Payroll

Pay Stubs—Discussion Guide

Slide 1: THINK ABOUT IT

Whether you are an accountant managing the books for a large company or an employee managing your personal finances, you’ll need to know what information is contained in a pay stub.

KEY CONCEPTS

Slide #2 A pay stub is a document that is included with an employee’s paycheck that contains detailed information on that employee’s pay.

While the contents can vary greatly, most pay stubs include:

• • Employer name and address
  • Employee name, address, department, job title, employee number, and pay rate (hourly wage or salary expressed in dollars)
  • Pay period
    • The time during which an employee’s hours are compiled and for which the employee is being compensated in the attached paycheck
    • Usually the pay period is expressed through the period start date and end date on a pay stub.
  • Hours worked during pay period, overtime hours worked, holiday pay, vacation pay, sick pay, bonuses, commissions, tips, and any other information that would affect gross pay
  • Gross pay
    • The total amount of money earned during a pay period calculated before various taxes and deductions are removed
  • Tax withholdings
    • Money set aside from an employee’s pay and provided to federal, state, and local government taxing agencies
    • These are usually itemized in the pay stub and include amounts withheld for income tax and a number of payroll taxes, such as Social Security and Medicare taxes, which are together called the FICA tax after the Federal Insurance Contributions Act (FICA).
  • Other deductions
    • Money set aside for programs or obligations not related to taxes
    • Voluntary deductions are for programs chosen by the employee such as charitable donations, union dues, insurance premiums, or for retirement plans such as a 401(k) or an individual retirement account (IRA).
    • Mandatory deductions are taken for court-ordered obligations such as child support or the repayment of debts.
  • Net pay
    • The amount of money that remains after all taxes and deductions are removed
    • This amount should equal the amount of the attached check.

Slide #3 Knowing how to interpret a pay stub will help in processing employee information quickly and accurately.

• • 1. 1. It is important to be able to interpret pay stubs to ensure compliance with labor laws and regulations as well.
       2. It is better to recognize and correct any issues before issuing information to the Internal Revenue Service (IRS) or any other government agency, for example.

Payroll Expenses—Discussion Guide

Slide #1 THINK ABOUT IT

There are many aspects of employee pay that don’t always show up on a pay stub. Establishing and managing a payroll system requires staying up to date about a number of employer obligations.

KEY CONCEPTS

Slide #2 The entire process of managing employee compensation, including recording pay rates and hours worked, calculating payroll deductions, and issuing pay, is called payroll administration.

• • 1. The payroll register includes each employee’s gross pay, net pay, tax withholdings, and any voluntary or mandatory deductions.
    2. Employer-paid taxes do not appear on the payroll register.

• • In most cases, the responsibility for managing withholdings and submitting them to the appropriate tax agency lies with the employer and is handled by the designated payroll processor.
  • The amount to be withheld from each employee’s paycheck is calculated based on the IRS Form W-4 completed by the employee.
    • This form provides the employer information about how much to withhold to cover that employee’s income tax.

Tax withholdings are only one type of deduction managed by the payroll processor.

• • A payroll deduction is any amount of money subtracted from an employee’s gross pay and set aside for another purpose.
  • Some deductions are voluntary in that the employee chooses to use this money to pay for programs such as health insurance, retirement accounts, union dues, etc.

• • There are also deductions that are mandated by the employer or a government entity.
    • For example, garnishments are court-ordered deductions that are taken from an employee’s paycheck to pay an obligation such as child support or an outstanding debt.

Slide #2 Employers are also responsible for certain payroll taxes and expenses.

Payroll Source Documents—Discussion Guide

Slide #1 THINK ABOUT IT

An important part of payroll administration is the maintenance and storage of payroll documents. Maintaining these documents is not only important; in some cases, it’s required by law!

KEY CONCEPTS

Slide #2 Payroll source documents, sometimes called employee earnings records, contain information used to calculate the earnings and payroll deductions for employees. The most common are time cards, time sheets, and tax forms.

A time card is a document on which employees record the times that they begin and end work each day.

• • The use of cardboard time cards was commonplace in past decades.
    • They were placed in a machine that stamped them with the time at the beginning and end of each work day.
  • Modern, digital versions usually allow employees to enter these times themselves.

• • Time sheets usually have a row for each day and columns in which employees record the number of hours worked in a given day.
  • Most time sheets allow employees to record their hours under different categories such as regular, overtime, or vacation hours.

The information contained on tax forms (such as the IRS Form W-4) helps the payroll processor determine how much should be deducted in tax withholdings from an employee’s gross pay.

• The amount of taxes withheld is calculated based on the employee’s income, marital status, and number of dependents as reported by the employee on the Form W-4 during the onboarding process.

Other payroll source documents such as tips and commissions reports might also be collected and used in calculating earnings.

Once these documents have been collected, they should be organized and stored to ensure their safe keeping, with the documents pertaining to each employee in a separate folder or file.

• • Payroll documents are sometimes stored along with other personnel information in a personnel file, but they may be stored separately for easier access for the payroll administrator or processor.

Slide #3 Keeping payroll documents in a well-organized system is crucial for good bookkeeping and payroll administration.

• • Many payroll documents contain confidential information, and every company is responsible for keeping these records contained and access to them restricted.
  • Any paper-based payroll documents should be kept in a locked file and documents for each employee should be kept separately.
  • Access to digital documentation should be restricted and password-protected.

Federal law requires that companies keep payroll records for at least three years.

For more information on maintaining employee records, click here: https://www.dummies.com/business/operations-management/how-to-maintain-employee-records/.

Employee Earnings—Discussion Guide

Slide #1 THINK ABOUT IT

There are a number of ways that employees are compensated for their work. Each method for earning compensation requires a different payroll calculation.

KEY CONCEPTS

Slide #2 The two most common types of employee compensation are wages and salary.

A wage is an amount of money earned by an employee that is based on units of time spent working.

• • Wages are typically calculated on an hourly or daily basis.
  • There are a number of regulations that set parameters on employers who pay wages such as the standardization of “full-time,” overtime, and minimum wage.
  • Any work that is performed beyond the maximum set by regulation is called overtime and is usually paid at a higher rate called an overtime premium (often calculated at 1.5x the pay rate, known commonly as “time and a half”).
  • Employees who are paid wages might also be given the opportunity to work for tips or gratuities, which are amounts of money given directly to an employee by a customer.

A salary is an amount of money that an employer agrees to pay an employee to work for an agreed upon length of time and is usually paid at specific intervals.

• • The amount paid at each interval is usually consistent no matter how many hours or days were worked during that interval.
  • Salaries are often determined on a yearly basis, and intervals often align with a company’s pay periods.
  • Salaried workers might also have the opportunity to work for commission, which is an amount of money paid to an employee for their role in completing a transaction.
    • For example, a common form of commission is based on the amount of sales or profits made.
    • In this case, the employee might be paid a standard or “base” salary and earn additional compensation for the amount of sales or profit s/he generates for the employer.

In some industries, such as retail, wage-earners can also make commission. Although there are exceptions, tips are rarely an option for salaried employees, however.

Slide #3 The methods for calculating employee earnings vary depending on the type of compensation.

For hourly wages, you will need the employee’s pay rate and earnings records, such as timesheets or time cards.

• • Count the amount of hours worked during the pay period.
  • Multiply the hours worked by the pay rate to arrive at the total earnings (gross pay).
    • If the hours total more than 40 in any one week during the period, then multiply the extra hours by the overtime rate (the regular wage times the overtime premium) and add this to the pay for the regular hours.

Here is an example of an earnings calculation for an hourly wage employee with a regular wage of $15.00/hr. who worked 44 hours in a week:

• • Regular pay rate: $15.00/hr.
  • Overtime pay rate: $15.00/hr. X 1.5 = $22.50/hr.
  • Regular hours pay: $15.00/hr. X 40 hours = $600.00
  • Overtime hours pay: $22.50/hr. X 4 hours = $90.00
  • Total earnings (gross pay): $690.00

• • 1. 1. 1. These calculations may vary based on federal and state laws and regulations.

For more information on calculating wages, click here: https://www.thebalancesmb.com/what-is-gross-pay-and-how-is-it-calculated-398696.

• • Be careful to distinguish between two common sets of intervals for salaried employees: twice per month (24 per year) and every two weeks (26 per year).

• • 1. 1. 1. Annual salary: $48,000
          2. Twice-per-month earnings: $48,000 / 24 pay periods = $2,000.00
          3. Every-two-weeks earnings: $48,000 / 26 pay periods = $1,846.15

Once you have calculated an employee’s gross pay, subtract deductions to arrive at her/his net pay. You will learn how to calculate these deductions in the next lesson.

Discussion #1: Ask students to discuss the advantages and disadvantages of being paid 24 times per year and 26 times per year.

Employee Payroll Deductions—Discussion Guide

Slide #1 THINK ABOUT IT

After calculating each employee’s gross pay, the payroll administrator must calculate all deductions. Once these are subtracted from the gross pay, the result will be the amount of net pay that will appear on the employee’s paycheck.

KEY CONCEPTS

Slide #2 A payroll deduction is any amount of money subtracted from an employee’s earnings (gross pay) and set aside for another purpose.

Some payroll deductions are voluntary (chosen by the employee) and some are not.

The most common types of payroll deductions are:

• • Social Security tax
  • Medicare tax
  • Income tax (federal, state, and local)
  • Garnishments
  • Voluntary deductions (retirement plans, charitable contributions, insurance premiums, etc.)

It is the responsibility of the payroll administrator to calculate and deduct these amounts and deliver them to the appropriate entity.

Slide #3 Some deductions are calculated pre-tax, which simply means that these amounts are calculated and set aside before taxes are calculated and withheld.

Pre-tax deductions decrease the amount of taxable earnings, thereby decreasing the total amount of tax dollars withheld.

• • Not all deductions are set aside pre-tax, however.

Examples of pre-tax deductions are:

• • Contributions to some retirement accounts like 401(k) or 403(b)
  • Payment of insurance premiums
  • Some health care deductions

Slide #4 Tax withholdings are payroll deductions that are set aside for the payment of taxes.

These are calculated after all pre-tax deductions have already been subtracted from the employee’s gross pay.

• • The IRS Form W-4 contains the information needed to determine the appropriate percentage used to calculate federal tax withholdings.
  • State income tax can also vary widely as some states do not charge one.

The FICA tax is the combined amount of Social Security tax and Medicare tax.

• • Both employees and employers pay an equal amount of the FICA tax.
    • Each pays (after pre-tax deductions) 6.2% of earnings for the Social Security tax and 1.45% for the Medicare tax.
  • There is a cap on the amount of income that is subject to the Social Security tax ($139,500 for 2019).
  • The Medicare tax has no maximum limit.

Slide #4 After taxes have been calculated, any remaining deductions are calculated.

These include:

• • Any mandatory deductions (such as garnishments)
  • Some voluntary deductions (like unions dues or charitable contributions)

Slide #5 The final step in payroll calculations is to add to the remaining amount of any reimbursements that the company owes the employee.

• • This is the amount reflected in the employee’s paycheck.

Employer-Paid Payroll Taxes—Discussion Guide

Slide # 1 THINK ABOUT IT

Employees are not the only ones responsible for paying payroll taxes. Employers are also required to pay taxes on their employees’ earnings.

KEY CONCEPTS

Slide #2 There are three main categories of payroll taxes:

1. Payroll taxes paid by employees only (federal, state, and local income tax)
2. Payroll taxes paid by both employers and employees (FICA tax)
3. Payroll taxes paid by employers only (FUTA and SUTA taxes)

The amount withheld for employee-paid income tax will vary greatly based on the level of income, state laws, and information from completed tax forms.

The FICA tax (the combined amount of the Social Security tax and the Medicare tax) is paid by both employers and employees.

• • For Social Security tax, each employee is taxed at 6.2% for every dollar of annual earnings up to a maximum ($132,900 for 2019).
    • The employer pays an additional 6.2%.
    • Together, they pay a total of 12.4% on the amount of the employee’s annual earnings up to the maximum.
  • The Medicare tax does not have a maximum cap on earnings taxed, and the employee and the employer each pay 1.45% on the employee’s earnings, totaling 2.9%.

Slide #3

An employer who has two employees, one who earns $145,000 per year and another who earns $60,000 per year, would calculate the FICA tax this way:

Slide #4 In addition to the matching funds for the FICA tax, employers must also pay a federal unemployment tax (FUTA) and a state unemployment tax (SUTA).

For each employee, employers are required to contribute up to 6.0% for the first $7,000 of annual earnings for the federal unemployment tax (up to $420 per year per employee) and an additional amount for the state unemployment tax.

• • This means that no matter how much an employee earns per year, as long as it is over $7,000, the FUTA tax is based on $7,000 of earnings.

For the purposes of this example, we will use the maximum 6.0% FUTA rate.

For more information on employer-paid payroll taxes, in addition to a helpful Employer Tax Calculator, click here: https://gusto.com/tools/employer-tax-calculator.

Discussion #1: Ask students to discuss why the rate charged for state unemployment tax/state unemployment insurance would be calculated differently for different companies. What do they think state unemployment insurance pays for? Why would company history affect this rate? How does this relate to other kinds of insurance?