PRACTICAL ACCOUNTING COURSE

LECTURE 10 – April 8th 2020

Topic: Payroll
Introduction
One of the functions of Accountants lies in the area of Payroll Accounting. He or she is responsible for the
preparation of payroll for employees working in the organization, computing employees’ pay and
generating payroll reports.

Many of us are concerned about receiving our salary at the end of the month and pay little attention to
the pay slip that accompanies it. Errors may be made in the preparation and calculation of wages and
salaries and as such pay slips should be retained by the employee and not discarded straight away in case
of verification required later.

A distinction must be made between wages and salaries. Wages can be defined as the money paid to daily
or weekly rated staff. They are often referred to as blue collar workers because of their low levels of
training and education achieved. White collar workers are paid salaries at the end of the month. These
workers earn higher remuneration because of their greater skills and educational background.

Method of payment of Wages or Employee Remuneration

Other than a fixed salary, some employees may earn a commission based on the amount of sales they
have brought in for the company. Others may also receive non-monetary rewards for their hard work.
Those who do not have a fixed monthly salary may be paid on a daily or weekly basis, their wages
depending on the number of hours worked or their input, and whether or not there is overtime.

The following are ways the employees may earn their pay:

a) Time Card or Job Card

A time card or job card is a rectangular piece of paper that is inserted into a time clock. This is a
special machine that prints the time whenever the card is punched. Therefore businesses that are
precise as to the number of hours worked will have their employees use these cards.

At the end of the week, these time cards are collected and the information on them carefully
screened. First, the number of days and hours worked is checked to ensure that a full week was
worked (normally 40 hours). Then instances of overtime payment need to be confirmed by the
supervisors in charge. Next, the card is checked to see if deductions have to be made for late-
coming and or excessive breaks including lunch. It is usual to give a three-minute grace period;
however, via union agreement, deductions of one quarter of an hour’s pay may be made for
lateness exceeding 3 minutes and below 15 minutes.

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 DOUBLE T BAKERY
Department: Kitchen
A. SAMMY Week Ending 11th April 2020
MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY SATURDAY
8:00 AM 8:04 AM 8:00 AM 8:01 AM 7:50 AM 8:00 AM
10:15 AM 10:12 AM 10:14 AM 10:20 AM 10:00 AM 12:02 PM
10:25 AM 10:25 AM 10:22 AM 10:30 AM 10:10 AM
12:10 PM 12:05 PM 12:03 PM 12:30 PM 12:15 PM
1:10 PM 1:07 PM 1:05 PM 1:32 PM 1:15 PM
4:02 PM 4:01 PM 4:00 PM 6:00 PM 4:00 PM

Image: A specimen Time Card

It can be seen from A Sammy’s time card that she works 8 hours a day, from 8:00am to 4:00pm, Monday
to Friday. Saturday is half day. She is allowed a 10-minute morning break and 1 hour for lunch. On Tuesday,
as she was late for more than three minutes, she would be paid 7 ¾ hours of work instead of 8. Thursday’s
overtime of 2 hours, from 4 to 6 pm, needs to be verified by a supervisor.

b) Piece Rate
The piece rate is a method of payment developed as an incentive for manual jobs. Essentially, the
worker is paid according to the amount of output. For example, the number of guavas a worker
peeled is weighed and his wages are based on kilograms of the guavas peeled. If he is paid on an
hourly rate, there is little or no incentive for him to maximize output.
c) Overtime
Powerful trade unions have been successful in getting employers to pay overtime rates and
benefits to their workers. If a worker is required to work beyond the full eight hours, then he or
she is entitled to be paid wages of “time and half” 1.5 time the normal rate of pay. If the worker
is asked to work beyond four overtime hours, then the rate of double time will apply. Work on
Saturdays and public holidays will normally be considered double time with overtime starting at
triple time. It is also customary for the worker to receive meal allowances or vouchers.

Example:
R Anderson has worked 40 hours for the week and has accumulated 4 overtime hours at the rate
of time and a half, and 2 overtime hours at the rate of double time. If his wages are $10 per hour,
what would be his gross pay?

Normal pay: 40 hours x $10 = $400

Overtime at time and half 4 hours x 1.5 x $10 = $ 60
Overtime at double time 2 hours x 2 x $10 = $ 40
Gross Pay $ 500

d) Commission
For salesmen and other executives involved in securing new business for the economy, it is
necessary to pay them using a mode of payment that will stimulate and encourage them to do
their best. Most companies thus pay their salesmen and such employees by commission. Payment

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 by commission is a means whereby salary is based on a certain percentage of sales made of the
number of size of new accounts (business) secured for the company. Therefore, a typical
salesman’s pay will comprise (1) a small basic salary, for example, $800, whether he sells anything
or not, and (2) commission, for example, 5% of all sales made.

Example:
S Wecter works as a salesman in a firm selling vacuum cleaners. He earns a basic salary of $800
and commission at the rate of 5% of sales. During the month of August he sold $100,000 worth of
vacuum cleaners. What was his total gross salary for August?

Basic Salary: = $ 800

Commission (5% x $100,000) = $5,000
Total Gross Pay $5,800

e) Allowances / Prerequisites
Another preferred method of payment to workers is allowances. The advantages to the worker is
that allowances. The advantage to the worker is that allowances are non-taxable. Examples
include travelling, meals and entertainment allowances. Prerequisites, commonly referred to as
“perks” are non-monetary benefits that workers enjoy. Examples include company car, house,
credit card and holiday travelling expenses the company provides for the worker.

Salary Deductions

Salary deductions can be divided into statutory and private.

Statutory Deductions

Employers are required by law to make certain deductions from the employee’s gross salary on behalf of
the government. The biggest statutory deduction, in most cases, is income tax or PAYE (Pay As You Earn).
For example, if personal tax rate is 25%, then 25% of gross salary is deducted and remitted to the
government by the employer.

Another compulsory deduction is Health Surcharge. Many Caribbean countries have such a system
whereby the working class is taxed in order to provide funds for the provision of hospitals and other
medical service to the public.

Health Surcharge is payable at 2 rates as follows; Where the weekly income is more than TT$ 109 the rate
is TT$8.25. Where the weekly income is less than TT$ 109 the rate is TT$4.80 per week.

National Insurance is another compulsory deduction. This is done for the provision of maternity and
sickness benefits and injury compensation to the worker.

Below is a chart detailing the respective earning classes, earnings and contributions for NIS as at
September 2016.

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Private Deductions

Private or voluntary deductions are so termed because they are so termed because they can only be made
at the discretion of the employee. To begin with, many firms offer private pension and health plans, and
employees have a choice as to whether to join the scheme. Only upon agreement in writing by the
employee can such deductions be made.

Many trade unions charge their members union dues which must be paid monthly. As such, registered
union members have union dues deducted from their salary. These funds are in turn used by the union to
finance the struggle for better wages and working conditions.

Private deduction also include insurance contributions by the employee. Insurance companies often
interest and sell employees polices with respect to annuities (life savings) and / or life insurance. To save
time, the employer can deduct the monthly contribution on behalf of the employee and remit it to the
insurance company. Again, this can be only be done upon the written consent of the employee.

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There are people who chose to save in credit unions. These are financial co-operatives which offer
members a chance to earn interest and dividends on savings and at the same time facilitate access to
cheaper loan financing. Arrangements may also be made for salary deductions for the credit union.

Example:

Patricia Smith is an administrative assistant earning $7,000 a month. She is taxed at the rate of 25%.
Deductions for Health Surcharge is $8.25 weekly and National Insurance is $70.40 respectively of gross
salary. In addition, she has union dues of $50 to be deducted and a monthly payment of $500 to her credit
union. Calculate her net salary for the month of April 2020.

Answer:

DETAILS $ NOTES
Gross Salary 7,000
Less: Deductions
PAYE (25% x 7,000) (1,750)
Health Surcharge ($8.25 x 4) (33) (4 Mondays in April 2020)
National Insurance ($70.40 x 4) (282)
Union Dues (50)
Credit Union (500)
Net Salary 4,385

At the end of the month, Patricia will receive $4,385 as her net salary and a pay slip containing information
about her gross salary and deductions.

Calculating Chargeable Income and Monthly Net Pay

“Chargeable Income” for the purposes of a person whose sole source of income is from an office or
employment, means the total emoluments of the person for the year of income less the appropriate
allowable deductions and exemptions granted under the Income Tax Act.

“Allowable Deductions” means deductions allowed in accordance with the Income Tax Act in determining
a person’s chargeable Income. The following are examples of allowable deductions:

 Tertiary Education expenses limited to $60,000 per year.

 First time Home Owners limited to $25,000 per year.
 Deed of Covenant – Limited to 15% of total Income
 Contributions/Premiums paid to deferred annuity/tax savings/pension fund plans
 70% of NIS contributions limited to $50,000
 Alimony or maintenance paid in accordance with a court order
 Personal Allowance $72,000
 Travelling expenses
 Conversion to guest house
 The tax credit for a venture capital investment – 30% of face value of bonds purchased

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Practice Question:

Dale Montgomery is employed with Fast & Furious Cars as a Junior Accountant and works for a Salary of
$12,000 per month.

His tax declaration is as follows as at 2020.

1. Annuity per month is $300 within the company.

2. He studied overseas amounting to $15,000 for the year

3. He purchased a house for the first time amounting to $675,000

4. He pays $500 per month Alimony for his son.

Required:

Calculate Freddy’s salary for the month of April 2020 (Four Mondays in the Month)

Note * Use employee weekly contribution rate of $122.10 to calculate NIS, Health surcharge is $8.25.

Answer:

1. Work out Annual Chargeable Income - to calculate monthly Income Tax

Calculations for TD1.
2020
Tax Computation Annual
$
Emolument income 144,000.00

Less Deductions:
(60K max) Tertiary education expenses (15,000.00)
(25K max) First-time acquisition of house (25,000.00)
($72K max) Personal allowance (72,000.00)
Annuity pension plan (3,600.00)
70% NIS allowance ($122.10 x 52 x 70%) (4,444.44)
Alimony maintenance (6,000.00)
Chargeable income 17,955.56

Income tax @ 25% 4,488.89

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2. Salary for April 2020
Apr-20
Monthly
$
GROSS SALARY 12,000.00

Less Deductions:
PAYE [annual divided by 12] (524.07)
Health Surcharge ($8.25 x 4) (33.00) 4 Mondays
NIS ($122.10 x 4) (488.40) 4 Mondays
Annuity contribution (300.00)

NET PAY 10,654.53

Assumptions:
1 All income and expenses remained the same for each month of the year 2020
2 Five (4) Mondays in the month of April 2020
3 Other than the statutory deductions (PAYE, Health Surcharge, NIS) the annuity
contribution of $300 was deducted from the employee's payslip
4 The objective was to calculate the employee's Net Pay

REFERENCES:
 Principles of Accounts – David Ramlochan & Charmain Lalla

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