The first time I was a manager, I had about a dozen student employees running a computer lab and I was responsible for hiring them and setting their salaries.When I started the job, it was summertime and, being very young, I was a bit panicked about getting good people.There weren’t very many students around at all. One of them was excellent, but he already had another, high-paying student job.To get him to work extra hours with me, I needed to pay him $11 per hour. I did it, because I was afraid that I wouldn’t get the lab start- ed without help.When the semester started, I got other students, but the usual pay rate was only $6 per hour.The first student’s extra skills were worth a higher salary, but the gap between $6 and $11 was real- ly too large. It created some strain, especially when other student assistants learned their jobs and became excellent as well.
mitments put you over budget, then you’ll have problems man- aging the department.
Each job position will be defined with a pay rate, usually an annual salary or an hourly wage. Before going any further, make sure that rules for work hours, holidays (standard and floating), vacations, sick days, overtime, comp time, flex time, and personal leave time are all clear. If not, you could end up with excess expenditures or with misunderstandings that lead to frustration and employee dissatisfaction. The business cal- endar and conversion spreadsheets from Chapter 3 will help you work this out.
Once the schedule and pay rates are clear, you will need to have the human resources or payroll department work out the payroll tax liabilities, benefits, and other deductions.
Work hours The rules governing hours of work, including start time, end time, breaks, lunch, shifts, and days.Work hours are subject to corporate rules, union agreements, and labor laws.
Holidays Days that all or some employees in a company do not work, including legal holidays, extra days (such as the Friday after Thanksgiving), and floating holidays used to allow employees to choose when to take holidays.
Sick days Days that employees can take with pay due to personal or family illness. Usually, these are accrued and employees get a certain number of sick days per quarter or year worked.
Overtime Work hours beyond the normal for a work week. Usually tracked for employees with an hourly wage, and perhaps paid at time and a half.
Comp time Work hours beyond the normal for a work week.
Sometimes tracked for professional, salaried employees, allowing them to take some time off to compensate.
Flex time Rules governing variations in start time, end time, and length of lunch break.
Leave Extended time off, paid or unpaid, for rare events such as a death in the family or the birth of a child. If unpaid, benefits continue and the employee is guaranteed a job when he or she returns.
Do not try to do this yourself. The rules are very complicated, they vary from state to state, they change frequently, and they vary with each worker’s pay rate and number of family mem- bers. We’re introducing the topic in this chapter only so that you can understand what payroll will do, not so that you can try to do it yourself.
Table 10-1 is an example of the information you might find on a basic pay stub. If an employee receives a weekly gross salary of $500 (that’s $26,000 per year), then a simplified pay- check stub might look like what you see in Table 10-1.
Although the employee earned $500.00, the paycheck is only for the net salary of $415.75. Where did the rest of the money go? To payroll taxes, including withholding for income tax and FICA (Federal Insurance Contributions Act), which comprises Social Security and Medicare. On most pay stubs, there would also be state deductions. In some areas, such as New York City, there might be local deductions as well.
In addition to what shows on the paycheck, the company also pays out money for each employee above the gross pay.
The company matches the $38.25 (7.65%) FICA contribution for Social Security (6.2%) and Medicare (1.45%). (The compa- ny also pays unemployment insurance—FUTA, Federal
Unemployment Tax Act—for each employee.) Above a certain salary, currently $84,900, nothing is withheld for Social Security, but the Medicare rate of 1.45% continues to apply.
(These figures are adjusted from time to time.)
The basic salary in Table 10-1 is just the beginning. There Budgeting for Managers
162
Gross Salary W-2 Withholding Medicare Social Security Total
Net Salary
$500.00
$415.75
$46.00
$7.25
$31.00
$84.25 Table 10-1. Basic salary
are several other items that might be added to a paycheck. The general categories are listed here:
• Pre-tax withholding.Certain benefits, such as retirement plans and some health insurance, can be taken out of the paycheck and paid directly to retirement accounts or insurance before taxes are deducted. The employee gets a smaller paycheck, but also pays less tax each year and gets the additional benefit.
• After-tax withholding.Some additional amounts may be withheld after tax deductions, because the money is being sent to a special account, but it is taxable. Union dues and charitable contributions might be examples.
• Additional taxes.The federal tax amount will vary depending on the employee’s exemptions based on the number of dependents (family size and other factors).
State and local taxes may apply. Unemployment insur- ance (FUTA—Federal Unemployment Tax Act) will usu- ally be withheld, but this is paid by the employer, not by the employee.
• Bonuses, commissions, variable hours, and overtime.
These items might change the gross pay on a paycheck.
Since tax rates vary with the pay rate, they can also change the withholding amount and even the withholding percentages.
Table 10-2 illustrates one of these items, a pre-tax deduction for insurance. The employee pays for the insurance, so it’s deduct- ed from his or her pay. But it’s a tax-free benefit, so it’s deducted before taxes are calculated. Taxes are calculated on only $465, instead of $500, reducing the amount of taxes withheld.
Table 10-3 shows what the last check of the year for the same employee might look like if the employee received a
$5,000 bonus. This shows why it’s important to explain payroll and deductions to your team members. Imagine how an employee will feel if he or she is expecting a $5,000 bonus and then gets a check for only $4,573.25!
It’s important to remember that some incentives—such as some types of insurance, transportation costs, and support for
Budgeting for Managers 164
Gross Salary Benefits
Pre-tax Insurance Taxable Income
$500.00
$465.00
$35.00 Salary
Deductions W-2 Withholding Medicare Social Security Total Deductions
$41.00
$6.74
$28.83
Net Salary $388.43
$76.57
Table 10-2 Basic salary
Table 10-3 Basic salary Gross Salary
W-2 Withholding Medicare Social Security Total Deductions
$500.00
$46.00
$7.25
$31.00
$84.25 Salary
Bonus
W-2 Withholding Medicare Social Security Total Deductions Net Weekly Salary
$4,573.25
$415.75 Bonus
$5,000.00
$460.00
$72.50
$310.00
$842.50
Check Amount
Net Bonus $4,157.50
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®relocation (moving expenses)—are counted as additional tax- able salary, increasing the deductions on paychecks.