Introduction to US Basic Payroll

By Capgemini FSH Payroll team

February 22, 2018
 Table of Content
❖Definition of Payroll
❖Pay frequencies in US Payroll
❖FLSA & Minimum Wage Act
❖Minimum Wages Distribution 2018 in different states in the US
❖Types of Pay
❖Deductions
❖401K Saving plan, 401K Catch up, 401K Roth
❖Garnishment
❖Taxes
❖Federal Taxes
❖W4 – Tax Form
❖State Taxes
❖Disbursing Net Pay
❖Sample of Four Seasons Pay Slip
❖Social Security limit of 2018 & Calculation
❖Medicare Limit of 2018 & Calculation
❖Medicare Surtax & calculation
❖W2 & W2 Correction © 2018 Capgemini. All rights reserved.
 Definition of Payroll
❖ The term ‘Payroll’ refers to the process of calculating and distributing wages & taxes correctly
and on a timely manner. The term payroll can also be classified as follows:-

• The total amount of salaries, wages, and/or additional compensation owed to employees for
a specific period of time (i.e., weekly, bi-weekly, semi-monthly, monthly).

• It can also mean the record keeping of wage and tax statement of all employees for a
company in a fiscal year.

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 Pay Frequencies in US Payroll

Payroll frequency determines how often employees are paid. The IRS allows any payroll frequency as
long as it is consistent, but individual states may have specific limits on time or type of occupation
when it comes to pay periods. When choosing a pay frequency, employers must consider any state
guidelines as well as the cost for the employer and the convenience for the employees.

Common payroll frequencies include:

• Weekly,
• Bi-weekly/fortnightly (once every two weeks)
• Semimonthly
• Monthly

Weekly Bi- Weekly Semi-monthly Monthly

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 FLSA & Minimum Wage Act

Definition - FLSA stands for the Fair Labor Standards Act,

which was enacted by Congress in 1938 and is under Federal
Wage and Hour statutes.

Governed by - The Fair Labor Standards Act (FLSA) is

administered by the Wage and Hour Division of the
Department of Labor (DOL). The FLSA covers minimum
wage, overtime Pay, Hours worked, Recordkeeping,
and youth employment standards affecting employees in the
private sector and in Federal, State, and local governments.
Definition – Minimum wages - The federal minimum wage
effective since 24 July 2009 is $7.25 per hour.

The fair labor standard act requires that all non-exempt

employees to be paid at 1.5 times their Regular rate of pay
(RRP) when employee physically works for more than 40
hours in one workweek.

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 Minimum Wages Distribution 2018 in different states in US
Link to check the Minimum wage:- https://www.dol.gov/whd/minwage/america.htm

Equals Federal minimum wage Less than Federal minimum

Greater Than Federal minimum wage No minimum wage required
$7.25 wage
AK - $9.84 IA - $7.25 GA - $5.15 AL
AR - $8.50 ID - $7.25 WY - $5.15 LA
AZ - $10.50 IN - $7.25 MS
CA - $11.00 KS - $7.25 SC
CO - $10.20 KY - $7.25 TN
CT - $10.10 NC - $7.25
DC - $12.50 ND - $7.25
DE - $8.25 NH - $7.25
FL - $8.25 OK - $7.25
HI - $10.10 PA - $7.25
IL - $8.25 TX - $7.25
MA -$11.00 UT - $7.25
MD - $9.25 VA - $7.25
ME - $10.00 WI - $7.25
MI - $9.25
MN - $9.65
MO - $7.85
MT - $8.30
NE - $9.00
NJ - $8.60
NM -$7.50
NV - $8.25
NY - $10.40
OH - $8.30
OR - $10.25
RI - $10.10
SD - $8.85
VT - $10.50
WA - $11.50
WV - $8.75
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 Child Labor Law in US

• No minor under the age 18 can work in a job that

has been declared Hazardous by the wage and hours
division of DOL (like mining, logging, woodworking,
meat packing, and construction).

• Age 16 and 17 may be employed for unlimited hours

for non-hazardous occupation.

• Age under 14 and 15 may be employed for limited no

of hours for non-hazardous occupation.

• Actors, performers, newspaper carriers not subject

to minimum age requirements.

Minimum Age to Work at Four Seasons: 18 years old

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 Types of Pay

• Salary – A fixed compensation

periodically paid to an employee for
regular work or services.

• Hourly – Hourly wage describes a rate

an employer agrees to pay a worker per
hour worked.

• Commission/Draw or Commission
only – Usually sales positions that are
responsible for productive revenue.

• Piece Work – A worker is paid a

fixed piece rate for each unit produced or
action performed regardless of time.

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 Types of employees

Exempt Employees

• Shall be exempt from the Fair Labor Standards Act (FLSA)

minimum wage and overtime provisions.
• Employers cannot dock pay other than full day increments.

Non-Exempt Employees

• Subject to FLSA regulations.

• Can be paid hourly or Salary.
• Employers required to pay employees for overtime
compensation.

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 Addition to Regular Pay

• Overtime – When an Non exempt employee

works more than standard 40 hours/week.
FLSA has set overtime pay to be paid at one
and one-half times the regular pay rate for all
hours in excess of 40 per week.

• Shift Differential – Bonus paid to work

working undesirable shifts.

• Bonus – Earnings over and above normal

pay as a reward for exceptional performance.

• Benefit Earnings – Pay for hours not worked

which are provided by company.

• Imputed Income – Non-Cash fringe benefits

that is added to taxable gross in a pay period.

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➢ What is the minimum Federal Wage rate for year 2018?

A. $7.45 B. $7.25
C. $8.25 D. $7.35

➢ What does FLSA stands for?

A. Federal Labor Standards Act B. Fair Labor Standards Act

➢ Employees are entitled to overtime pay at one-and-a-half times their regular pay rate,
for hours worked in excess of _____ hours per workweek.

A. Thirty B. Sixty
C. Forty D. Forty Five
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 Payroll Deductions
Payroll deductions are amounts withheld from an employee's payroll check, and these amounts are withheld by
their employer. Among these deductions are insurance pension contributions, wage assignments, child support
payments, taxes, and union and uniform dues.

Deductions

Pre tax Deductions Post tax Deductions

Voluntary Voluntary Involuntary

Deductions Deductions Deductions

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 Pre Tax & Post Tax Deductions

❖ Pre Tax Deductions: Pre tax deductions are deducted from an employee's paycheck before taxes
are deducted. These pre tax deductions help in reducing the taxes owed by the employee and also
increase their take home pay. They are mainly voluntary deductions. (E.g., Retirement Plans,
Cafeteria Plan Contribution). These deductions are also called tax deferred retirement plan.

❖ Post Tax Deductions: Post tax deductions come out of an employee's paycheck after all taxes have
been withheld. They don’t affect the taxes that an employee owes since taxes have already been
deducted. Post tax deductions may either be voluntary or involuntary deductions. (e.g., union dues,
charity, Garnishments, Tax Levies).

➢ Voluntary Deductions: Deductions which the employee chooses to have withheld are called
voluntary deductions. All such deductions require employee authorization. (E.g. union dues, cafeteria
plan contribution and charity).

➢ Involuntary Deductions: Deductions which are forcibly taken out of employee’s paycheck without
employee consent are called involuntary deductions. (E.g., Garnishments, Tax levies).

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 401K Saving plan, 401K Catch up, 401K Roth

A 401(k) is a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of
their paycheck before taxes are taken out. Taxes aren't paid until the money is withdrawn from the account.
The contribution limit for employees who participate in 401(k) Savings Plan is $19,000.
A catch-up contribution is an elective deferral made by a participant age 50 or older that exceeds a
statutory limit, a plan-imposed limit, or the actual deferral percentage (ADP) test limit for highly
compensated employees (HCEs).
Roth 401(k), is an employer-sponsored investment savings account that is funded with after-tax
money up to the contribution limit of the plan.

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 Garnishment
Garnishment refers to a legal process that instructs a third party to deduct payments directly from a debtor’s
wage or bank account. Typically, the third party is the debtor’s employer and is known as the garnishee.
Garnishments are used for debts such as unpaid taxes, monetary fines, child support payments and defaulted
student loans.

Both private and government organizations can garnish an employee's wages to collect on a variety of unpaid
debts.

The most common types of debt that result in wage garnishment include:-

❖ Child support
❖ Student loans
❖ Taxes
❖ Unpaid court costs
❖ Credit card bills
❖ Medical bills
❖ Any other debts on which a person has defaulted.

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➢ What does Pre Tax Deduction means, quote any example of pre tax deduction?

➢ What is the limit of 401K contribution in 2019?

A. $15,800 C. $16,500
B. $18,500 D. $19,000

➢ Is Garnishment deducted before taxes are calculated in the paycheck?

A. True B. False

➢ 401 K Roth is ______________type of deduction.

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 Taxes
Taxes are primary deduction which reduces your
gross pay.

Net pay is the part of an employee’s wages that

remains after all deductions have been
subtracted.

Gross Pay - Pre Tax deductions – Taxes -

Post Tax deduction = Net Pay

The federal government requires payment for

below types of taxes:

❖ Federal Taxes

❖ Social Security (FICA – OASDI)

❖ Medicare (FICA – HI)

❖ Unemployment Tax (FUTA)

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 Federal Taxes
Social Security and Medicare

The Federal Insurance contribution Act (FICA) funds the

social security and Medicare benefit programs. Social Security
is taxed at a rate of 6.2% (Upper wage limit (2018)-$128,400).
Medicare is taxed at a rate of 1.45% (with no wage limit).

Employers' Responsibility for FICA Payroll Taxes. An employer's federal payroll tax
responsibilities include withholding from an employee's compensation and paying an
employer's contribution for Social Security and Medicare taxes under the Federal
Insurance Contributions Act (FICA).Employer also contribute in the same ratio.
Social Security is taxed at a rate of 6.2%.Medicare is taxed at a rate of 1.45%.

Federal Income Tax (FIT)

FIT Is calculated based on the following:

❖ Gross pay
❖ Marital status
❖ Number of withholding allowances
❖ Pay frequency

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 W4 – Tax Form

Withholding tax (also known as “payroll withholding”) is essentially income tax that
is withheld from your wages and sent directly to the IRS by employer.

The purpose of Tax Form W-4 is simple ― it is used by employer to withhold the
proper amount of federal income tax from employee paycheck. The IRS recommends
that employee submit a new W-4 tax form each year, or any time their personal or
financial situation changes. Of course, this is required upon being hired.

Instructions to fill the form:-

1. Employee needs to enter his name

2. Enter Social security number.
3. Marital status
4. No. of Allowances claimed.
5. Additional amount if any needs to
be deducted.
6. If exempt from federal income
tax.
7. Note:- Signature is mandatory

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 State Taxes
State Income Tax (SIT)

Calculation vary by State

It can be calculated similar to FIT or maybe a percentage of wages,
9 states do not impose SIT are :

Florida, Alaska, Nevada, South Dakota, Texas, Washington,

Wyoming, New Hampshire, Tennessee

State Unemployment Insurance (SUI)

All employers in all state are subject to state unemployment insurance tax
Percentage of employee’s wages are paid by employer up to a limit
All states require quarterly reporting and specify its own form and date to be
included in the report

State Disability Insurance (SDI)

Provide benefits to employees who are temporarily disabled by non-work related
injury or illness through a tax supported state fund
Both employee and employers pay into this fund

Federal Unemployment Tax Act (FUTA) is a United States federal law

that imposes with state unemployment systems, provides for payments
of unemployment compensation to workers who have lost their jobs.
It’s a Employers tax reported by filing an annual Form 940 with the Internal
Revenue Service.

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 Disbursing Net Pay

❑ Check
It was the main method for paying employees
Requires visit to bank to either cash or deposit check
Costly produce for employer due to special check stock
used to print pay checks

❑ Direct Deposit
Automatic deposit of an employee’s pay into their checking
and/or saving account. Also known as Electronic Fund Transfer
(EFT) No need for employees to visit bank to deposit or have
funds moved to other accounts State rules govern the
regulations of direct deposit for employers

❑ Payroll Cards
Cards designed for employees who cannot have bank account
Enable employers to transfer payroll funds directly to an employee’s
payroll card Many vendors allow employers to implement a
payroll card as a direct deposit account or a stored value card

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Sample of Four Seasons Pay Slip

❖ Gross earnings includes all the

earnings e.g. Regular, Time off pay,
Other earnings.

❖ Pre Tax Deductions – Pay components

with * sign in the paycheck.

❖ Post Tax Deductions – Other

deductions showing in the paycheck is
post tax (401K loan, Garnishment.

❖ Net Pay – Highlighted is showing

direct deposit in employee’s account.
It will be in Net pay portion if
employee will receive Live Check.

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 Social Security limit of 2018 & Calculation

Social security – 6.20%, with $7960.80 limit Maximum taxable

earnings - $128,400

Example check

Social Security tax is calculated on Gross earning of the employee after having Pre Tax deductions (Medical),
For example:- Employee has $1910.30 gross earning in the pay period and have Medical deduction setup (pre tax).
So, the calculation as shown below.

Gross Earning = $1910.30+$1.74 (GTL)

Pre Tax deduction - $63.34 (Medical)
Gross SS taxable earning = $1910.30-$63.34 = $1848.70
SS calculation = $1848.70*6.20)/100
Social security tax = $114.62
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 Medicare Limit of 2018 & Calculation

Medicare – 1.45% with no wage limit

Example check

Medicare tax is calculated on Gross earning of the employee after having Pre Tax deductions (Medical),
For example:- Employee has $1910.30 gross earning in the pay period and have Medical deduction setup (pre tax).
So the calculation as shown below.

Gross Earning = $1910.30+ $1.74 (GTL)

Pre Tax deduction - $63.34 (Medical)
Gross Medicare taxable earning = $1910.30-$63.34 = $1848.70
Medicare calculation = $1848.70*1.45%)100
Medicare tax = $26.81

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 Medicare Surtax
Medicare Surtax– 0.9% It applies to the amount of wages that is
more than threshold amount $200,000.

Medicare sur tax is calculated on Gross earning of the employee. For example:- Employee has $1500 gross earnings in
the pay period So calculation as shown below.

Gross Earning = $1500

Medicare surtax calculation = $1500*0.9%
Medicare tax = $13.50

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 ➢ The 2018 rate for the Social Security tax that is
withheld from employees' salaries and wages up to a
specified annual amount is ____________.

➢ The federal form on which an employee indicates the

number of exemptions/dependents to be used in
calculating the amount of federal income tax
withholding for the employee is the __________ form.

➢ If an employee is earning $1500 in a paycheck and

have $45 medical pre tax deduction. Calculate the
Social Security and Medicare tax?

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 W2 & W2 - Correction

❑ W2 - The IRS requires employers to report

wage and salary information for employees
on Form W-2. W-2 also reports the amount
of federal, state and other taxes withheld
from paycheck. As an employee, the
information on your W-2 is extremely
important when preparing tax return. To
insure you have it in time, the IRS requires
employer to send a W-2 no later than
January 31 following the close of the tax
year, which is usually December 31.

❑ W2C - The form is used to make any and all

corrections on previously issued W2s from
current or past years.W2C form is prepared
by entering both the previously erroneous
information and the correct information.

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 1040 Form
Form 1040 is the standard Internal Revenue Service (IRS) form that taxpayers
use to file their annual income tax returns.

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 About Capgemini
A global leader in consulting, technology services and digital transformation,
Capgemini is at the forefront of innovation to address the entire breadth of clients’
opportunities in the evolving world of cloud, digital and platforms. Building on its
strong 50-year heritage and deep industry-specific expertise, Capgemini enables
organizations to realize their business ambitions through an array of services from
strategy to operations. Capgemini is driven by the conviction that the business
value of technology comes from and through people. It is a multicultural company
of 200,000 team members in over 40 countries. The Group reported 2016 global
revenues of EUR 12.5 billion.

Learn more about us at

People matter, results count. www.capgemini.com

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