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Payroll Calculation

I will use Tony's Tacos to explain the basic payroll calculation and the laws that apply. As Tony's grows its payroll will increase in complexity to explain and demonstrate more advanced payroll information. The button above opens a window showing the basic layout for Tony's payroll for a single pay period, here a single week, for the three current employees.

Tony's started business June 1, 2012 and its pay period starts Sunday Midnight and runs through to the following Saturday Midnight and the pay day is the Friday following the Satuday ending the pay period. The payday shown for Tony's Tacos is September 14, 2012 for the pay period starting Midnight Sunday September 2, 2012 and ending Midnight Saturday September 8, 2012. Tony's employees a cook, a waitress and a manager to prepare and serve tacos to the breakfast and lunch crowd.

This basic layout is typical for a manual payroll systems, a row is used to record information for a single employee and a column is used to record information for a single payroll item. As this layout is so common and easily understood most computerized payroll packages us it as well.

To make explanation easy each column is label with a Capital Letter (A,B,C) for use in a formula (E=AxB).

  • Rate is pay rate per hour or period.
  • Reg is regular hours.
  • O/T is over time.
  • Tips are the Tips the waitress B. Booker collected during week 1.
  • Reg $ is the regular wages (Reg Hours x Rate)
  • O/T $ is Overtime wages [O/T Hours x (Rate x1.5)]

 The separate columns for Reg. time and O/T are necessary under the FLSA requirement that hours worked  exceeding 40 hours in a workweek be compensated at a minimum rate of 1.5 times the regular rate.

The tax calculations following gross wage are for Federal Tax reporting and payment. The amounts and rates are statutorily set by Congress. The withholding (W/H) amount was determend using tables from Publication 15; Circular E, Employer's Tax Guide issued annually by the IRS.

Prior to passage of the Tax Relief, unemployment Insurance Reauthorization, and Job Creation Act of 2010 the social security rate was the same for both employer and employee at 6.2% up $106,800 in gross wages. The Act reduced the rate on paid by the employee to 4.2% and it was temporarily extended for the first two months of 2012 then subsequently extended by the Middle Class Tax Relief and Job Creation Act of 2012 to the end of 2012 with the uncollected social security funds being replaced by transfers from the General Fund.

An employee's net wage is Gross Wages less W/H, Emp SocSec, Emp Medicare. The amounts withheld from an employee's gross wage is called the Trust Fund Portion.

The employer's payroll liability is the total of the Trust Fund Portion and the Employer's social security and medicare tax, FUTA and SUTA taxes. There are regulations established by the IRS on when these taxes are to be deposited. Unfortunately many employers fail to timely deposit the tax incuring penalties and interest on the undeposited amounts with the taxing authorities.

This is the basic layout that will be used to explain payroll taxes and payroll transactions.


What Employers Face. The Governmental Trinity.

Employer Blog is intended to help small employers and business people learn and understand the governmental regulations and taxes that they are subject to as employers. An employer ignorant of even the basic information is placing their business, livelihood and future in jeopardy. And if an employer agrees to use anyone of the host of employee leasing or payroll service companies they will need this information to determine which outside service provider will best fit the employer's situation and judge if the service provider is performing agreed upon services.

There are three principal government agencies with oversight and enforcement powers regarding employee compensation, taxation and reporting; The Department of Labor (DOL) charges with enforcing federal labor laws principally under the Fair Labor Standards Act (FLSA). The Internal Revenue Service (IRS) which is responsible for for tax reporting and collections to the federal government. Each state has an agency that is responsible for administering a program for unemployment taxes and benefits. In Texas the Texas Workforce Commission (TWC) is responsible for enforcing Texas Labor Laws and collecting and administering unemployment taxes from employers and to workers, aiding employers find employees and in some training of workers.

Because each agency has authority over the employer/employee relationship complying with the laws, regulations, reporting requirements for employee taxes, benefits etcetera can be overwhelming to business people to remain informed, compliant and still run a business. To complicate the issue for an employer recently the IRS and DOL have signed a Memorandum of Understanding (MOU) to share information “to end the business practice of misclassifying employees in order to avoid providing employment protections”. Now if the DOL learns of an employer who has not followed the labor laws the DOL will inform the IRS and vice versa. To further complicate matters for the employer the IRS Small Business/Self-Employed Division and 37state have had a MOU since the early 2000s to exchange information on abusive tax avoidance transactions (ATAT). This can result in the employer complying with the DOL and suddenly find the IRS and state employment agency asking questions of the employer. It is easier and less costly to comply with the labor laws. To comply an employer and management must be aware of the laws that affect their industry and be aware of changes as they occur.

The right sidebar provides the current numbers, rates and amounts used in payroll, tax, and financial calculations.

First subject to be posted Tuesday will be a summary of DOL FSLA standards for determining hours worked, minimum wage, overtime rate and pay period and the related TWC pay day rules. The following Thursday a basic payroll calculation will be demonstrated using an excel spreadsheet.

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