Payroll

Students should be able to:

 Calculate gross pay based on fixed rates, time rates, piece rates and commission
 Identify and prepare source documents for calculating gross pay
 Calculate income tax taking account of personal allowances and a basic rate of tax
 Prepare a pay slip taking account of statutory and voluntary contributions
 Prepare an extract from payroll.

What is a pay slip?

Here is a typical pay slip:
Pay slip for Cynthia Brown
Date: 31 May 2018
$ $
Gross pay for May 4,000
Deductions
Income tax 320
National insurance 160
Pension fund 200
680
Net pay 3,320

You can see that although Cynthia earned $4,000 during the month, she took home much less
than this (net pay) – just $3,320. This was because various deductions were made. In this unit,
you are going to learn:
 How an individual’s gross pa is calculated
 For what reasons deductions are made and how these are calculated
 How to prepare a pay slip
 How to prpare a business’s payroll.

What is the payroll?

The payroll is the list of all business’s employees that shows details of the wages or salaries paid
to each individual and how these amounts were calculated.
How is gross pay calculated?
Gross pay is the amount due to be paid by an employer in wages or salaries in return for work
done before making any deductions. Wages are often paid weekly and can be paid in cash;
salaries are usually paid monthly, either by cheque or directly into the employee’s bank account.
Gross pay can be calculated in a number of ways:
 Fixed rate: salaries and sometimes wages, are usually an agreed amount for ayear, when
they may be reviewed with the possibility of a pay rise.
  Time rates: often wages are based on the hours worked, with an hourly rate agreed with
the employer. Usually an employee is expected to work an agreed number of hours per
week. However, sometimes employees may work “overtime” (more than the agreed
hours) and be paid at a higher rate for these extra hours.
 Piece rates: wages can be based on the amount of work done, that is, the number of
products made or operations carried out, with an agreed rate per product/operation.
Employees who work faster therefore earn more than those who work more slowly.
 Commission: some individuals, particularly salespeople, are paid at a basic rate plus an
additional amount that is dependent on the amount of sales they have achieved.

Example 1:
Fixed Salary
Patrick’s annual salary was agreed at $63,000 for the year ending 31 December year 1.
In order to calculate Patrick’s monthly gross earnings for year 1, it is necessary to divide the
annual salary by 12:
$63,000
= $𝟓, 𝟐𝟓𝟎 𝒑𝒆𝒓 𝒎𝒐𝒏𝒕𝒉
12
Patrick’s employer agreed to a 5% pay raise for the year ending 31 December year 2
Patrick’s salary for Year 2 will be:
$63,000 + (5% x $63,000) = $63,000 + $3,150 = $66,150
So Patrick’s monthly gross earnings in year 2 will be:
$66,150
= $5,512.50
12
Example 2:
Fixed wage
Quinlan earns $37,500 per annum. He is paid weekly.
$37,500
Quinlan’s weekly wage will be = $𝟕𝟐𝟏. 𝟏𝟓
52

Activity 1
Calculating gross pay based on fixed rate salaries and wages.
a. Mala and Sharon both work for Golden Palm Jewellers Ltd.

During Year 1, Mala’s salary was $85,000 per annum and Sharon’s wage was $64,000 per
annum. Both employees received a pay increase of 5% for year 2.
Calculate Mala’s monthly salary and Sharon’s weekly wage for years 1 and 2.
b. Kris and Rishi work for Bestprice Hotels Ltd.
During Year 1, kris’s salary was $112,000 per annum and Rishi’s wage was $56,000 per
annum. Both employees received a pay increase of 4% for year 2
Calculate kris’s monthly salary and Rishi’s weekly wage for Years 1 and 2.

Example 3:
Time rates
Rhonda works part time in a local restaurant. Rhonda is paid $24 per hour. During the week
ended 7 May 2018, Rhonda was employed for 17 hours.
Rhonda will be paid a wage of 17 hours x 24 = $408.
Example 4:
Time rates including overtime
Seeta is paid $30 per hour working in a luxury hotel. Seeta is contracted to work 35 hours per
week. However, during the week ended 21 May 2018, she worked for 39 hours. Overtime is paid
at time and a half.
Seeta will be paid 35 hours x $30 per week = $1,050.
During the week ended 21 May 2018, she will be paid $1,050 plus overtime:
Overtime payment = 4 hours x ($30 x 1.5) = 4 hours x $45 = $180
Seeta’s wage for the week ended 21 May 2018 is $1,230.
Overtime rates vary. In the example above, the basic rate was increased by 1.5 (described as
“time and a half”). You may find overtime rates of, for example, “time and a quarter” (multiply
the basic rate by 1.25).
Activity 2
Calculating gross pay using time rates
a. Seaview Manufacturing Ltd employs staff on the basis that they work for 40 hours per
week.

The following information is available about three employees for the week ended 24 July
2018:
 Keith worked for 40 hours; his rate of pay is $32 per hour.
 Leela woeked 45 hours; her rate of pay is $28 per hour with overtime paid at time and a
quarter.
  Michael worked for 46 hours; his rate of pay is $36 per hour with overtime paid at time
and a half.
Calculate each employee’s gross pay for the week ended 24 July 2018.

b. Candy Restaurants employs staff on the basis that they work for 35 hours per week.
The following information is available for three of the employees for the week ended 16
October 2018:
 Geeta, a kitchen assistant, worked for 35 hours; she is paid 26 per hour.
 Henry, a waiter, worked for 41 hours; his rate of pay is $30 per hour with overtime paid
at time and a quarter
 Ishaka, a chef, worked for 44 hours; her rate of pay is $50 per hour with overtime paid
at time and a half.
Calculate each employee’s gross pay for the week ended 16 October 2018.

Example 5:
Piece rates
MXL Ltd manufactures computer printers.
There are several processes involved in assembling a printer.
Employees are paid the following piece rates:
 Assemply process 1: $1.40 per printer
 Assembly process 2: $1.50 per printer
 Assembly process 3: $1.10 per printer

Shane works part time in the assembly department. During the week ended 23 June 2018, Shane
completed the following tasks:
 Assembly process 1: 30
 Assembly process 2: 50
 Assembly process 3: 60.

Shane will be paid the following.

$
Process 1 30 x $1.40 42
Process 2 50 x $1.50 75
Process 3 60 x $1.10 66
Total 183
Example 6:
Piece rates and minimum wage agreements
MXL Ltd (see example 5) pays full-time staff piece rates, but also has a minimum wage
agreement whereby full-time staff are paid at least $800 per week.
Tara is a full-time employee. During the week ended 26 August 2018, Tara completed the
following tasks:
 Assembly process 1: 100
 Assembly process 2: 240
 Assembly process 3: 220

Based on piece rates, Tara would be paid the following

$
Process 1 100 x $1.40 140
Process 2 240 x $1.50 360
Process 3 220 x $1.10 242
Total 742

The minimum wage agreement will be applied to Tara during his week, so she will earn $800.
Activity 3:
Calculating gross pay using piece rates
Albion Sports Ltd manufactures windsurfing equipment, including surfboards, sails and masts.
The following information is available for two employees (Francis and Sweeta) who worked in
the assembly department during the week ended 18 March 2018.
Piece rates per product are:
$
Surfboards 3.00
Surfsails 4.00
Surfmasts 3.50

Francis and Sweeta completed the following products.

Francis Sweeta
Boards Sails Masts Boards Sails Masts
Monday 10 10 10 8 12 14
Tuesday 12 8 12 10 10 16
Wednesday 15 6 14 12 8 12
Thursday 12 12 6 16 6 12
Friday 11 15 11 9 11 14
 a. Calculate each employee’s gross pay for the week ended 18 march 2018.
The directors of Albion Sports Ltd are considering the introduction of a minimum weekly
wage agreement. This would amount to $575 per week.
b. If the minimum wage agreement was already operating, how much would Francis and
Sweeta have been paid for the work completed during the week ended 18 March 2018?

Example 7:
Piece rates with quality checks
Uwana works part-time for MXL Ltd (See example 5 and 6). During the week ended 16 July
2018, she completed the following tasks:
 Assembly process 1: 35
 Assembly process 2: 72
 Assembly process 3: 14

However, quality checks meant that the following items were rejected:
 Assembly process 1: 3
 Assembly process 2: 7
 Assembly process 3: 1.

Based on piece rates for the accepted items, Uwana will be paid the following:
$
Process 1 (35-3) x $1.40 44.80
Process 2 (72-7) x $1.50 97.50
Process 3 (14-1) x $1.10 14.30
Total 156.60

Activity 4:
Calculating piece rates where there is quality control
Kimberly is paid a piece rate of $1.20 for each item that is passed by a quality check. During a
recent week, Kimberly’s work record was as follows.
Completed items Items rejected
Monday 154 6
Tuesday 172 11
Wednesday 164 7
Thursday 153 2
Friday 175 9
Calculate Kimberly’s gross pay for this week
Example 8:
Commission
Ulrick works in a department store. He is paid $3,000 per month but is also entitled to a
commission of 1.5% based on his department’s monthly sales.
His department’s monthly sales were.
$
August 2018 32,000
September 2018 27,400

Ulrick will be paid as follows.

Basic Salary Commission Total
$ $ $
August 2018 3,000 1.5% x $32,000 = $480 3,480
September 2018 3,000 1.5% x $27,400 = $411 3,411

Activity 5:
Commission and gross pay
Kyle and Antonio are employed by Harold’s Department Store. Kyle works in the shoe
department and Antonio works in the technology department. Both employees earn a basic salary
of $3,400 per month. In addition, they are paid a commission of 1% of the amount by which the
sales of their department exceed $40,000 per month.
Sales for each department for two recent months were as follows.
Shoe department Technology department
$ $
August 2018 44,000 38,700
September 2018 39,500 49,200
Calculate Kyle and Antonio gross pay for the months of August and September 2018.