The Mathematics of Money

Copyright © 2008, The McGraw-Hill Companies, Inc.

15.1 Payroll 587

II. Dental Plan

Single $18.55

Family $33.55

III. Life Insurance

1  Salary $0.00

Additional multiples of salary (up to 5 ) $4.75 per additional multiple

IV. Disability

Basic Disability (60% of income) $0.00

Additional Disability (70% of income) $4.75

V. Legal Services Plan $9.35

VI. Additional Vacation Days

Each additional day (up to 5) $7.05

To tal deductions for selected coverages

Less benefi t allowance $72.55

Net Payroll Deduction

Other Benefi t Selections (Not included in Cafeteria Plan)

VII. Company-Sponsored 401(k) Program

You may contribute 2% up to 16% of your salary to this program.

Contributions are made on a pretax basis and are eligible for 50% match up to 8%.

VIII. Flexible Spending Accounts

You may contribute up to $750 for medical expenses and up to $5,000 for dependent

care expenses annually.

Administrative costs for this plan are paid by the company.

Note that the “costs” for benefits offered in this plan may not be the full actual cost of the

benefit. Companies offering these types of plans often set the “costs” of cafeteria benefits

to employees by a formula that includes the company bearing some of the benefits costs in

addition to the employee’s benefit allowance.

Example 15.1.10 Using the cafeteria plan shown above, calculate the benefi t

payroll deduction for an employee who selects HMO insurance coverage for himself

and his children, family dental coverage, basic disability coverage, and 3 × salary for

life insurance, and no other benefi ts.

From the table, the HMO cost would be $75.89 and the dental plan’s cost is $33.55, and

there is no charge for the basic disability. Since he is selecting 2 additional multiples of salary

for life insurance, that will cost 2($4.75) 
 $9.50.

The total costs for all selected benefi ts is $75.89  $33.55  $9.50 
 $118.94.

Subtracting the benefi t allowance, we arrive at $118.94  $72.55 
 $46.39.

Because of the expense of administering them, cafeteria plans are more common among

large companies than smaller businesses. Also, smaller businesses seldom feel that they are

in a position to offer many of the more exotic benefits that a cafeteria plan may include.

Employer Payroll Taxes

Just as an employee’s take home pay does not equal his gross, neither does an employer’s

costs for an employee equal the employee’s gross pay.

Employers are responsible for paying certain taxes on their payrolls. These taxes do not

directly affect any employee’s paycheck, and many employees are not even aware of them.

They do represent a significant cost and responsibility to employers, however.

The two most significant employer payroll taxes are FICA and unemployment taxes.