate
Wage Base
Social Security
12.4% (6.2% × 2)
$113,700
Medicare
2.9% (1.45% × 2)
No limit
50,000/4 =
$12,500
12,500 x .124 =
$1,550
12,500 x .029 =
$362.50
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41. SUTA tax rates vary from state to state (5.4% is used as an example).
Computing State Unemployment Taxes (SUTA) and Federal Unemployment Taxes (FUTA)
FUTA tax rate: 6% of the first $7,000 of wages paid to each employee during the year
SUTA tax rates vary from state to state (5.4% is used as an example).
For companies with full and timely payments to the state unemployment system, the FUTA tax rate is reduced.
FUTA rate = 6.0% FUTA – 5.4% SUTA credit = .6%
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42. Computing State Unemployment Taxes (SUTA) and Federal Unemployment Taxes (FUTA) Example
A firm had a total payroll of $10,000 last month. It pays a SUTA tax rate of 5.4% and a FUTA rate of 6% less the SUTA credit. If none of its employees had reached the $7,000 wage base, what is the amount of SUTA and FUTA tax the firm must pay?
SUTA tax = Gross earnings × 5.4%
SUTA tax =
FUTA tax = Gross earnings × .6%
FUTA tax =
10,000 × .054 =
$540
10,000 × .006 =
$60
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43. To Calculate employer’s fringe benefits expense
Step 1 If the fringe benefit is a percent of gross payroll, multiply that percent by the amount of the gross payroll. If the fringe benefit is a dollar amount per employee, multiply that amount by the number of employees.
Step 2 Find the total fringe benefits by adding all the individual fringe benefit amounts.
Step 3 Calculate the fringe benefit percent by using the percentage formula Rate = Portion ÷ Base with total fringe benefits as the portion and gross payroll as the base (remember to convert your answer to a percent).
Fringe benefit percent =
Total fringe benefits
Gross payroll
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44. Calculating Fringe Benefit Expenses
A firm employs 250 workers with a gross payroll of $150,000 per week.
Fringe benefits are 5% of gross payroll for sick days and holiday leave, 8% for health insurance and $12.40 per employee for dental insurance.
What is the total weekly cost of fringe benefits? What percent of payroll does this represent? What is the cost of these fringe benefits to the firm for a year?
Sick days = Gross payroll x 5%
Sick days =
Health insurance = Gross payroll x 8%
Health insurance =
150,000 x .05 =
$7,500
150,000 x .08 =
$12,000
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45. Calculating Fringe Benefit Expenses
Dental insurance = Number of employees x 12.40
Dental insurance =
Total fringe benefits =
250 x =
$3,100
7, , ,100 =
$22,600
Yearly fringe benefits = Weekly total × 52
Yearly fringe benefits =
22,600 × 52 =
$1,175,200
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46. Calculating Quarterly Estimated Tax
Self-employed people are required to pay quarterly federal income tax on their gross earnings.
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47. Quarterly Estimated Tax Payment Voucher
EXHIBIT 9-5
Quarterly Estimated Tax Payment Voucher
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48. Calculating Quarterly Estimated Tax Example
Bill is a self-employed artist. His annual salary this year is estimated to be $110,000, with a federal income tax rate of 20%. What is the amount of estimated tax that Bill must send to the IRS each quarter?
Social security =
Medicare =
Income tax =
Quarterly tax =
27,500 x .124 =
3,410
27,500 x .029 =
797.50
27,500 x .20 =
5,500
3, ,500 =
$9,707.50
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49. Chapter Review Problem 1
George Diaz works at a factory. He is on straight piecework rate of $.51 per piece. What is George’s total gross pay for last week if he produced 879 units?
Total gross pay = Output quantity x Rate per unit
Total gross pay = 879 x .51 =
$448.29
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a publicly accessible website, in whole or in part.

50. Chapter Review Problem 2
What are the withholdings for social security and Medicare for an employee with gross earnings of $3,700 per month?
Social security tax = Gross earnings x 6.2%
Social security tax =
Medicare tax = Gross earnings x 1.45%
Medicare tax =
3,700 x .062 =
$229.40
3,700 x =
$53.65
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51. Chapter Review Problem 3
Daniel, a self-employed consultant, had total gross earnings of $75,000 last year. What is the amount of the social security and Medicare taxes that Andie was required to send the IRS each quarter?
Quarterly earnings =
Social security =
Medicare tax =
Tax Rate
Wage Base
Social Security
12.4% (6.2% × 2)
$113,700
Medicare
2.9% (1.45% × 2)
No limit
Annual earnings/4 = 75,000/4 =
$18,750
18,750 x .124 =
$2,325
18,750 x .029 =
$543.75
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a publicly accessible website, in whole or in part.