Chapter 9
Payroll
Student Performance Objectives:
Section I Employee’s Gross Earnings and Incentive Pay Plans
9-1 Prorating Annual Salary on the Basis of Weekly, Biweekly, Semimonthly, and Monthly
Pay Periods
9-2 Calculating Gross Pay by Hourly Wages, Including Regular and Overtime Rates
Section II Employee’s Payroll Deductions
9-5 Computing FICA Taxes, Both Social Security and Medicare, Withheld from an
Employee’s Paycheck
Section III Employer’s Payroll Expenses and Record Keeping Responsibilities
9-8 Computing FICA Tax for Employers and Self-Employment Tax for Self-Employed
Persons
Chapter Notes, Teaching Tips and Lecture Launchers
• Lecture Launcher: Whether you are an employer or an employee, payroll is an important
function to understand.
• Ask if anyone in the class has ever done payroll. Ask about their experiences in
• Lecture Launcher: Ask students how many of them know what the minimum wage is in your
state and federally.
• The current federal minimum wage is $5.85 an hour. Employees on hourly pay must
• Lecture Launcher: Emphasize to students that payroll is a very important responsibility of
any business. Employees must be paid on a regular basis and accurate records must be kept
for government reporting.
• Payroll is usually one of the largest “expense” categories of a company. For example,
80-90% of a community college budget is the cost of employees.
• Homework Activity: Have students research companies that specialize in
payroll preparation and report their findings to the class.
• What exactly do they do?
• What does it cost?
• What is the advantage of outsourcing the payroll function?
• Inform students that today, more than ever, the payroll function is computerized.
• Classroom Activity: Invite a manager from a company’s human resources department to
class as a guest speaker to discuss the payroll function.
• This chapter’s Collaborative Learning Activity, “Researching the Job Market,” will give
students some first-hand experience in:
• Using the Statistical Abstract of the U.S. to determine “wage differentials” in
different:
• Industries and government occupations
• Spotlight: The Business Decision, “The Bride, the Groom, and the Taxman” at the end of the
chapter will give students some dramatic insights into how marital status affects the amount
Section I Employee’s Gross Earnings and Incentive Pay Plans
• Spotlight: Students are frequently confused between the terms gross pay and net pay. Point
out that:
• Gross means before deductions.
• Spotlight: Students also confuse biweekly, every two weeks, and semimonthly, every half
month, or twice per month. Point out that:
• Inform students that hourly employees usually keep their own work records on a “time card,”
which they fill in either electronically or by hand, or “punch–in” on a time clock, and turn in
weekly to the payroll department.
• Classroom Activity: Invite a manager from a company’s human resources department to
class as a guest speaker to discuss “current happenings” regarding payroll and fringe benefits.
• Spotlight: Typically, students incorrectly use the pay rate at the final level to
calculate “all” of the garments produced, rather than using the “graduated” pay rates
at each level.
• Lecture Launcher: When discussing sales commission, inform students that companies often
give sales managers “override” commissions. This is a small commission on the total sales
of the manager’s sales force.
• Example: Jim and Diane sell for Apex Electronics. They each receive 15%
• Call student’s attention to the fact that sometimes manufacturers’ and wholesalers’ sales reps
“transfer” merchandise to retailers by a method known as consignment. Under this
“stuck” with.
• Collaborative Learning Activity: As a Section I review, have students work in small groups
to solve Section I Review Exercises 1-7.
• To solve 4-7, first have students calculate the annual salary, then prorate (divide), to
determine the salary for the remaining pay periods.
Section II Employee’s Payroll Deductions
• Breaking News!! Point out to students that the wage base for Social Security increases each
year.
• Homework Assignment: Have students find out the current year’s Social Security
wage base.
• This information is listed in the IRS publication: Circular E, Employer’s Tax
www.ssa.gov.
• Classroom Activity: Have students calculate the maximum amount of Social Security
• Inform students that all employees must have a Social Security number. Applications can be
obtained at United States post offices, or Form SS-5 can be downloaded from the Social
Security Administration’s website, www.ssa.gov.
• Social Security numbers are used by the IRS as a taxpayer identification number as well as
by banks, credit unions and other financial institutions for reporting income from savings and
other investments.
• Spotlight: Information about an individual’s Social Security account can be obtained
by filing a Form 7004 – Request for Earnings and Benefit Estimate Statement.
• Homework Activity: Have students who are employed, or have been in the past,
• Remind students that a new W-4 must be submitted to their employer when the number of
withholding allowances they are claiming changes.
• Spotlight: Point out to students that the “Percentage Method” of calculating an employee’s
federal income tax withholding is an application of the percentage formula, from Chapter 6.
• Collaborative Learning Activities: Have students work Try-It Exercise 11 in pairs.
• In groups of two’s, have students write an income tax withholding exercise and then
Section III Employer’s Payroll Expenses and Record Keeping
Responsibilities
• Spotlight: Beginning July 1, 1997, the Internal Revenue Service implemented a
nationwide Electronic Federal Tax Payment System (EFTPS), replacing the old
paper-based tax payment system with an electronic system, in which tax payment
• Spotlight: Emphasize to students that employers are required to “match” all FICA tax
payments withheld from employees.
• Self employed persons must pay both shares:
• Students should understand that FUTA and SUTA are paid by the employer, not the
employee; and only on the first $7,000 of wages paid to each employee during the year.
• The FUTA and SUTA tax rates can be reduced, if the employer has a good
• Spotlight: Students should be made aware that fringe benefits are very important to workers
today, and frequently amount to as much as 50% of an employer’s payroll expenses.
• Classroom Activity: Have students research and report to the class about “cafeteria” plans
and popular fringe benefits being offered by companies today.
Questions Students Always Ask
“Can I claim more allowances on Form W–4 than the number of dependents I actually have?”
• No, you may not claim more allowances than you are entitled to. You can claim fewer
“Do I calculate Social Security, Medicare, FUTA and SUTA deductions based on gross pay?”
• Yes, all of these deductions are based on gross pay. Apply the applicable rate for each
“What happens when an employee reaches the maximum taxable earnings for Social Security?”
• If an employee is paid less on a yearly basis than the maximum taxable earnings for