Multiple Rates of Pay—Finally a Use for High School Math

A post from guest author, Vickie Lambert:

Under the FLSA it is required that employers pay employees overtime based upon the regular rate of pay. For this blog entry I want to look at one facet of calculating overtime and the regular rate of pay. What to do when an employee works at two or more different rates within the same workweek. In this type of situation, the regular rate of pay for the week is the weighted average of all the rates. Remember weighted average is not the same as average.

Let’s do an example: At Secrest Corp this week Paul worked to cover for other employees on vacation. His time card reads as follows:

Paul does not work in a state which requires daily overtime. So under the FLSA we would calculate his gross pay as follows:

Step 1… Calculate the Earnings for Each Day
Monday       8 x $8.00 = $64.00
Tuesday       8 x $8.00 = $64.00
Wednesday 8 x $9.00 = $72.00
Thursday     9 x $8.75 = $78.75
Friday         10 x $7.50 = $75.00
$353.75

Many times I have seen payroll professionals confuse weighted average with average. They add up the rates then divide by the number of rates. For example $41.25 (total of all the rates) divided by 5 (number of rates) = $8.25 and try to use that as the regular rate of pay. In this case it would be close enough. But unfortunately it doesn’t always work out so close and can end up underpaying the employee.

Step 2: Divide the total earnings by the total hours worked to determine the regular rate of pay
$353.75 divided by 43 = $8.23 (regular rate of pay)

Step 3: Determine the premium pay for overtime by multiplying the regular rate of pay by .5 (or divide by 2) then multiplying that amount by the number of overtime hours
$8.23 x .5 x 3 = $12.35

Step 4: Determine the total weekly compensation by adding the total earnings (step 1) and the premium pay (step 3)
$353.75 + $12.35 = $366.10 (total weekly compensation)

These 1938 rules under the FLSA require this method to properly pay employees working at more than one rate in a workweek. So you see, you should have paid closer attention to your teacher in high school math class.

Vicki M. Lambert, CPP
www.thepayrolladvisor.com

Arizona’s New Withholding

Arizona has done it again.  Currently, anyone who is being paid in Arizona must select from several percentages on the A-4.  Arizona withholding is based on a percentage of federal withholding.  The percentage you pick will be multiplied times the federal withholding number on your paycheck to arrive at Arizona withholding.  If you selected 24.5%, and your federal withholding was $112, then your Arizona withholding would be .245×112 or $27.44.

This created a problem with all the federal withholding changes that have happened over the last 10 years.  Each time there was a withholding decrease, Arizona’s revenue decreased as well.  The Making Work Pay Credit last year decreased checks for everyone and was the last straw in the problem.  Arizona’s legislature had to increase the percentages on this form each time the federal government decreased withholding  just to keep withholding even. Finally, last year, the legislature directed the AZ Department of Revenue to develop a new withholding system to be put into place by July 1, 2010.

There are other glaring problems with this method.  Arizona’s tax rates are based on a formula.  By requiring employees to pick a flat percentage, they are forced to determine a marginal (or average) tax rate for their tax situation.  This can change based on events in a person’s life like marriage, divorce, new children, home purchase, a second job or a spouse begins working that didn’t before.  Any of these events change the marginal rate.  Most people never adjust their A-4.  This obviously causes frequent confusion.

Another problem is that many people simply have no federal tax liability.  With no federal withholding, there was no way to have any Arizona withholding and inevitably, these individuals would end up paying extra every year at tax time.

Yet another problem is those that move into the state mid-year.  As a Tax Preparing CPA, I found it very difficult to advise my clients when they move in mid- year which percentage to pick.  The problem still exists in the second year (first full year of residence) since they have no history to draw from in selecting their percentage.

So…..Arizona’s new method was recently announced and here is the form.  All employees must complete a new one of these by July 1, 2010.  Guess what? They solved none of the above mentioned problems and even made some new problems.  Now, the percentage you select is percent of gross pay.  This decouples the state from federal withholding changes but still does not give employees who are new a clue to which rate to select.  Now instead of new employees only being confused, any person working in the state gets to be confused and not just for half a year, but for next year as well.  There is still no basis in the actual tax rates with these percentages.

Instead of providing some rates that anyone can pick, there are still three lines for employees to select based on income level.  This should have been removed.  If you have very low tax liability but a higher than $15,000 income, you cannot select the lowest rate.  On the back of the new form, there is a worksheet provided.  Notice in line 10 of the worksheet that there is no provision in the instructions for selecting anything other than line 1 (front side) percentages.  What if the calculation result is lower than the percentages on the form?

Employees are not able to determine their “target” withholding without digging into last year’s tax return or contacting their tax preparer.  Again, changes in taxable life events make last year’s number irrelevant.  What are you supposed to choose? This value is difficult for those without a tax background to understand.

Supposedly, payroll “experts” were used to help develop this form.  Unfortunately, they chose to tweak the existing system enough to only make things more confusing.   I hope that the state will make some wholesale changes to this form to more closely match what other states are doing and what the Arizona tax system actually looks like.  It’s not bad to use withholding allowances and marital status.  We are forced to use that on the tax form.   Let’s get this right next time.

FUTA and SUTA

Q. As a small business owner looking forward to processing my own payroll, I am curious about FUTA and SUTA and how the calculation works.

A. First, congratulations on taking the step toward hiring employees. It can be both a good thing, because you are growing, and a bad thing, because employees bring new challenges to the business. To get started, let me say that all discussions regarding federal level taxes and withholdings that are the responsibility of the employer can be found in IRS Publication 15. FUTA is also discussed there.

FUTA stands for “Federal Unemployment Tax Act” and is a tax paid on the wages of employees by the employer. The tax is 6.2% of employee wages up to $7000 per employee. That equates to $434 per person per year. There is relief from this rate built in to the calculation. Per Pub 15, “Generally you can take a credit against your FUTA tax for amounts that you paid into state unemployment funds”. The credit is up to 5.4% which leaves your FUTA tax rate at .8% or $56 per employee per year. The credit has some stipulations and your state has to be in the good graces of the federal government for that to work. New York employers lost this credit a couple of years ago. Generally, if you pay your state unemployment tax on time, you get the credit.

SUTA is State Unemployment Tax Authority. It is essentially the state version of the federal unemployment tax. Each state has a wage base. Each new employer will be assigned a new employer rate that will adjust after 1 or 2 years of experience with employees. This is also a tax on wages paid by the employer. For instance, in Arizona, new employers pay 2% of wages up to $7000 or $140 per person per year. After some time has passed, the rate adjusts down if you have no unemployment claims or up if you do. Certain states have special starting rates depending on industry.