Accounting and Finance Foundations

Unit 8

Accounting and Finance Foundations Unit 8: Payroll 655

Payroll

Chapter 19

Student Guide

Many employers keep track of the number of hours that employees work with a time clock and time cards.

Each employee uses his/her own time card (which is typically kept near the time clock) to “clock in” and

“clock out” at the beginning and ending of each work day. The time clock keeps an accurate record of the

hours that the employee worked. Many companies still use time cards to track the hours an employee

works. However, instead of manually calculating the hours worked, some businesses track the time au-

tomatically using a computer. The payroll clerk’s job is to check each time card for accuracy and total the

hours worked (if the time clock or computer hasn’t already done so).

The Federal Labor Standards Act of 1938 set the standard work week for hourly employees at 40 hours.

Any amount of time worked over 40 hours is eligible for overtime pay, which must be at least 1.5 times the

hourly wage (time and a half). Earnings that are based on the hourly rate are considered regular pay, and

earnings calculated using the overtime rate are considered overtime pay.

Gross Pay for an Hourly Employee = Regular Earnings + Overtime Earnings

To Calculate Overtime and Gross Pay:

As stated earlier, overtime is determined by finding at least 1.5 the regular rate.

For example, if Wes’s hourly rate is $6 an hour and he qualifies for overtime, his overtime rate should

be $9 ($6 x 1.5).

Now, let’s say Wes works 43 hours in one week and gets paid weekly. What should his gross pay be?

n       First you need to determine Wes’s regular earnings. To do this, you multiply 40 hours by his regu-

lar rate, which is $6 per hour. Wes’s regular earnings are $240 (40 x $6).

n       Next, determine Wes’s overtime earnings. Start by determining how many hours of overtime Wes

worked. Since Wes worked 43 hours, he worked three hours of overtime (43 - 40). Now, multiply

the overtime hours by the overtime rate, which is $9. Wes’s overtime earnings are $27 (3 x $9).

n       To figure his gross pay, simply add regular earnings and overtime earnings. Wes’s gross pay is

$267 ($240 + $27).

Commission

Some employees earn commission instead of an hourly or salary rate. Others earn commission in addition

to their regular pay. Commission is a percentage of the dollar value of sales. To calculate commission:

Commission = Sales x Commission Rate

For example, Jill receives a 6% commission on her monthly sales. During March, her sales were $38,000.

Her commission is calculated as $38,000 x 6% = $38,000 x 0.06 = $2,280 commission.

Bonuses

In addition to paying their employees a salary or hourly wage, overtime, and/or commission, some compa-

nies also offer performance-based incentives, often called bonuses, to their workers. These incentives or

bonuses may take the form of additional pay, stock options, paid time off, trophies, certificates, lunch with

senior leaders, or promotional options. Typically, bonus programs serve a couple of purposes. One, they

motivate employees to meet or exceed organizational goals. Secondly, they attract new employees to the

organization.