Payroll Accounting(Quick Test #3 with Coaching)

In this question, exempt is referring to the Fair Labor Standards Act (FLSA) which requires salaried and hourly employees to be paid at time and one-half for the hours worked that are in excess of a 40-hour workweek.

FLSA allows for some companies and employees to be exempt from the overtime pay. For example, if a salaried manager earns $80,000 a year, the employer is exempt from giving the manager overtime pay even if the manager works more than 40 hours every week. Hence, the manager is referred to as an exempt salaried employee.

On the other hand, if the company pays a salaried office employee $20,000 per year, the company is not exempt from paying overtime wages. Therefore, the company must pay this employee time and one-half for every hour worked that is in excess of the 40-hour workweek. This $20,000 a year office employee is a nonexempt salaried employee.

One of the criteria in the federal rule for overtime is a weekly salary amount.

Beginning in 2020, the rule states that if an employee's salary is less than $684 per week, the employer must pay the employee for working the overtime hours.

If the employee's salary is $684 or more per week, the employer is exempt and does not have to pay the employee for working the 6 hours of overtime.

Comparison of the employee's salary to the federal amount of $684:
The employee's monthly salary of $1,800 X 12 months = the full-year amount of $21,600.

The federal amount of $684 per week X 52 weeks = the full-year amount of $35,568.

Since the employee's salary of $21,600 is less than the federal amount of $35,568, the employer is not exempt from the federal rule, and must pay the employee time and one-half for the 6 overtime hours.

NOTE: Always check the federal and state regulations for the current amounts and rules that apply to your company's employees.

Since the employee is nonexempt, the employer must comply with the rules of the Wage and Hour Division of the U.S. Department of Labor. Therefore, the employer must pay an overtime amount for the 6 additional hours worked. The rule specifies that the overtime pay will be "at time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek." (https://www.dol.gov/agencies/whd/fact-sheets/17a-overtime)

Calculation of regular rate of pay:
Monthly salary of $1,800 times 12 months = $21,600 for a full year.

Normal work hours in full year: 40 hours per week X 52 weeks = 2,080 hours.

Annual salary of $21,600 divided by 2,080 hours = regular rate of pay of $10.39 (after rounding the actual $10.385). The regular rate of pay is also known as the straight-time rate.

Time and one-half hourly rate is the regular (straight-time) rate of $10.39 plus $5.20 (one-half of $10.39) = $15.59 for each overtime hour. The $5.20 is also referred to as the overtime premium.

Since the employee worked 6 overtime hours, the employee will have overtime pay of $93.54 (6 hours X $15.59 for each overtime hour). This amount is in addition to the normal salary amount.

The federal unemployment tax (or FUTA) is paid entirely by the employer and becomes a company expense.

The FUTA rate is 6%, but there is usually a FUTA credit of 5.4%. As a result, the net rate is usually 0.6% or 0.006. The rate is applied only to each employee's first $7,000 of each year's gross pay.

Calculation of the company's FUTA expense:
Full-time employee having a salary of $50,000: $7,000 X 0.006 = $42.
Part-time employee that had wages of $5,000 is: $5,000 X 0.006 = $30.

The total for the two employees is $72.

Form 940 is the IRS Form entitled Employer's Annual Federal Unemployment (FUTA) Tax Return.

Form I-9 is entitled Employment Eligibility Verification. It is a U.S. Citizenship and Immigration Services form.

Form W-4 is the IRS Form entitled Employee's Withholding Certificate.

Form 941 is the IRS Form entitled Employer's Quarterly Federal Tax Return.

Semiweekly means two times during a week. This term is used in the IRS rules for employers depositing federal payroll taxes. If the federal payroll taxes are greater than $50,000 during a one-year lookback period, the employer must deposit the federal payroll taxes from a Wednesday, Thursday, and/or Friday payday by the following Wednesday. Federal payroll taxes from a Saturday, Sunday, Monday, and/or Tuesday payday must be deposited by Friday.

Biweekly means every two weeks. For instance, if employees are paid every other Friday, they are paid biweekly. These employees will have 26 paydays during most years.

Semimonthly means two times during a month. For example, some companies pay their salaried employees on the 15th and the last day of each month. These employees will have 24 paydays during the year.

In the year 2024, the Social Security tax that is withheld from an employee's gross wages is 6.2% (0.062) of the first $168,600 of the employee's gross wages.

Since the employee in this question has $300,000 of gross wages, the Social Security tax to be withheld from the employee is $168,600 X 0.062 = $10,453.20.

[The employer must also match the employee's withholding and must remit $20,906.40 ($10,453.20 + $10,453.20) for the Social Security tax alone. Medicare tax is an additional amount.]

The Medicare tax that is withheld from an employee's gross pay is 1.45% (0.0145) of every dollar of an employee's gross wages.

Therefore, the Medicare taxes withheld from this employee will be $160,000 X 0.0145 = $2,320.00.

[The employer must also match the employee's withholding and remit $4,640 ($2,320 + $2,320) for the Medicare tax alone.]

The Additional Medicare Tax is imposed only on the employee through payroll withholdings. The amount of the Additional Medicare Tax is calculated by using the gross wages that exceed $200,000 in the year.

Unlike the Medicare tax, the employer does not match the employee's withholdings of the Additional Medicare Tax.

The Additional Medicare Tax is withheld from an employee's wages and it is calculated by using the employee's wages that are in excess of $200,000 during the year.

The Additional Medicare Tax rate to be applied to the wages in excess of $200,000 is 0.9% (0.009).

For an employee with wages of $300,000 for the year, only $100,000 ($300,000 minus $200,000) is multiplied by 0.009, resulting in an Additional Medicare Tax of $900.

(The employer does not match the Additional Medicare Tax.)

Since the state's minimum wage is higher than the federal minimum wage, the state's minimum wage is required.

Fact Sheet #17A of the Wage and Hour Division of the U.S. Department of Labor states "When the state laws differ from the federal FLSA, an employer must comply with the standard most protective to employees."

Post-tax payroll deductions do not reduce the employee's taxable wages and therefore do not reduce the amount of taxes withheld from the employee's paycheck.

Pre-tax payroll deductions will reduce the employee's taxable gross wages and if large enough will reduce the amount of taxes withheld from the employee's paycheck.

If a company pays an independent contractor in the current year for services it received, the company must issue IRS Form 1099-NEC by January 31 of the following year. (The form is required only for an independent contractor who was paid $600 or more during the year and is not a corporation.)

IRS Form W-9 is entitled Request for Taxpayer Identification Number and Certification and is used to obtain an independent contractor's taxpayer ID number required on Form 1099-NEC.

Using the accrual basis of accounting, the wages expense reported on the corporation's December income statement is the amount of expense the corporation has incurred and the amount the employees have earned as the result of working the 31 days in December.

The total amount of gross wages reported on the W-2 statements reflect the amounts that were included on the payroll checks issued during the month of December.

Since it requires time between the hours that the employees worked and the day that the payroll checks are issued, the total of December's W-2 gross wages will be less than December's wages expense. The difference is reported as a current liability on the corporation's balance sheet.

FLSA pertains to both the minimum wage and overtime pay.