Now that we've covered the types
of compensation and typical payroll deductions in prior lessons, we
need to combine the two and throw in some additional concepts and
practical examples to see how we actually perform payroll
calculations. Our calculations also need to abide by any applicable
federal or state laws.
The total earnings of an employee
prior to any deductions is called gross pay or gross
earnings. The gross pay minus the legal and authorized
deductions is called net pay. Our examples will include the
major types of compensation such as salaries, hourly wages, piece
rate wages, overtime, tips, and bonuses. In addition, our examples
will illustrate how and where to get the information necessary to
calculate the different types of payroll deductions. Additionally,
we'll discuss any areas (earnings or deductions) where federal or
state laws may apply.

Since the best way to learn about
calculating payroll is actually doing, that's exactly the approach
we're going to take. We're going to use a restaurant (Mom's Secret
Recipes) as our example type of business so that we can also
include some examples of tipped employees. For those businesses
that don't have to deal with tips, the extra bit of knowledge won't
hurt.
Payroll Assumptions and
Rules regarding Mom's Secret Recipes:

 We're organized as a sole
proprietorship.
 We'll use the rates for social
security and medicare in effect for the year 2005.
Social Security  6.2 % or .062
Medicare  1.45 % or .0145
 We'll use the IRS's income tax
withholding tables and calculations in effect for the 2005
year.
 We'll assume our state has a
state income tax and that state income tax is withheld at a flat
rate of 10% of gross pay. Note:Actually states publish
withholding tables and calculations similar to the IRS withholding
tables.
 We live in a locality that has no
city income tax.
 Our restaurant is subject to the
Fair Labor Standards Act (FLSA) minimum wage and overtime
laws.
The Fair Labor Standards Act (FLSA) as of 2004 sets a federal
minimum wage of $5.15 per hour for covered, nonexempt employees. An
employer of a tipped employee is only required to pay $2.13 ($5.15
3.02 tip credit) an hour in direct wages if that amount plus the
tips received equals at least the federal minimum wage, the
employee retains all tips and the employee customarily and
regularly receives more than $30 a month in tips. If an employee's
tips combined with the employer's direct wages of at least $2.13 an
hour do not equal the federal minimum hourly wage, the employer
must make up the difference.
Some states have minimum wage
and/or overtime laws that differ from the federal law. When an
employee is subject to both the federal and state wage laws, the
employee is entitled to the provisions which provide the greater
benefits.
 Our state as well as the federal
government allows us a "maximum tip credit" of $3.02 and our
state's minimum wage is the same as the federal minimum wage of
$5.15. In addition, all our tipped employees comply with any
additional federal laws.
 All our employees have signed an
agreement where if the need arises where their earnings are not
enough to cover all authorized deductions from their pay that we
may require them to setup and deposit funds in order to cover these
deductions or reimburse us each pay period that this situation
occurs.
 Our chef and cooks salaries are
based on a 45 hour work week. We do not dock salaries for days off
or tardiness. In other words if our cooks and chefs work less than
45 hours we still pay them their full salary.
 All our employees are
married.
 Our restaurant pays 50% of a
family's premium for health insurance and our plan qualifies with
the IRS for taxexempt treatment. The annual premium for our family
plan is $5,200.
 We provide one week of vacation
for all employees with at least 6 months of company service and two
weeks for all employees with a year or more of company service. All
our current employees qualify for two weeks.
 We provide 5 paid holidays a year
for all employees with at least 6 months of company service. All
our current employees qualify for the 5 holidays.
 We provide 5 sick days paid a
year for all employees with over 6 months company service. All our
current employees qualify for the 5 sick days.
 Our state requires a 30 minute
"lunch" break for all employees scheduled to work more than 6 hours
during a day. In addition, we provide two 10 minute paid breaks
during the work day.
 We include any bonuses with
regular wages. In other words we don't issue separate checks for
bonuses.
 For the convenience of our
employee's we administer an employee savings account and U.S.
Savings Bond programs.
 We hold our waiters and
waitresses responsible and accountable for 50% of any bills (tabs)
the customer left without paying. In other words we share the cost
of "walked tabs". All our waiters and waitresses have signed a
statement authorizing this "special" deduction.
Note: Ma's accountant (me) discusses this with Ma later in this
lesson.
 We require our tipped employees
to report their tips each week.
 We hold our dishwashers
responsible for broken dishes. All our dishwashers have signed a
statement authorizing this "special" deduction.
Note: Ma's accountant (me) discusses this with Ma later in this
lesson.
 We require all our employees to
have "uniforms" embroidered shirts with the our name and logo. We
supply the first three at no cost and the employee is responsible
for purchasing additional shirts that are lost or worn out. All our
employees have signed a statement authorizing this "special"
deduction.
 All our employees have been
instructed about employee deductions and have signed our "blanket"
employee deduction authorization form.
 All our food handlers are subject
to periodic health exams. We pay 100% of the cost of these required
exams.
What should you pick up from
reviewing our assumptions ?
 We've established policies such
as "special deductions".
 We've done our research to
determine if any special requirements apply to our type of
business health exams for food handlers and tips must be reported
by our tipped employees.
 We've done our homework as to
what deductions are required by federal, state, or local
laws.
 We've set up fringe benefits such
as insurance and paid holidays and vacations  not required by law
but we want to be competitive in attracting good
employees.
 We've obtained "blanket" and
"special" authorizations for deductions from our employee's
pay.
 We used salary as the payment
method for some of our nonexempt employees. Normally nonexempt
employees are paid on an hourly or other basis but the labor laws
also allow you as an employer to use the salary payment method for
nonexempt employees if you want to. We based our chef and cook
salaries on a 45 hour work week. This is perfectly legal although
many small businesses don't realize it.
Although not required, I recommend
that even a small business with employees prepare an employee's
manual (it doesn't have to be fancy) that contains your employee
policies and prepare job descriptions. By doing this, everyone
should know what to expect.
 Our Employee Job
Categories:
Name 
Method Of Pay 
Dishwashers 
Hourly 
SalesBanquets 
Commission 
Waiters/Waitresses 
Hourly + Tips 
Head Chefs 
Salary / Bonus 
Chefs 
Salary 
Cooks 
Salary 
Line Helpers 
Hourly 
Food Preparers (Prep) 
Piece Rate 
Cashier 
Hourly 
Managers 
Salary / Bonus 
 Our Current Employee
Information
Employee Name 
W4
Exemptions 
Job Description 
Method of Pay 
Pay Rate 
Pay Period 
Fat Chef 
M3
Married
3 Exemptions 
Head Chef 
Salary + Bonus 
$1,300 every 2  weeks
or $650 every week
Note: Based on 45 hours
each week 
BiWeekly
(every two weeks) 
Notbad Cook 
M1 
Cook 
Salary 
$800 every 2  weeks
or $400 every week
Note: Based on 45 hours
each week 
BiWeekly 
Goodwith Cash 
M2 
Cashier 
Hourly 
$6.00 
Weekly 
Wet Hands 
M1 
Dishwasher 
Hourly 
$5.15 
Weekly 
Good Waitress 
M1 
Waitress 
Hourly + Tips 
$7.00 
Weekly 
Handsome Waiter 
M2 
Waiter 
Hourly + Tips 
$2.13 ($5.153.02) 
Weekly 
Knowit All 
M2 
Manager 
Salary + Bonus 
$3,000 
Monthly 
Betty Baker 
M3 
Food
Preparation 
Piece Rate 
Various Rates 
Weekly 
Line Man 
M1 
Line Helper 
Hourly 
$7.50 
Weekly 
Talk Alot 
M1 
Sales 
Commission 
20 % of Sales
Banquets & Special Events 
Weekly 
Mom Toall 
N/A 
Owner 
Draws 
Various 
Various 
What should you pick up from
reviewing our job categories and employee list ?
 You can establish different pay
periods for different employee job categories.
 You can have different methods of
calculating pay for different employee job categories.
 We've used our allowed maximum
tip credit of $3.02 in determining the $2.13 ($5.15  3.02) rate
per hour for Handsome Waiter.
 Since Mom's organized as a sole
proprietorship she is not included in payroll. Instead she receives
draws. Mom is not actually considered an employee. We'll discuss Ma
in a later Lesson.
Let's first classify our employees
as exempt or nonexempt as required by the Fair Labor Standards Act.
Let's do the easy part first. Any worker that is not paid a
salary is automatically classified as
nonexempt.
What exactly is a salary ?
Salariescompensation based on a fixed amount and paid to an
employee for management, professional, administrative, or similar
services (exempt type of jobs). A salary is usually stated in terms
of a weekly, monthly, or yearly amount. Note: Although salaries are
normally used to pay for the so called exempt types of jobs, they
may also be used as the payment method for skilled or unskilled
employees in non management or supervisory jobs , the so called
nonexempt types of jobs. With a "true" salaried position the
employee is paid the same amount regardless of how many hours the
employee actually works during the pay period.
Don't be led astray, just because
an employee is paid by the salary method does not necessarily mean
you don't have to pay that employee overtime. If the employee is
also exempt you don't have to pay overtime; however, if the
employee is nonexempt you are required by law to pay
overtime.
So based on this, our Nonexempt
Employees (those not paid by the salary method)
include:
 Goodwith Cash
 Wet Hands
 Good Waitress
 Handsome Waiter
 Line Man
 Betty Baker
 Talk Alot
For employees that we're paying a
salary we need to see what type of job and the duties and
tasks that the employee performs and if their salary is
greater than $455 a week in order to determine if the
employee is exempt or nonexempt. In general, all administrative and
managerial type of jobs are exempt. Since Knowit All's job is the
manager and he makes more than $455 per week, he falls under the
exempt category.
Exempt
Employees:
Fat Chef's salary stated on a
weekly basis is $650 which is greater than the $455 a week needed
to qualify as an exempt employee; however, his job duties do not
qualify for the exempt status.
Notbad Cook's salary stated on a
weekly basis is $400 which is less than the $455 a week needed to
qualify as an exempt employee. We don't have to analyze his job
duties because based on his salary he is already classified as a
nonexempt employee. Although Fat Chef and Notbad Cook are paid a
salary their job duties and/or salary amounts do not qualify them
for an exempt status.
Additional Nonexempt
Employees:
You should note that our only
exempt employee (not subject to the laws and regulations of the
Fair Labor Standards Act) is our manager. All the rest of our
employees are covered.
Note:New labor laws and
regulations regarding exempt employees went into effect in 2004. If
you already own a business you should check them out in order to
make sure your business is complying with the new laws.
I think Ma's employees are getting
impatient and want their checks so Ma (who does the payroll) better
gather up the information and get out her pencil, calculator, and
tax tables .
What information does Ma need in
order to properly calculate her payroll ?
 Regular and Overtime Hours Worked
, Production of Pastries, Bonus Calculations, and Reported
Tips.
Ma uses a time clock to record the time worked for all her
employees except the manager and cooks who fill out a weekly time
sheet and in addition any preparation employees also fill out a
daily production report (number of pastries made) and tipped
employees fill out a weekly report of tips received.
Hours Worked and To be
Paid
Employee 
Total Hours
Worked 
Regular Hours 
Overtime Hours 
Vacation / Sick 
Fat Chef 
85 
80
1st wk 40 hrs
2nd wk 40 hrs 
5
1st wk 3 hrs
2nd wk 2 hrs 

Notbad Cook 
88 
78
1st wk 38 hrs
2nd wk 40 hrs 
10
1st wk 0 hrs
2nd wk 10 hrs 

Goodwith Cash 
35 
35 
0 
8 
Wet Hands 
42 
40 
2 

Good Waitress 
45 
40 
5 

Handsome Waiter 
50 
40 
10 

Knowit All 
200 
200 
Included in
Regular Hrs 
8 
Betty Baker 
45 
40 
5 

Line Man 
40 
40 
0 

Talk Alot 
40 
40 
0 

Other Employee Payroll
Information
 Piece Work Quantities for Betty
Baker.
Betty gets paid $1.00 for each desert item she bakes. Betty
produced 175 deserts during the week.
 Banquet and Special Event Sales
during the pay period.
Talk Alot had 4 banquets and/or special events booked during the
pay period with total sales amounting to $1000.
 Any Employee Vacation , Sick
Days, or Holidays that need to be paid.
Our cashier Goodwith Cash was off one day due to sickness and Mom
had to run the register. Ma checked and Goodwith Cash hadn't used
any of her 5 days allowed.
Also our manager Knowit All took one day off for vacation. Ma
checked and he still had 7 days remaining.
 Report of tips received during
the pay period for Good Waitress and Handsome Waiter.
Good Waitress reported tips amounting to $250 during the
period.
Handsome Waiter reported tips amounting to only $50 during the
period. I guess he didn't impress the lady customers that
much.
 Cash Shortages, Broken Items, and
Walked Tabs during the pay period. Ma just started these new
policies. In the past, she did not hold her employees responsible
for any of the cost.
Friday was a hectic evening and Goodwith Cash had a cash shortage
of $25 for the night.
Wet Hands (should have been named Slippery Hands) broke 10 plates
at a cost of $3.00 a piece his share of the breakage cost is $1.50
for 10 plates for a total amount of $15.
Good Waitress and Handsome Waiter both had customers leave without
paying their bills. Handsome Waiter had total walked tabs amounting
to $100.00 and Good Waitress had total walked tabs amounting to
$50.00. Since they pay half Good Waitress has a deduction amounting
to $25 and Handsome Waiter a deduction amounting to
$50.
 Our manager's bonus is based on a
1/2% of the current monthly sales and our chef's a 1/4% commission
of the sales for the current twoweek pay period. The sales for the
month amounted to $100,000 and the sales for the current two week
period amounted to $50,000.
Knowit All's Bonus $500 (1/2 % x
$100,000)
Fat Chef's Bonus $125 (1/4 % x
$50,000)
The sales during the first week were $23,000 and the sales for the
second week were $27,000.
 Employee deduction amounts for
insurance.
Employee's Share (50%)  $5200/52 x .5 = $50 per week
Paid Weekly Employees $50 Paid BiWeekly Employees $100 Paid
Monthly Employees $217
 Deduction amounts for employee
bonds or savings accounts. Only the ChefFat Chef, CookNotbad
Cook, and ManagerKnowit All have signed up for and authorized a
deduction for bonds and/or savings.
Knowit All Manager  $25 savings deduction $25 bond deduction per
pay period.
Fat Chef Chef  $25 bond deduction per pay period.
Notbad Cook $20 savings deduction per pay period.
 Fat Chef purchases a new shirt
(uniform) costing $25.00 during the pay period.
Where did Ma get all this payroll
information from ?
Ma designed forms to record days off, employee tips, breakage, cash
shortages, walk out tabs , and employee authorization forms for
other deductions. Ma's pretty smart and also saves time by keeping
an employee summary deduction sheet with the name of each employee
and all the normal recurring employee deductions for each employee
so that she doesn't have to go to the employee's payroll file each
pay period to find out what deductions and how much to deduct from
an employee's pay each pay period.

Gross
Earnings
Our first step is calculating our
employee's Gross Earnings. In other words, we need to use the hours
and other employee payroll information to calculate our employee's
earnings prior to any deductions.

Employee 
Pay Period 
Regular
Earnings 
Overtime
Earnings 
(B)Bonuses
(T)Tips
(C)Commissions 
(S)Sick
(V)Vacation 
Total
Gross 
(1) Fat Chef 
Biweekly 
$1,300.00
1st wk 650
2nd wk 650 
36.10
1st wk 21.66
2nd wk 14.44 
125  (B)


$1,461.10

(2) Notbad Cook 
Biweekly 
$800.00
1st wk 400
2nd wk 400 
88.95
1st wk  0
2nd wk  88.95 


$888.95

(3) Goodwith Cash 
Weekly 
$210.00 


48  (S) 
$258.00 
(4) Wet Hands 
Weekly 
$206.00 
15.46 


$221.46 
(5) Good Waitress 
Weekly 
$280.00 
52.50 
250  (T) 

$582.50 
(6) Handsome Waiter 
Weekly 
$166.00 
67.30 
50  (T) 

$283.30 
(7) Knowit All 
Monthly 
$2,861.52 

500  (B) 
138.48  (V) 
$3,500.00 
(8) Betty Baker 
Weekly 
$206.00 
38.65 


$244.65 
(9) Line Man 
Weekly 
$300.00 



$300.00 
(10) Talk Alot 
Weekly 
$206.00 



$206.00 
Let's review the calculations of
what makes up gross pay for each employee.
(1) Fat Chef
 Fat Chef is paid by the salary
method and his salary is based on working up to 45 hours a week as
agreed upon with Ma. If he works less than 45 he is also paid the
same amount; however, since he is a nonexempt employee if he works
over 40 hours during a pay week he must be paid overtime for all
hours worked over 40. Fat Chef is also entitled to a bonus. The law
basically requires all types of remuneration to be included in
calculating an employee's regular and overtime rates. In our case,
we need to include our chef's bonus in our
calculations.
 Our first step is to calculate
Fat Chef's bonus for the two week pay period. Fat Chef's bonus is
based on a rate of 1/4 % of the sales during the two week pay
period  $50,000. The sales during the first week were $23,000 and
the sales for the second week were $27,000. This calculation is
simple. Just multiply the bonus rate times the sales for the
period.
Bonus 1st Week = Sales X Bonus
Rate
Bonus 1st Week = $23,000 X 1/4 %
Bonus 1st Week = $57.50
Bonus 2nd Week = Sales X Bonus
Rate
Bonus 2nd Week = $27,000 X 1/4 %
Bonus 2nd Week = $67.50
Total Bonus = Bonus 1st Week +
Bonus 2nd Week
Total Bonus = $57.50 + 67.50
Total Bonus = $125.00
 In order to calculate what to pay
him for any overtime, we first need to calculate what his straight
time rate of pay per hour is. We do this by dividing his weekly
Salary amount of $650 a week plus his Bonus for the week by the
number of hours his pay is based upon.
Calculation of 1st Weeks Pay
Straight Time Rate = (Salary + Bonus) / Hours Salary Based On
Straight Time Rate Per Hour = ($650 + $57.50) / 45 hours
Straight Time Rate Per Hour = $15.72 per hour
 Our next step is to calculate
what his overtime rate of pay per hour is. Ma pays 1/1/2 times the
straight time rate for overtime hours. So all we need to do is
multiply his straight time rate per hour time 1.5.
Overtime Rate Per Hour = Straight
Time Rate Per Hour X 1.5
Overtime Rate Per Hour = $15.72 x 1.5
Overtime Rate Per Hour = $23.58
The overtime rate per hour is
actually made up of the straight time rate of $15.72 plus what is
often called the premium portion of $7.86. All we're saying here is
that Fat Chef makes an additional $7.86 an hour when he works
overtime. A simple way of determining the premium portion is
subtracting the Straight Time Rate Per Hour from the Overtime Rate
Per Hour.
Premium Rate Per Hour = Overtime Rate Per Hour  Straight Time Rate
Per Hour
Premium Rate Per Hour = $23.58  15.72
Premium Rate Per Hour = $7.86
 Next we need to get and review
Fat Chef's actually hours worked for each week of his two week
payroll period.
Week 1  43 hours worked
Week 2  42 hours worked
Do we need to pay Fat Chef for any
overtime hours for either or both weeks ? We sure do, he worked
over 40 hours during both weeks.
 Now that we have the rates and
hours and bonus, all we need to do is pay Fat Chef his base salary
and bonus and pay his overtime hours at his overtime rate of $23.58
 right ?
Week 1 Calculation:
Base Salary = $650.00
Bonus For Week = $57.50
Overtime Hours = Total Hours
Worked  40
Overtime Hours = 43 40
Overtime Hours = 3
Overtime Pay = Overtime Rate x
Overtime Hours
Overtime Pay = $23.58 x 3
Overtime Pay = $70.74
Total Pay For Week 1 = Base Salary
+ Bonus + Overtime Pay
Total Pay For Week 1 = $650.00 + 57.50 + 70.74
Total Pay For Week = $778.24
Wrong ! Since Fat Chef's
salary is based on a 45 hour work week the calculation of his
overtime is a little different. Why ? Because for any overtime
hours worked between 40  45 hours we have already paid him his
straight time rate for up to 5 hours. All we owe him for the
overtime hours worked between 40  45 hours is the premium portion
or $7.86 per hour to get his pay for these hours up to the $23.58
overtime rate. What about any overtime hours that exceed 45 hours ?
In that case, we would have had to pay any overtime hours that
exceeded 45 hours at his full overtime rate of $23.58.
Week 1 Correct
Calculation:
Base Salary = $650.00
Bonus For Week = $57.50
Overtime Pay
Overtime Hours = Total Hours Worked  40
Overtime Hours = 43 40
Overtime Hours = 3
Additional Overtime Pay = Overtime
Hours x Overtime Premium
Additional Overtime Pay = 3 x $7.86
Additional Overtime Pay = $23.58
Total Regular Earnings Week 1
Total Week 1 Pay = Base Salary + Bonus + Overtime
Total Week 1 Pay = $650.00 + 57.50 + 23.58
Total Week 1 Pay = $731.08
Week 2 Correct
Calculation:
Base Salary = $650.00
Bonus For Week = $67.50
Straight Time Rate Per Hour =
($650 + $67.50) / 45 hours
Straight Time Rate Per Hour = $15.94 per hour
Overtime Rate Per Hour = Straight
Time Rate Per Hour X 1.5
Overtime Rate Per Hour = $15.94 x 1.5
Overtime Rate Per Hour = $23.91
Overtime Premium = $23.91  15.94
Overtime Premium = $7.37
Overtime Pay
Overtime Hours = Total Hours Worked  40
Overtime Hours = 42 40
Overtime Hours = 2
Additional Overtime Pay = Overtime
Hours x Overtime Premium
Additional Overtime Pay = 2 x $7.37
Additional Overtime Pay = $15.94
Total Regular Earnings Week 2
Total Week 2 Pay = Base Salary + Bonus +Overtime
Total Week 2 Pay = $650.00 + 67.50 + 15.94
Total Week 2 Pay = $733.44
Total Earnings For 2 Week Pay
Period
Total Earnings = Week 1 + Week 2
Total Earnings = $731.08 + 733.44
Total Earnings = $1,464.52
(2) Notbad Cook
 Notbad Cook, like Fat Chef, is
also paid by the salary method and his salary is also based on
working up to 45 hours a week as agreed upon with Ma. If he works
less than 45 he is also paid the same amount; however, since he is
a nonexempt employee if he works over 40 hours during a pay week he
must be paid overtime for all hours worked over 40.
Calculating his pay should be a
breeze since his calculations are very similar to Fat Chef's. Good
Chef however does not receive a bonus.
 In order to calculate what to pay
him for any overtime, we first need to calculate what his straight
time rate of pay per hour is. We do this by dividing his weekly
salary amount of $400 a week by the number of hours his pay is
based upon.
Straight Time Rate Per Hour = $400 / 45 hours
Straight Time Rate Per Hour = $8.89 per hour
 Our next step is to calculate
what his overtime rate of pay per hour is. Ma pays 1/1/2 times the
straight time rate for overtime hours. So all we need to do is
multiply his straight time rate per hour time 1.5.
Overtime Rate Per Hour = Straight
Time Rate Per Hour X 1.5
Overtime Rate Per Hour = $8.89 x 1.5
Overtime Rate Per Hour = $13.34
The overtime rate per hour is
actually made up of the straight time rate of $8.89 plus what is
often called the premium portion of $4.45. All we're saying here is
that Fat Chef makes an additional $4.55 an hour when he works
overtime. A simple way of determining the premium portion is
subtracting the Straight Time Rate Per Hour from the Overtime Rate
Per Hour.
Premium Rate Per Hour = Overtime Rate Per Hour  Straight Time Rate
Per Hour
Premium Rate Per Hour = $13.34  8.89
Premium Rate Per Hour = $4.45
 Next we need to get and review
Notbad Cook's actually hours worked for each week of his two week
payroll period.
Week 1  38 hours worked
Week 2  50 hours worked
Week 1 Calculation:
Base Salary = $400.00
Overtime Pay
No Hours Worked over 40 No Overtime Hours
No Additional Overtime
Pay
Total Regular Earnings Week 1
Total Week 1 Pay = Base Salary + Overtime
Total Week 1 Pay = $400.00 + 0
Total Week 1 Pay = $400.00
Did you notice that although
Notbad Cook only actually worked 38 hours during week 1 that he was
paid his full weekly salary of $400.00. ?
Week 2 Calculation:
Base Salary = $400.00
Overtime Pay
Overtime Hours = Total Hours Worked  40
Overtime Hours = 50 40
Overtime Hours = 10
Overtime Calculation in Good
Cook's case will involve two calculations. One for the overtime
hours worked up to and including 45 hours and another for the
overtime hours worked over 45 hours. Can you tell me why ? Because
Good Cook's salary is based on working a 45 hour work week. In
effect his salary already includes the straight time rate for
working up to 45 hours.
Additional Overtime Pay For Hours
From 40  45 = Overtime Hours x Overtime Premium
Additional Overtime Pay For Hours From 40  45 = 5 x $4.45
Additional Overtime Pay For Hours From 40  45 = $22.25
Additional Overtime Pay For Hours
From 45  50 = Overtime Hours x Full Overtime Rate
Additional Overtime Pay For Hours From 45  50 = 5 x $13.34
Additional Overtime Pay For Hours From 45  50 = $66.70
Total Overtime Pay = Pay For Hours
From 40  45 + Pay For Hours From 45  50
Total Overtime Pay = $22.25 + 66.70
Total Overtime Pay = $88.95
Total Regular Earnings Week 2
Total Week 2 Pay = Base Salary + Overtime
Total Week 2 Pay = $400.00 + 88.95
Total Week 2 Pay = $488.95
Total Regular Earnings For 2 Week
Pay Period
Total Regular Earnings = Week 1 + Week 2
Total Regular Earnings = $400.00 + 488.95
Total Regular Earnings = $888.95
or Total Regular Earnings = Salary (2  Weeks) + Overtime (2 
Weeks)
Total Regular Earnings = $800.00 + 88.95
Total Regular Earnings = $888.95
Total Pay For 2  Week
Period (Gross)  $888.95
(3) Goodwith
Cash
 Our calculation of our cashier's
pay is fairly straight forward since she's paid a $6.00 hourly rate
except that Ma wants to be able to track how much sick and vacation
time costs her each year. Remember Goodwith was out one day due to
sickness.
 Our first step in calculating her
pay for the week is analyzing her hours in order to see if we need
to pay her any overtime for more than 40 hours worked during the
week. Goodwith Cash only actually worked 35 hours but was also off
sick one day ( 8 hours). Since Ma pays for days off sick her total
hours paid for the week are 43 hours.
Do we need to pay her 3 hours of
overtime ? I tried to trick you  overtime is only based on actual
hours worked and does not include holiday or vacation time not
actually worked. So, the answer is no we don't have to pay
her any overtime. Goodwith Cash's actual hours worked are only 35
hours.
Note:If a holiday was actually worked, the hours would be
included in the determination if any overtime hours were
worked.
 All we need to do is multiply her
hours times her hourly rate to calculate her earnings (gross) for
the week. We do however need to break it out between sick time and
regular earnings because although not required, Ma wants to keep
track of how much sick days are costing her.
Regular Earnings = Hours Worked x
Hourly Rate
Regular Earnings = 35 hours x $6.00
Regular Earnings = $210.00
Sick Time Pay = Sick Time Hours x
Hourly Rate
Sick Time Pay = 8 hours x $6.00
Sick Time Pay = $48.00
Total Pay For Week 
$258.00
(4) Wet Hands
 Let's see if we need to pay our
dishwasher any overtime. Our dishwasher is only paid $5.15 an hour
(current minimum wage ) and worked 42 hours during the week. Since
he worked over 40 hours we need to pay him for 2 hours at his
overtime rate of pay.
 Now let's calculate his overtime
rate.
Overtime Rate = 1.5 X Regular Rate
Overtime Rate = 1.5 X $5.15
Overtime Rate = $7.73
 Now all we need to do is
calculate the regular and overtime earnings and we've got it
made.
Regular Earnings = Regular Hours X Regular Rate
Regular Earnings = 40 hours X $5.15
Regular Earnings = $206.00
Overtime Earnings = Overtime Hours
X Overtime Rate
Overtime Earnings = 2 hours X $7.73
Overtime Earnings = $15.46
Total Earnings = Regular Earnings
+ Overtime Earnings
Total Earnings = $206.00 + 15.46
Total Earnings (Gross) = $221.46
(5) Good
Waitress
 Good Waitress is one of Ma's
tipped employees and Ma requires her to report the tips received
from her customers each week. She had an excellent week and
reported tips received amounting to $250.00 for the
week.
Although by law, Ma could legally
only pay her "out of pocket wages" of $2.13 ($5.15 3.02) per hour
as long as her reported tips equal or exceed the maximum tip credit
of $3.02 per hour, she's such a great waitress that Ma, although
not required to, pays her $7.00 an hour.
 Our first step is determine if
Good Waitress worked any overtime hours during the week. Her time
card shows that she worked a total of 45 hours during the week and
is entitled to 5 (4540) hours of overtime pay.
 Next we need to calculate her
overtime rate of pay.
Overtime Rate Per Hour = Straight Time Rate X 1.5
Overtime Rate Per Hour = $7.00 X 1.5
Overtime Rate Per Hour = $10.50
 Now that we have her rates, let's
do our math and calculate her regular and overtime earnings.
Regular Earnings = Straight Time Rate X Straight Time Hours
Regular Earnings = $7.00 X 40 hours
Regular Earnings = $280.00
Overtime Earnings = Overtime Rate
X Overtime Hours
Overtime Earnings = $10.50 X 5 hours
Overtime Earnings = $52.50
Total Earnings Paid By Ma =
Regular Earnings + Overtime Earnings
Total Earnings Paid By Ma = $280.00 + 52.50
Total Earnings Paid By Ma = $332.50
Are we done yet ? You know better,
Ma must now account for Good Waitress's Reported Tips. Although Ma
did not actually pay Good Waitress's Tips amounting to $250, her
customers did, Ma is required by law to include Good Waitress's
Tips in her Gross Wages in order to calculate Good Waitress's
social security, medicare, and income tax withholdings.
Note: Ma also has to match and pay her employer's share of
social security and medicare based on Good Waitress's total gross
pay including her reported tips.
 Our final step is to determine
Good Waitress's Total Earnings (Gross) including her reported
tips.
Total Earnings Including Tips = Total Earnings Paid By Ma +
Reported Tips
Total Earnings Including Tips = $332.50 + 250.00
Total Earnings Including Tips = $582.50
(6) Handsome
Waiter
 Handsome Waiter is our other
tipped employee. Although good looking, he's relatively new and
inexperienced and Ma only pays him the required $2.03 rate per hour
when his reported tips equal or exceed the $3.02 an hour tip
credit.
 First, let's see if we owe
Handsome Waiter any overtime pay. After checking Handsome's time
card Ma determined that Handsome worked 50 hours during the week.
Your turn  do we owe him any overtime pay ? Since Handsome worked
more than 40 hours during the week we have to pay him for 10 hours
of overtime.
In addition Handsome reported $50
of tips received for the week. Not a very good week when compared
to Good Waitress's reported tips of $250.00.
 First we need to convert his tips
reported to an hourly basis or calculate his Tip Rate Per Hour.
Tip Rate Per Hour = Reported Tips / Actual Hours Worked
Tip Rate Per Hour  $50.00 / 50 hours
Tip Rate Per Hour = $1.00
The law states that Ma has to pay
at least $5.15 an hour and can use a maximum tip credit of $3.02
per hour if the actual tip rate per hour equals or is greater than
$3.02 per hour to offset this rate. If the actual tip rate per hour
is less than $3.02 an hour Ma is only allowed to use the actual tip
rate per hour to reduce her required "out of pocket" wages
paid.
So, for Handsome's straight time
hours Ma has to pay him $4.15 an our "out of pocket".
Out Of Pocket Straight Time Rate =Minimum Wage Rate  Tip
Credit
Out Of Pocket Straight Time Rate = $5.15 1.00
Out Of Pocket Straight Time Rate = $4.15
 Since we need to pay him
overtime, we need to calculate his overtime pay rate. We know that
the required overtime rate is determined by multiplying an
employee's straight time rate times 1.5. Our question is what is
Handsome Waiter's straight time rate. Is it $2.03 an hour ? No,
although the tip credit is used to calculate an employer's "out of
pocket" payment the employee must by law make at least a $5.15 an
hour straight time rate including tips up to $3.02 an hour and be
paid at least 1.5 times his straight time rate for any hours worked
over 40.
Overtime Rate Per Hour = Straight
Time Rate X 1.5
Overtime Rate Per Hour = $5.15 X 1.5
Overtime Rate Per Hour = $7.73
The law also allows an employer to
reduce the overtime rate per hour with the tip credit. Our
calculated tip credit for the current week was $1.00 an hour.
Overtime Rate Including Tip Credit = Overtime Rate Per Hour  Tip
Credit Rate Per Hour
Overtime Rate Including Tip Credit = $7.73  1.00
Overtime Rate Per Hour = $6.73
 Now that we have our rates
calculated, all we need to do is do our math.
Regular Earnings = Out Of Pocket Straight Time Rate X Straight Time
Hours
Regular Earnings = $4.15 X 40 hours
Regular Earnings = $166.00
Overtime Earnings = Out Of Pocket
Overtime Rate X Overtime Hours
Overtime Earnings = $6.73 X 10 hours
Overtime Earnings = $67.30
Total Earnings Paid By Ma =
Regular Earnings + Overtime Earnings
Total Earnings Paid By Ma = $166.00 + 67.30
Total Earnings Paid By Ma = $233.30
 Our final step is to determine
Handsome Waiter's Total Earnings (Gross) including his reported
tips.
Total Earnings Including Tips = Total Earnings Paid By Ma +
Reported Tips
Total Earnings Including Tips = $233.30 + 50.00
Total Earnings Including Tips = $283.30
(7) Knowit All
 Knowit All is Ma's only exempt
employee and is paid a salary of $3,000 a month or $36,000 on an
annual basis. In addition to his salary he is also paid a bonus of
1/2 % of monthly sales. During the month he took off one day for
vacation.
 Since Knowit All is exempt and is
paid by the salary method he receives the same for his regular
earnings amount regardless of the number of hours worked and is not
paid for any overtime.
Since monthly sales during the
current month were $100,000 his bonus calculation is just a matter
of multiplying the monthly sales times his bonus rate.
Bonus = Monthly Sales X Bonus Rate
Bonus = $100,000 X 1/2 %
Bonus = $500.00
 So all we need to do is add his
salary and bonus for the month in order to calculate his earnings 
right ? Yes and no. Because as we stated earlier, Ma wants to keep
up with how much holiday, sick time, and vacation time is costing
her a year we have to make an additional calculation in order to
assign pay to her manager's vacation time.
In order to do this, Ma only uses
his regular salary (excludes bonus amounts) to calculate how much
to allocate to his vacation time.
Ma converts his salary to an hourly rate by dividing his annual
salary by the number of "normal" working hours in a year (2,080
hours).
Hourly Rate = $36,000 / 2,080 hours
Hourly Rate = $17.31
 She then assigns a portion of his
salary to vacation time by multiplying his calculated hourly rate
times the number of hours of taken off for vacation.
Vacation Time Pay = 8 hours X $17.31
Vacation Time Pay = $138.48
 Knowit All's regular earnings are
then calculated by subtracting his vacation time pay from his
normal salary for the month.
Regular Earnings = Salary  Vacation Time Pay
Regular Earnings = $3,000  138.48
Regular Earnings = $2861.52
 We're home free now. All we need
to do is calculate his total earnings for the month.
Total Earnings = Regular Earnings + Vacation Time Pay + Bonus
Total Earnings = $ 2,861.52 + 138.48 + 500
Total Earnings (Gross) = $3,500
(8) Betty Baker
 Betty is paid by the piece rate
method of pay. In other words, she is paid based on what she
produces. The piece rate for her job is currently $1.00 for each
desert prepared by her. Ma determined from Betty's daily production
reports that Betty prepared 175 deserts during the current
week.
If Betty's calculated earnings
based on her production are less than what Betty would have earned
based on minimum wage and her actual hours worked, Ma is required
by law to pay her minimum wage.
 Since Betty is nonexempt, Ma must
also pay her for any overtime hours that she worked. Ma determined
from Betty's time card that she worked 45 hours during the week so
she is entitled to 5 hours of overtime pay.
 Let's first calculate what
Betty's Production Earnings are for the week.
Production (Piece Rate) Earnings = Number Deserts Produced X Rate
Per Desert
Production Earnings = 175 pastries X $1.00
Production Earnings = $175.00
Let's convert this to a rate per
hour.
Production Straight Time Rate Per Hour = Production Earnings /
Hours Worked
Production Straight Time Rate Per Hour = $175.00 / 45 hours
Production Straight Time Rate Per Hour = $3.89
 Since Betty's calculated
production rate per hour of $3.89 is less than the current minimum
wage of $5.15 an hour, Ma must pay Betty the minimum wage for her
actual hours worked.
Regular Earnings = Minimum Wage
Per Hour X 40 hours
Regular Earnings = $5.15 X 40 hours
Regular Earnings = $206.00
 In addition. since Betty worked 5
hours of overtime Ma must also pay her overtime based on minimum
wage. Betty's overtime rate for the current week is 1.5 times the
minimum wage ($5.15 X 1.5) or $7.73.
Overtime Earnings = Overtime Rate
X Overtime Hours
Overtime Earnings = $7.73 X 5
Overtime Earnings = $38.65
 Finally all we need to do is add
Betty's regular and overtime earnings to calculate her total
earnings for the week.
Total Earnings = Regular Earnings + Overtime Earnings
Total Earnings =$206.00 + 38.65
Total Earnings = $244.65
(9) Line Man
 Line Man is paid an hourly rate
of $7.50 and Ma determined from checking his time card that he only
worked 40 hours during the week .
Finally, we've got a payroll
calculation we don't even need to think about. All we need to do is
multiple his rate per hour times his hours worked which are all
straight time (no overtime hours).
 Regular and Total Earnings = Rate
Per Hour X 40 hours
Regular and Total Earnings = $7.50 X 40 hours
Regular and Total Earnings = $300.00
(10) Talk Alot
 Thank goodness our last employee.
Talk Alot is our salesman in charge of banquets and special events.
He is paid a 20 % commission of all banquet and special events
sales. Banquet and special event sales totaled $1,000. He actually
worked 40 hours during the week.
 Let's dig in and see what his
commission for the week amounts to.
Commission = Commission Rate X Banquet & Special Event
Sales
Commission = 20% X $1,000
Commission = $200.00
Are we finally done ? Well we know
we don't have to pay him any overtime because he only worked 40
hours during the week. We do however have to make sure that he
makes at least minimum wage for the actual hours that he worked.
Remember the law states that regardless of how an employer
calculates an employee's earnings, the employee must at least be
paid minimum wage for the hours he/she worked.
 OK , lets do a calculation
similar to the calculation that we made with Betty Baker. First
lets calculate his hourly rate based on his commission
earnings.
Commission Rate Per Hour = Commissions Earned / Actual Hours
Worked
Commission Rate Per Hour = $200.00 / 40 hours
Commission Rate Per Hour = $5.00
 Woops ! Since $5.00 an hour is
less than the minimum wage of $5.15 we have to base Talk Alot's
earnings on the current minimum wage rate and his actual hours
worked.
Regular Earnings = Minimum Wage X Regular Hours Worked
Regular Earnings = $5.15 X 40 hours
Regular Earnings = $206.00
What should you
have picked up from following along with the different
calculations used for determining our employees earnings
?
 Tipped Employees are subject to
special rules and laws.
 All nonexempt employees must be
paid overtime for all hours worked in excess of 40 hours during a
week.
 Only actual hours worked are used
in calculating overtime.
 We used the following methods of
calculating our employee's earnings  hourly rate ,hourly rate +
tips, piece rate, sales commission rate, salary for exempt, salary
for nonexempt, and additional bonuses for some of our employees
which illustrate that an employees earnings may be calculated using
different agreed upon methods.
 Although an employer and employee
may agree on any method they want to calculate an employee's
earnings, the employer must pay at least the minimum wage
for the actual hours worked and must also pay overtime for any
hours worked over 40 during a week for all nonexempt
employees.
 Bonuses, shift payments, and
other compensation are normally included in calculating an
employee's straight time and overtime rates.
 We based our nonexempt salaried
employees earnings on a 45 hour work week.
Regular Rate and Overtime Rate
Calculation
The employee's rate calculation includes other compensation in
addition to the employee's base rate of pay. The employee's actual
calculated rate may vary week to week depending on what
compensation they earned during the period.
Regular Rate and Overtime Rate
Includes:
 Base pay for all hours
worked
 Non discretionary
bonuses
 Fair market value of non cash
compensation
 Shift premiums
 Production bonuses
 Costofliving
adjustments
 Retroactive pay
 All payments not specifically
excluded by law
Regular Rate and Overtime Rate
Excludes:
 Reimbursed business
expenses
 Overtime in excess of FLSA
requirement
 Employer benefit plan
contributions
 Vacation/holiday/sick pay for
unworked hours
 Gifts on special
occasions
 Discretionary bonuses
 Stock options
What was my purpose in
using many different methods for calculating our employee's
earnings ? To illustrate that calculating an employees earnings is
not always just a simple exercise of multiplying hours times
a rate.

Payroll
Deductions
What the Employer "Giveth", The
Government Taketh Away !
Finally, we're now done
calculating our employee's gross pay (earnings), but we still have
to calculate the deductions taken out from their pay. I guess there
really is "no rest for the weary."

Employee 
Pay Period
W4
Allowances 
Total
Gross 
Social
Security  (SS)
Medicare  (M) 
Income
Tax
State
Tax 
Medical Insurance
Pre Tax Deduction 
Other Deductions
Savings  (S)
US Bonds  (B)
Tip Wages  (TW)
Walk Out  (WO)
Breakage  (BR)
Shortage  (CS)
Uniforms  (U) 
(1) Fat Chef 
Biweekly
M3 
$1,461.10 
84.39  (SS)
19.74  (M) 
76.00
146.00 
100.00 
25.00  (B)
25.00  (U) 
(2) Notbad Cook 
Biweekly
M1 
$888.95 
48.91  (SS)
11.44  (M) 
36.00
89.00 
100.00 
20.00  (S) 
(3) Goodwith Cash 
Weekly
M2 
$258.00 
12.90  (SS)
3.02  (M) 
0
26.00 
50.00 
25.00  (CS) 
(4) Wet Hands 
Weekly
M1 
$221.46 
10.63  (SS)
2.49  (M) 
0
22.00 
50.00 
15.00 (BR) 
(5) Good Waitress 
Weekly
M1 
$582.50 
33.02  (SS)
7.72  (M) 
34.00
58.00 
50.00 
25.00  (WO)
250.00  (TW) 
(6) Handsome Waiter 
Weekly
M2 
$283.30 
14.46  (SS)
3.38  (M) 
0
28.00 
50.00 
50.00  (WO)
50.00  (TW) 
(7) Knowit All 
Monthly
M2 
$3,500.00 
203.55  (SS)
47.60  (M) 
254.00
350.00 
217.00 
25.00  (S)
25.00  (B) 
(8) Betty Baker 
Weekly
M3 
$244.65 
12.07  (SS)
2.82  (M) 
0
24.00 
50.00 

(9) Line Man 
Weekly
M1 
$300.00 
15.50  (SS)
3.63  (M) 
4.00
30.00 
50.00 

(10) Talk Alot 
Weekly
M1 
$206.00 
9.67  (SS)
2.26  (M) 
0
21.00 
50.00 

Before we discuss our deductions,
let's revisit Lesson 2  Types Of Deductions. If you recall, we
classified deductions into three categories:
 Deductions Required by
Law
 Deductions for the Employer's
Convenience
 Deductions for the Employee's
Convenience
Let's classify our deductions in
our table above into our three categories.
 Required
By Law
 Social Security
 Medicare
 Federal Income Tax
 State Income Tax
 Employer's Convenience
 Uniforms
 Breakage
 Shortages
 Walkouts
 Tip Wages
 Uniforms
 Employee's Convenience
 Medical Insurance
 Savings
 U. S. Bonds
Now we'll discuss the deductions
taken out of each of Ma's employee's wages. Mom wants to be sure
that she's following all the labor laws since she made some new
rules about some of the deductions she takes (docks) from her
employee's wages so she called in a hot shot accountant she heard
about called Bean Counter (me) for his opinion and to determine if
she needed to consult with an attorney or labor law
specialist.

Dave Marshall (Bean Counter)
looked over Ma's calculations and told Ma that she was doing a
pretty good job of calculating her payroll but she might want to
rethink some of her new rules concerning deductions for breakage,
unpaid customer tabs, and cash shortages. Dave told Ma that
although he's no expert in Labor Law that the law does not allow
deductions that are classified as for the employer's convenience
and that reduce an employee's wages below minimum wage. In effect,
Ma's employees who are at all times considered as minimum wage
employees include Handsome Waiter and Wet Hands and Ma would not be
able to deduct such items as shortages, breakage, or unpaid
customer tabs from their wages since the deduction would reduce
their wages below minimum wage. In addition, Dave told Ma she could
deduct this within limits for all her nonminimum wage employees
but it didn't seem fair just making these type of deductions from
her higher paid employees. Dave also told Ma that in the future,
she might want to discuss any new policies with a Labor Law
Professional prior to implementing them. Ma rescinded her new
policies regarding these types of deductions. Ma said she would
still monitor the shortages, breakage, and unpaid customer tabs and
try to implement some better controls concerning customer unpaid
tabs and would discuss breakage and cash shortages with her
employees when warranted. 
Mom revised her prior Payroll
Worksheet and omitted any deductions for breakage, unpaid customer
tabs, and cash shortages. Her revised Payroll Worksheet appears
below.
Employee 
Pay Period
W4
Allowances 
Total
Gross 
Social
Security  (SS)
Medicare  (M) 
Income
Tax
State
Tax 
Medical
Insurance 
Other Deductions
Savings  (S)
US Bonds  (B)
Tip Wages  (TW)
Uniforms  (U) 
Net Pay 
(1) Fat Chef 
Biweekly
M3 
$1,461.10 
84.39  (SS)
19.74  (M) 
76.00
146.00 
100.00 
25.00  (B)
25.00  (U) 
984.97 
(2) Notbad Cook 
Biweekly
M1 
$888.95 
48.91  (SS)
11.44  (M) 
36.00
89.00 
100.00 
20.00  (S) 
583.60 
(3) Goodwith Cash 
Weekly
M2 
$258.00 
12.90  (SS)
3.02  (M) 
0
26.00 
50.00 

166.08 
(4) Wet Hands 
Weekly
M1 
$221.46 
10.63  (SS)
2.49  (M) 
0
22.00 
50.00 

136.34 
(5) Good Waitress 
Weekly
M1 
$582.50 
33.02  (SS)
7.72  (M) 
34.00
58.00 
50.00 
250.00  (TW) 
149.76 
(6) Handsome Waiter 
Weekly
M2 
$283.30 
14.46  (SS)
3.38  (M) 
0
28.00 
50.00 
50.00  (TW) 
137.46 
(7) Knowit All 
Monthly
M2 
$3,500.00 
203.55  (SS)
47.60  (M) 
254.00
350.00 
217.00 
25.00  (S)
25.00  (B) 
2377.85 
(8) Betty Baker 
Weekly
M3 
$244.65 
12.07  (SS)
2.82  (M) 
0
24.00 
50.00 

155.76 
(9) Line Man 
Weekly
M1 
$300.00 
15.50  (SS)
3.63  (M) 
4.00
30.00 
50.00 

196.87 
(10) Talk Alot 
Weekly
M1 
$206.00 
9.67  (SS)
2.26  (M) 
0
21.00 
50.00 

123.07 
Now we'll take a look at how to
calculate or determine the deductions taken out of an employee's
pay.
Social Security &
Medicare
The calculation of the deductions
for social security and medicare is straight forward. All we need
to do is multiply the wages subject to social security and medicare
by the current rates. Wages subject to social security and medicare
are total earnings less any "special" pre tax deductions. The
current rate for social security is 6.2 % or .062 and for medicare
the current rate is 1.45 % or .0145.
There is a maximum amount that may
be withheld during a calendar year for social security. The maximum
deduction amount for the year 2004 is/was $5449.80. This is based
on the maximum earnings amount of $87,900. All employee earnings
over $87,900 are excluded from additional withholdings. There is no
maximum for medicare thus all wages earned during the year are
subject to the medicare "tax".
As stated earlier all we need to
do in order to calculate the deductions for social security and
medicare is to multiply an employee's earnings less any pre tax
deductions allowed times the appropriate rates. Additionally, for
our higher paid employees we need to make sure that their earnings
have not exceeded the maximum salary base.
Let's do our math ! We'll start
with our chef.
Fat Chef
 Social Security Deduction =
(Earnings  Medical Insurance) X Social Security Rate
Social Security Deduction = ($1,461.10  100.00) X .062
Social Security Deduction = $84.39
 Medicare Deduction = (Earnings 
Medical Insurance) X Medicare Rate
Medicare Deduction = ($1,461.10  100.00) X .0145
Medicare Deduction = $19.74
Why did we deduct medical
insurance from the earnings before we calculated the social
security and medicare deductions ? If you recall, one of our
assumptions about Ma's restaurant was that Ma pays 50% of a
family's premium for health insurance and her medical plan
qualifies with the IRS for taxexempt treatment. This
deduction for the employee's share of the medical insurance premium
thus qualifies for special tax treatment.
This special type of deduction is
called a pre tax deduction. Pre tax deductions
(benefits) are those benefits deducted from an employee's wages
(gross pay) before taxes come out. The medical insurance deduction
in our example is made on a pre tax basis, thereby reducing the our
calculated amounts deducted for social security, medicare, and
federal and state income taxes.
What's so special ?
By deducting these special types of deductions before we calculate
the payroll taxes and income tax withholdings, the employee
has more take home pay ( a bigger net pay check). The
employer also saves on their social security and medicare
matching contributions. This also provides a savings to employers
for unemployment taxes.
Let's calculate Fat Chef's social
and security without considering the special tax treatment and see
what he saves and Ma as the employer also saves in payroll
taxes.
 Social Security Deduction =
Earnings X Social Security Rate
Social Security Deduction = $1,461.10 X .062
Social Security Deduction = $90.59
 Medicare Deduction = Earnings X
Medicare Rate
Medicare Deduction = $1,461.10 X .0145
Medicare Deduction = $21.19

Pre Tax 
After Tax 
Savings 
Social Security 
84.39 
90.59 
6.20 
Medicare 
19.74 
21.19 
1.45 




Totals 
104.13 
111.78 
7.65 
If I did my math correctly, it
looks to me as if Fat Chef and Ma both saved a total of
$7.65.
Before you say oh wow,
remember this is the savings on only one pay check. Fat Chef gets
paid every two weeks, so if we assume he earns the same amount for
each pay period, the saving for the entire year are $198.90 (26 pay
periods X $7.65). Remember Ma also gets to save this amount. I
don't know about you, but I'd gladly take approximately an extra
$200.00 a year home in my pay check.
Some examples of pre tax
benefits that are offered by employers are:
 health and dental insurance
premiums
 employee retirement plans such as
401k contributions
 group term life
insurance
 dependent care
programs
 medical reimbursement
accounts
 disability benefits
Since these calculations are
basically just a mathematical exercise, I'm going to illustrate the
rest of our employee social security and medicare deductions using
a simple table. If you've got the urge, get out your calculator and
check me out. Notice that we reduced the earnings by the employee's
share of the medical insurance in all our calculations.
Employee 
(Gross Earnings  Medical
Insurance) X Social Security Rate 
Social Security
Deduction 
(Gross Earnings  Medical
Insurance) X Medicare Rate 
Medicare Deduction 
Notbad Cook 
($888.95  100.00) X .062
= 
$48.91 
($888.95  100.00) X .0145
= 
$11.44 
Goodwith Cash 
($258.00  50.00) X .062
= 
$12.90 
($258.00 50.00) X .0145
= 
$3.02 
Notbad Cook 
($888.95  100.00) X .062
= 
$48.91 
($888.95  100.00) X .0145
= 
$11.44 
Wet Hands 
($221.46  50.00) X .062
= 
$10.63 
($221.46  50.00) X .0145
= 
$2.49 
Good Waitress 
($582.50  50.00) X .062
= 
$33.02 
($582.50  50.00) X .0145
= 
$7.72 
Handsome Waiter 
($283.30  50.00) X .062
= 
$14.46 
($283.30  50.00) X .0145
= 
$3.38 
Knowit All 
($3,500.00  217.00) X .062
= 
$203.55 
($3,500.00  217.00) X .0145
= 
$47.60 
Betty Baker 
($244.65  50.00) X .062
= 
12.07 
($244.65  50.00) X .0145
= 
$2.82 
Line Man 
($300.00  50.00) X .062
= 
$15.50 
($300.00  50.00) X .0145
= 
$3.63 
Talk Alot 
($206.00  50.00) X .062
= 
$9.67 
($206.00  50.00) X .0145
= 
$2.26 
Income Tax Withholdings
(deductions)
Next we'll take a look at how we
determine how much to withhold from our employee's earnings for
income tax. The purpose of withholding income taxes is to take
deductions from his/her earnings that will approximate the
employee's actual year end income tax liability. The amount to
withhold is determined for each employee.
What factors determine the amount to withhold ?
 How often an employee is paid
the frequency of payroll periods.
 Employee's marital
status.
 Number of withholding exemptions
the employee claims on his/her W4 Form.
 Amount of the employee's
earnings.
 Any Pre Tax
Deductions
In order to make it easy for
employer's to determine how much to withhold, the IRS has
incorporated the above factors into easy to use tables. The tables
are found in IRS Publication 15, Circular E.
There are two basic
frequently used types of withholding tables:
 Wage Bracket Tables
This is the easiest table used to determine how much to withhold
from an employee's wages and saves the employer from having to make
additional calculations prior to using the tables.
Tables are provided for five
different types of payroll periods (weekly, biweekly, semimonthly,
monthly, and daily/miscellaneous) and the marital status of
Single/Head of Household or Married.
Note: No tables are supplied for quarterly, semiannually,
and annually pay periods. If you pay using these pay periods you
need to use the percentage method tables.
All you need to do to properly use
the tables are:
 Determine the employee's
frequency of payment (payroll period).
 Obtain the employee's Marital
Status from W4 .
 Based on the payroll period and
marital status select the appropriate percentage withholding
table.
 Using the employee's earnings for
the pay period find the row containing the wage bracket within
which the wages fall.
 Using the employee's withholding
allowances obtained from their W4 read across the wage bracket
line to the table column that has the number of withholding
allowances claimed by the employee where the amount to withhold is
given.
 Percentage Method
Tables
Percentage method tables are available for eight different payroll
periods (weekly, biweekly, semimonthly, monthly, quarterly,
semiannual, annual, and daily/miscellaneous), and there are
separate sets of tables for married and single/head of household
employees.
To properly use the tables you
need to do the following:
 Determine the employee's
frequency of payment (payroll period).
 Obtain the employee's Marital
Status from W4 .
 Adjust (reduce) the employee's
wages by the value of the employee's withholding allowance obtained
from the withholding allowance table multiplied by the number of
exemptions claimed on his/her W4.
 Based on the payroll period and
marital status select the appropriate percentage withholding
table.
 Find the wage bracket within
which the employee's adjusted wages (earnings reduced by value of
employee's withholding allowances) fall.
 The amount to withhold is shown
in the table as a dollar amount plus a percentage of that portion
of the wages that exceeds the minimum bracket amount.
Unlike our earlier table, we have
to do a little calculating based on the information in the table in
order to determine the amount to withhold.
 Step (1) We have to subtract the
minimum bracket amount from our adjusted earnings.
 Step(2) Using the amount we
calculated in Step (1) , we need to multiply this amount by the
percentage amount found in the table.
 Step(3) We need to add the dollar
amount found in the table and our calculated amount determined in
Step (2) to finally arrive at the amount to withhold.
There are other methods that you
can use to determine how much you must withhold. The two methods we
discussed are probably two of the most commonly used. See IRS
Publication 15, Circular E for more information.
Ma's like many of us and wants to
use the easiest and quickest method for calculating the amount of
income tax to withhold from her employee's so she chooses the wage
bracket tables method because she doesn't have to make additional
calculations.
All you have to do to find the
amount of income tax to withhold from an employee's wages using the
table is:
 Know the employee's pay
period.
 Know the employee's marital
status.
 Know the number of withholding
allowances on the employee's W4 form.
 Find the row that has the wage
bracket where the employee's gross earnings fall within and the
column that has the number of allowances claimed and use the amount
given as the employee's withholding amount.
Ma's pays some of her employees
weekly, biweekly, and monthly and all her employees are married. We
thus only need to use the tax tables for marriedweekly,
marriedbiweekly, and marriedmonthly employees in order to
calculate her employee's income tax withholdings.
Let's organize the employee
information the way we need it to easily use the tables. Since the
tables are by pay period let's group our employee information by
pay period  in other words by how often they're paid.
Remember our prior discussion
about pre tax deductions and how they affected Ma's social security
and medicare deductions ? Well, they also provide an income tax
saving to Ma's employees. This saving is reflected in the amount of
income tax taken from an employee's pay check. Hooray  more take
home pay again !
In the table
below, take notice of how the earnings were reduced
by the pre tax medical insurance premium before the amount of
income tax withheld was calculated.
Weekly Pay Period
Employees
Name 
Marital Status
& Exemptions 
Wages 
Pre Tax Medical
Deduction 
Taxable Wages 
Goodwith Cash 
M2 
$258.00 
$50.00 
$208.00 
Wet Hands 
M1 
$221.46 
$50.00 
$171.46 
Good Waitress 
M1 
$582.50 
$50.00 
$532.50 
Handsome Waiter 
M2 
$283.30 
$50.00 
$233.30 
Betty Baker 
M3 
$244.65 
$50.00 
$194.65 
Line Man 
M1 
$300.00 
$50.00 
$250.00 
Talk Alot 
M1 
$206.00 
$50.00 
$156.00 
Biweekly Pay
Period
Name 
Marital Status
& Exemptions 
Wages 
Pre Tax Medical
Deduction 
Taxable Wages 
Fat Chef 
M3 
$1,461.10 
$100.00 
$1361.10 
Notbad Cook 
M1 
$888.95 
$100.00 
$788.95 
Monthly Pay
Period
Name 
Marital Status
& Exemptions 
Wages 
Pre Tax Medical
Deduction 
Taxable Wages 
Knowit All 
M2 
$3,500.00 
$217.00 
$3283.00 
How much in income tax do Ma's
employees save because of the pre tax medical insurance deduction ?
It actually depends on each of her employees tax bracket. Just for
illustration purposes, let's assume an average tax bracket of 15 %
for all of Ma's employees. If you recall from earlier, the total
medical insurance premium is $5,200 and Ma pays half ( 50 % ). Thus
the employee's share is $2,600 a year (50% X 5,200).
Ma's Employees Estimated Tax
Savings:
 Total Employee Deductions for
Medical Insurance = Number of Employees X 2,600
Total Employee Deductions for Medical Insurance = 10 X 2,600
Total Employee Deductions for Medical Insurance =
26,000
 Estimated Income Tax Savings =
Estimated Tax Rate X Total Employee Deductions for Medical
Insurance
Estimated Income Tax Savings = 15 % X 26,000
Estimated Income Tax Savings = $3,900
Wage Bracket
Tables
The following portions of
the tables were taken from IRS Publication 15. Three tables are
needed for Ma's business because she pays some employees weekly,
biweekly, and monthly and all are married. If she had any single
employees she would also need to consult the IRS tables provided
for single employees. If you need or want to check out the complete
tables download Publication 15 from the IRS site. The Rows
in the tables contain the Wage Brackets (ranges) and the Amount to
Withhold and the Columns contain the Number Of
Exemptions.
Since we have all the information
we need to properly use the tables, our task of finding the amount
to withhold from our employee's is simply (1) selecting the proper
Pay Period Table and (2) using our employee's Actual Taxable Wages
to find the appropriate Row (Wage Bracket) and then (3) reading the
Amount To Withhold from the Column that contains the Number of
Employee Withholdings.
To illustrate where the
withholding amounts came from, I've made simple tables that
includes the employee's name and earnings that follow the IRS's
actual tables  weekly  biweekly  monthly below so that you can
easily determine and see where the amount to withhold came from in
the actual IRS tables.
Married
Weekly
Employee 
Actual Taxable Wages 
If wages
are 
And the number of
withholding allowances claimed is 

At least 
But less than 
0 
1 
2 
3 


The amount of income
tax to be withheld is 
Goodwith Cash 
$208.00 
200 
210 
5 
0 
0 
0 
Wet Hands 
$171.46 
170 
175 
2 
0 
0 
0 
Good Waitress 
$532.50 
530 
540 
43 
34 
26 
20 
Handsome Waiter 
$233.30 
230 
240 
8 
2 
0 
0 
Betty Baker 
$194.65 
190 
195 
4 
0 
0 
0 
Line Man 
$250.00 
250 
260 
10 
4 
0 
0 
Talk Alot 
$156.00 
155 
160 
0 
0 
0 
0 
Nothing to it  right ? All we did
is find the row in the table that the employee's wages fell within
and the column for the number of allowances claimed by the employee
on their W4.
Married
Biweekly
Employee 
Actual Taxable Wages 
If wages
are 
And the number of
withholding allowances claimed is 

At least 
But less than 
0 
1 
2 
3 


The amount of income
tax to be withheld is 
Fat Chef 
$1,361.10 
1,360 
1,380 
131 
113 
94 
76 
Notbad Cook 
$788.95 
780 
800 
48 
36 
24 
11 
Same ole same ole. All we did is
use the Married  Biweekly table for our employee's paid every two
weeks to find the row in the table that the employee's wages fell
within and the column for the number of allowances claimed by the
employee on their W4.
Married
Monthly
Employee 
Actual Taxable Wages 
If wages
are 
And the number of
withholding allowances claimed is 

At least 
But less than 
0 
1 
2 
3 


The amount of income
tax to be withheld is 
Knowit All 
$3,283.00 
3,280 
3,320 
334 
294 
254 
214 
One again, all we did is use the
Married  Monthly table for our employee's paid every month to find
the row in the table that the employee's wages fell within and the
column for the number of allowances claimed by the employee on
their W4.
What should you gather from our
review of the Wage Bracket Method of calculating the amount of
income tax to withhold ?
 The more exemptions an employee
claims on their W4 the less the amount of taxes
withheld.
 Vice versa. The less exemptions
an employee claims on their W4 the greater the amount of taxes
withheld.
 No special calculations are
needed to determine the amount to withhold.
 Tables are provided for married
and single employees.
 Tables are provided for the
frequency of payment (how often an employee is paid) such as
weekly, semiweekly, or monthly.
Percentage Method Of
Withholding
You didn't think I was going to let the other common method slide
by without at least showing you an example or two of how to
calculate the amount of income tax to withhold did ya ?
As we earlier stated, to properly
use the percentage tables you need to do the following:
 Determine the employee's
frequency of payment (payroll period).
 Obtain the employee's Marital
Status from W4 .
 Adjust (reduce) the employee's
wages by the value of the employee's withholding allowance obtained
from the withholding allowance table multiplied by the number of
exemptions claimed on his/her W4.
 Based on the payroll period and
marital status select the appropriate percentage withholding
table.
 Find the wage bracket within
which the employee's adjusted wages (earnings reduced by value of
employee's withholding allowances) fall.
 The amount to withhold is shown
in the table as a dollar amount plus a percentage of that portion
of the wages that exceeds the minimum bracket amount.
We have to do a little calculating
based on the information in the table in order to determine the
amount to withhold.
 Step (1) We have to subtract the
minimum bracket amount from our adjusted earnings.
 Step(2) Using the amount we
calculated in Step (1) , we need to multiply this amount by the
percentage amount found in the table.
 Step(3) We need to add the dollar
amount found in the table and our calculated amount determined in
Step (2) to finally arrive at the amount to withhold.
Withholding Allowance
Table
Pay Period 
One Withholding
Allowance 
Weekly 
61.54 
Biweekly 
123.08 
Semimonthly 
133.33 
Monthly 
266.67 
Quarterly 
800.00 
Semiannually 
1,600.00 
Annually 
3,200.00 
Daily 
12.31 
The annual amount of $3,200 is
used to convert the amount allowed for the other pay periods. The
amounts used in the above table are based on the following
calculations:
Weekly  3,200 / 52 pay periods =
61.54
Biweekly  3,200 / 26 pay periods = 123.08
Semimonthly  3,200 / 24 pay periods = 133.33
Monthly  3,200 / 12 pay periods = 266.67
Quarterly  3,200 / 4 pay periods = 800.00
Semiannually  3,200 / 2 = 1,600.00
Annually  3,200
Daily = 3,200 /260 (working days in year) = 12.31
Percentage
Method Withholding Tables
All the tables that are needed for
the percentage method of withholding like the wage bracket tables
are contained in IRS Publication 15  Circular E. The Weekly ,
Biweekly, and Monthly tables are illustrated below. Our examples
will only be using the Weekly Table; however, the calculations used
with the different Pay Period Tables all follow the same logic and
steps.
We'll use two of our weekly paid
employees Good Waitress and Line Man and our monthly paid employee
Knowit All for our examples.
We use the following steps to
determine our employee's withholdings using the percentage
withholding method:
 Determine the employee's
frequency of payment (payroll period).
 Obtain the employee's Marital
Status from W4 .
 Adjust (reduce) the employee's
wages by the value of the employee's withholding allowance obtained
from the withholding allowance table multiplied by the number of
exemptions claimed on his/her W4.
 Based on the payroll period and
marital status select the appropriate percentage withholding
table.
 Find the wage bracket within
which the employee's adjusted wages (earnings reduced by value of
employee's withholding allowances) fall.
 The amount to withhold is shown
in the table as a dollar amount plus a percentage of that portion
of the wages that exceeds the minimum bracket amount.
We have to do a little calculating
based on the information in the table in order to determine the
amount to withhold.
 Step (1) We have to subtract the
minimum bracket amount from our adjusted earnings.
 Step(2) Using the amount we
calculated in Step (1) , we need to multiply this amount by the
percentage amount found in the table.
 Step(3) We need to add the dollar
amount found in the table and our calculated amount determined in
Step (2) to finally arrive at the amount to withhold.
Let's gather the information we
need for our three sample employees. We need their pay period,
number of exemptions claimed, and taxable earnings.
Employee 
Pay Period
W4 Allowances
Claimed 
Earnings 
Calculated
Exemption Amount 
Adjusted
Earnings 
Good Waitress 
Weekly
M1 
$532.50 
$61.54 X 1 = $61.54 
$470.96 
Line Man 
Weekly
M1 
$250.00 
$61.54 X 1 = $61.54 
$188.46 
Knowit All 
Monthly
M2 
$3,283.00 
$266.67 X 2 = $533.34 
$2,749.66 
We calculated the deduction for
their exemptions by obtaining the amount allowed for one exemption
from our exemption table based on the employee's pay period and
multiplying this amount times the number of allowances claimed on
their W4. The amount for our weekly paid employees was $61.54 and
$266.67 for our monthly paid employee.
Now we need to select the
appropriate percentage withholding table based on the employee's
payroll period and marital status. Our three example employees are
all married and two are paid weekly and one is paid monthly.
We need to use two percentage withholding tables:
 Married  Weekly
 Married  Monthly
Then, we need to find the wage
bracket within which the employee's adjusted wages (earnings
reduced by value of employee's withholding allowances) fall and
obtain the information needed to calculate the amount to withhold.
remember, the amount to withhold is shown in the table as a dollar
amount plus a percentage of that portion of the wages that exceeds
the minimum bracket amount.
Table 1 Weekly Pay Period 
Married
Employee 
Adjusted Earnings 
If the amount of
wages ( after subtracting withholding allowances ) is : 
The amount of income
tax to withhold is : 

Over 
But Not Over 

of excess over 
Good Waitress 
$470.96 
$435 
$1273 
$28.10 plus 15% 
$435 
Line Man 
$188.46 
$154 
$435 
10% 
$154 
At last our final
steps.
 Step (1) We have to subtract the
minimum bracket amount from our adjusted earnings.
 Step(2) Using the amount we
calculated in Step (1) , we need to multiply this amount by the
percentage amount found in the table.
 Step(3) We need to add the dollar
amount found in the table and our calculated amount determined in
Step (2) to finally arrive at the amount to withhold.
Good Waitress
Calculation
Good Waitress amounts from the table are $28.10 plus 15 % of excess
over $435.
Excess Over $435 = $470.96  435.00
Excess Over $435 = $35.96
15 % of Excess = .15 X $35.96
15 % of Excess = $5.39
Total Withholding Amount = $28.10 + $5.39
Total Withholding Amount = $33.49
Line Man
Line Man amounts from the table are $0 plus 10 % of excess over
$154.
Excess Over $154 = $188.46  154.00
Excess Over $188 = $34.46
10 % of Excess = .10 X $34.46
10 % of Excess = $3.45
Total Withholding Amount = $3.45
Table 4 Monthly Pay Period 
Married
Employee 
Adjusted Earnings 
If the amount of
wages ( after subtracting withholding allowances ) is : 
The amount of income
tax to withhold is : 

Over 
But Not Over 

of excess over 
Knowit All 
$2,749.66 
$1,883 
$5,517 
$121.60 plus 15% 
$1,883 
Knowit All Calculation
Knowit All amounts from the table are $121.60 plus 15 % of excess
over $1,883.
Excess Over $1,883 = $2,749.66  1,883.00
Excess Over $1,883 = $866.66
15 % of Excess = .15 X $866.66
15 % of Excess = $130.00
Total Withholding Amount = $121.60 + $130.00
Total Withholding Amount = $251.60
Before we move on, let's compare
the results obtained from using the Percentage and Wage Bracket
Methods of calculating income tax withholdings.
Employee 
Wage Bracket
Method 
Percentage
Method 
Good Waitress 
$34.00 
$33.49 
Line Man 
$4.00 
$3.45 
Knowit All 
$254.00 
$251.60 
Not much difference is
there?
Note: The Annual Percentage
Withholding Table is the table used by many payroll computer
software programs and when the IRS revises the tables the user many
times have to pay what I consider an outrageous fee to update their
software to the new current table. As you can see, there's really
not much involved in updating the table. The reason the annual
table is used is that the annual table can easily be converted into
a table for any payroll period  weekly, biweekly, etc. by
performing some simple mathematical calculations.
All that is required, is to figure
the amount of income tax to withhold based on annual wages and
prorate the tax calculated based on the employee's actual pay
period.
Example:
A married person claims two withholding allowances and is paid $500
for the week. Multiply the weekly wages of $500 by 52 weeks
to convert the weekly wage into an annual wage of $26,000. Subtract
$6,400 ($3,200 X 2) the annual value of 2 withholding allowances
for 2005 to arrive at a balance of $19,600. Using the table for the
annual period, divide the annual amount calculated by 52 to arrive
at the weekly pay period amount to withhold.
Using the Annual Table, the calculated amount of $19,600 falls in
the range of over $8,000 but not over $22,600.
Annual Amount Calculated = 10 % of
excess over $8,000.
Annual Amount Calculated = ($19,600  $8,000) X 10%.
Annual Amount Calculated = $1,160
Convert Annual Amount To Weekly
Amount
Weekly Amount To Withhold = Annual Amount Calculated / 52 weeks
Weekly Amount To Withhold = $1,160 / 52 weeks
Weekly Amount To Withhold = $22.31
The same logic may be used to
calculate the amount to withhold for any pay period  biweekly,
monthly, etc. This is the reason it's used by many payroll computer
software programs.
State Income Tax
In our example calculations, we used a flat 10% rate. In the real
world, the states have tables that are similar to the tables
provided by the IRS. You need to consult your state agency to find
out what the requirements are for your state(s). The following is a
listing of sites provided to aid you in determining what are the
requirements for your state.
 Find Your State
These links guide you to your state's labor laws.
 State
Withholding Information
http://www.taxsites.com/state.html
Taxsites.com has provided an easy to use Tax and Accounting Sites
Directory .
 State Income Tax Withholding
http://www.toolkit.cch.com/text/P07_1278.as
CCH also has provided a nice State Income Tax Withholding Map that
guides you to the state information you may need.
Additional Withholdings
Employees may request that a fixed amount of federal and/or state
income tax be withheld in addition to their regular withholding.
This fixed federal or state tax deduction may be for any amount and
may be discontinued at any time by completing a new W4.
Other Deductions
The other deductions such as
medical insurance, savings bonds, uniforms, etc. are deductions
that the employee has authorized Ma to deduct from their wages.
Note: Since tips paid by customers are required to be
reported and included in a tipped employee's wages, the employer
must also show them as a deduction or offset to earnings since tips
are not paid by the employer but by the customer.
Deductions  what order are
payroll deductions deducted from an Employee's pay?
Payroll deductions are usually taken in a priority order: FICA,
Federal Taxes, State Taxes, conditions of employment deductions
such as retirement, mandated deductions, health insurance
deductions and voluntary deductions. If, for some reason, the
Employee's paycheck does not have enough funds to cover the entire
amount of any deduction, then that deduction is not taken and is
usually handled by setting up an employee receivable or arrears
account in order to deduct the amount in a future payroll
period.
For Your
Information
 Additional Withholding
Methods
Besides the two methods that we used for calculating the amounts of
social security, medicare, and income tax deductions, the IRS also
has some additional optional methods. For additional information
about these methods, consult IRS Publication 15A, Employer's
Supplemental Tax Guide.
 Advance Earned Income Credit
Payments
None of our example employees were illustrated receiving advanced
earned income credit payments. Although I did not provide an
example, you as an employer do need to be aware that you may have
to make these payments to some of your employees.
The purpose of this employee
payroll option is to make advance payments to employees who qualify
for taking the earned income credit on their personal tax
returns. Basically, the credit is designed to provide lower wage
earners with children a tax break.
Most of the smaller companies I've
worked with have not had their employees take advantage of this
early payment of the credit option. In my opinion, the reason is
because it requires the employer to make some additional
calculations and many employees don't know about it.
In order for an employee to
receive Advance Earned Income Payments they must qualify and submit
Form W5.
The amount of the advance payment
an employee receives is based on tables similar to the tables we
used to determine the amount of income tax to withhold.
Additional information and the
tables are included in IRS Publication 15, Circular E.
 Pre tax Deductions
Note to the wise, not all pre tax deductions are handled the
same as our medical insurance deduction. For example, pre tax
deductions for an approved employee retirement plan such as a 401 K
is subject to social security and medicare taxes but not subject to
income tax withholding.
What should you
have picked up from following along with our deduction
calculations ?
 Discussed and determined that
some deductions might require you to seek professional help and
guidance.
 Learned that some deductions
called pre tax receive favorable tax treatment
 IRS publications provide
employers with tables and methods to aid in calculating social
security, medicare, and amounts of income tax to withhold from
employee's salaries and wages.
 Most states have a state income
tax and require employers to withhold (deduct) estimated amounts
for state employee income tax. The states provide tables and
methods similar to the IRS tables and methods for calculating the
amounts.

What About Ma ?
Since Ma is the owner of a sole proprietorship, Ma is not
officially classified as an employee and is not included in the
regular payroll. When Ma needs money to pay personal bills she
receives what is called a draw and is subject to some special rules
and laws which we will discuss in Lesson 6  Self
Employed. 
I don't know if you were aware,
but by using our fictitious business Ma's Secret Recipes we covered
quite a bit of material. What all did we cover ?
 Classified employees as exempt or
nonexempt.
 Illustrated Different Methods
used to compute wages and salaries.
 Provided Job Categories to our
employees.
 Used different Pay
Periods.
 Performed Overtime
Calculations.
 Learned a little about
Tips.
 Calculated Required Government
Deductions and used approved methods and tables for calculating the
amount of employee income tax withheld.
 Learned that some deductions
called pre tax receive favorable tax treatment.
 Discussed and determined that
some deductions might require you to seek professional help and
guidance.
 IRS publications provide
employers with tables and methods to aid in calculating social
security, medicare, and amounts of income tax to withhold from
employee's salaries and wages.
 Most states have a state income
tax and require employers to withhold (deduct) estimated amounts
for state employee income tax. The states provide tables and
methods similar to the IRS tables and methods for calculating the
amounts.

I don't know about you but I'm
worn out doing all these calculations. I sure don't want you having
to run to keep up ! You probably deserve a break  why not relax a
little and dig into the remaining lessons later ?

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