MODULE 4 - CHP 9 + 13 - PAYROLLS AND CREDIT

Finance Charge Rebate

Unearned portion of the finance charge that the lender returns to the borrower when an installment loan is paid off early

0% to 30%

What % range do down payments generally range in

FUTA = Federal Unemployment Tax Act

What does the "FUTA" tax stand for?

SUTA - State Unemployment Tax Act

What does the "SUTA" tax stand for?

FUTA = Federal Unemployment Tax

What does the FUTA tax stand for?

Self Employment Contributions Act Tax

What does the SECA tax stand for?

SUTA = State Unemployment Tax

What does the SUTA tax stand for?

Social Security, Medicare, State Unemployment Tax (SUTA), and Federal Unemployment Tax (FUTA)

What four payroll taxes are employers responsible for paying?

Regulation Z

What is "open-end credit" also known as?

Revolving Credit

What is the most popular type of open-end credit? And the most widely used open-end credit by retail stores and credit card companies.

Self Employment Contributions Act (SECA)

What tax is also known as the "self employment tax"

1 - Use the account like a regular charge account, whereby the balance paid off at the end of the month with no financial charges 2 - Make minimum payments or portions of the payment but less than the full balance

What two payment options does the "Revolving Credit" (open end credit) have?

Self Employed Workers They are technically they are both the employer and the employee

What type of business entity is responsible for social security and medicare taxes at twice the rate deducted for employees

sum-of-the-digits method or the Rule of 78

Widely accepted method for calculating the finance charge rebate. Based on the assumption that more interest is paid in the early months of a loan, when a greater portion of the principal is available to the borrower

Formula for finding "sum-of-digits" (for loans of 24, 36, or 48 months)

n (n + 1) / 2 N = number of payments

Net Pay Formula

net pay = gross pay - total deductions

Two categories FICA is divided into

1 - Social Security (OASDI) 2 - Medicare Tax

Federal Unemployment Tax Act (FUTA)

A FEDERAL tax that is paid by employers for each employee to provide unemployment compensation to workers who have lost their jobs

State Unemployment Tax Act (SUTA)

A STATE tax that is paid by employers for each employee to provide unemployment compensation to workers who have lost their jobs

The Fair Labor Standards Act of 1938

A federal law that specified that a standard work week is 40 hours per week

Social Society Tax (OASDI)

A federal tax based on a percentage of a workers income up to a specified limit or wage base for the purpose of providing monthly benefits to retired and disabled workers and to the families of deceased workers. Old Age, Survivors, and Disability Insurance (OASDI)

Medicare Tax

A federal tax used to provide health care benefits and hospital insurance to retired and disabled workers

Salary

A fixed gross amount of pay equally distributed over periodic payments without regard to the number of hours worked

Federal Income Tax

A graduated tax based on gross earnings and marital status that is paid by all workers earning over a certain amount in the US

Salary Plus Commission

A guaranteed salary plus a commission on sales over a specified amount. Variation of straight and incremental commission pay schedules

Open-end credit

A loan arrangement in which there is no set number of payments. As the balance of the loan is reduced, the barrower can renew the amount of the loan up to a pre-approved credit limit. A form of revolving credit

Calculating APR by Formula

APR = 72I / 3P (n + 1) + I (n - 1) I = Finance Charge on Loan (interest) P = Principal, or fixed financed N = Number of months of the loan

Amount Financed

After the down payment, the amount of money that is borrowed to complete a sale

Formula for Total Amount of Installment Payments

Amount Financed + Finance Charge

Overtime

Amount a worker is paid after the standard 40 hours/week

Percentage Method

An alternative method to the wage bracket tables used to calculate the amount of an employee's federal income tax withholding

Withholding Allowance

An amount that reduces an employee's withholding amount. Employees are allowed one withholding allowance for themselves, one for their spouse if the spouse does not work, and one for each dependent child or elderly parent living with the taxpayer but not working

State Unemployment Tax Act (SUTA)

An employer can take a credit against the FUTA tax for amounts paid into the state unemployment funds These taxes are commonly known as what?

Mortgage

An installment loan made for homes and other real estate properties

*Straight* Commission

Commission based on a specified percentage of the sales volume attained by an employee. Ex. Delta pays its sales staff a commission of 8% on all sales

Drawing account or Draw against commission

Commission paid in advance of sales and later deducted from the commission earned.

Fringe Benefits

Employer provided benefits and service packages over & above an employee's paycheck, such as pension funds, paid vacations, sick leave, and health insurance.

Mandatory Deductions

Deductions withheld from an employee's paycheck by law: social security, Medicare, and federal income tax.

Voluntary Deductions

Deductions withheld from an employee's paycheck by request of the employee, such as insurance premiums, dues, loan payments, and charitable contributions.

Finance Charge

Dollar amount that is paid for credit. Total of installment payments for an item less the cost of that item

Wages

Earnings for routine or manual work, usually based on number of hours worked

Annual Percentage Rate (APR)

Effective or true annual interest rate being charged for the credit. Must be revealed to borrowers under the 'Truth in Lending Act'

Federal Insurance Contributions Act (FICA)

Federal legislation enacted in *1937* during the great depression to provide retirement funds and hospital insurance for retired or disabled workers. Today its divided into: Social Security & Medicare

Rebate Fraction

Fraction used to calculate the finance charge rebate. The numerator is the sum of the digits of the number of payments remaining at the time the loan is paid off; the denominator is the sum of the digits of the total number of payments of the loan

Deductions or Withholdings

Funds withheld from an employee's paycheck.

*Incremental* Commission

Greater incentive method of compensation than straight commission whereby higher levels of sales earn increasing rates of commission. Similar to *differential* piecework Ex. 5% commission on all sales up to $70,000 6% commission on $70,000 - $120,000 7% commission on $120,000+

Differential Piecework Plan

Greater incentive method of compensation than straight piecework, where pay per unit increases as output goes up. Ex. $3.05 for the first 50 units $3.45 for 51-100 units $3.90 for 100+ units

6 months to 10 years

How long do 'Installment Loans' usually range from

as long as 30 years on a home 30+ for commercial properties

How long do mortgages typically last for

Combined Wage Bracket Tables

IRS tables used to determine the combined amount of income tax, social security, and Medicare that must be withheld from an employees from an employee's gross earnings reach pay period

U.S. Prime Rate

Lending rate at which the largest and most creditworthy corporations borrow money from banks. The interest rate of most lines of credit is tied to the movement of the prime rate

Installment Loan

Loan made for a specified number of equal monthly payments A form of closed-end credit used for purchasing durable goods such as cars, boats, furniture and services (such as vacations and home improvements) A lump sum loan whereby the borrower repays the principle plus interest in a specific amount of equal monthly payments

Revolving Credit

Loans made on a continuous basis and billed periodically. Borrower makes minimum monthly payments or more and pays interest on the outstanding balance. The customer has a prearranged credit limit and two payment options

Secured Loans

Loans that are backed by tangible assets, such as: a car, boat, or home which can be repossessed and sold if the borrowe fails to pay back the loan. These loans carry less risk for the lender and therefore have lower interest rates than unsecured loans

Unsecured Loans

Loans that are backed simply by the borrower's "promise" to repay, without any tangible asset pledged as collateral. These loans carry more risk for the lender and therefore have higher interest rates than secured loans

Formula for Total Amount of Installment Payments (when amount of monthly payments is known)

Monthly payment amount x Number of monthly payments

Steps to calculate *STRAIGHT* total gross pay

Multiply the total gross sales by the commission rate Total Gross Pay = Total Sales X Commission rate

Formula for Net Pay (deductions)

Net Pay = Gross Pay - Deductions

Billing Cycles

Open-end credit transactions that are divided into time periods

Formula for Overtime Pay

Overtime Pay = Hourly rate X Overtime factor X Overtime worked

Straight Piecework Plan

Pay per unit of output regardless of output quantity. Ex: $3.15 per unit

Piecework Rate

Pay rate schedule based on an employee's production output, not hours worked. Based on production output not time. Ex. The more units the worker produces the more money made

Commission

Percentage method of compensation primarily used to pay employees who sell a company's goods and services

Add-On Interest

Popular method of calculating the interest on an installment loan

Down Payment

Portion (percentage) of the purchase price that the buyer must pay in a lump sum at the time of purchase

Line of Credit

Pre-approved amount of open-end credit based on borrower's ability to pay

Formula for Add On Interest (Finance Charge)

Principal (amount financed) x Rate x Time I = PRT

Formula for finding Amount Financed (when the down payment is known cost wise)

Purchase Price - Down Payment

Formula for finding Down Payment with a down payment percentage

Purchase Price x Down Payment Percent

Cash Price (or Purchase Price)

Purchase price paid for goods and services without the use of financing

Formula for Regular Pay

Regular pay = hourly rate X regular hours worked

Examples of Fringe Benefits

Retirement plans, stock option plans, holiday leave, sick days, health and dental insurance, and tuition reimbursement.

Steps to find the total income tax, social security, and Medicare withheld using the combined wage bracket table

STEP 1 - Based on the employee's marital status and period of payment, find the corresponding table (Exhibit 9-3 or 9-4) STEP 2 - Note that the two left-hand columns, labeled "At least" and "But less than", are the wage brackets. Scan down these columns until you find the bracket containing the gross pay of the employee STEP 3 - Scan across the row of that wage bracket to the intersection of the column containing the number of withholding allowances claimed by the employee STEP 4 - The number in that column on the wage bracket row us the amount of combined tax withheld

Steps for calculating employee's gross pay by hourly wages (+ overtime)

STEP 1 - Calc employee's reg gross pay for working 40 hours Formula: Regular pay = hourly rate X regular hours worked STEP 2 - Calc an employee's overtime pay by multiplying the hourly rate by the overtime factor by the number of overtime hours Formula: Overtime pay = Hourly rate X Overtime factor X Overtime hours worked STEP 3 - Calc total gross pay Formula: Total gross pay = Regular pay + Overtime pay

Steps to calculate the regular monthly payment of an installment loan using add-on interest

STEP 1 - Calculate the amount to be financed by subtracting the down payment from the purchase price (Note: When the down payment is expressed as a percent, the amount financed can be found by the complement method because the percent financed is 100% minus the down payment percent) Amount Financed = Purchase Price (100% - Down Payment percent) STEP 2 - Compute the add on interest finance charge by using I = PRT, with the amount financed as principal STEP 3 - Find the total amount of installment payments by adding the finance charge to the amount financed Total amount of installment payments = Amount Financed + Finance Charge STEP 4 - Find the regular monthly payments by dividing the total amount of installment payments by the number of months of the loan Regular Monthly Payments = Total amount of installment payments / Number of months of loan

Steps to find the annual percentage rate of an installment loan by using APR tables

STEP 1 - Calculate the finance charge per $100 Finance Charge per $100 = Finance Charge x 100 / Amount Financed STEP 2 - From Table 13-1, scan down the Number-of-payments column to the number of payments for the loan in question STEP 3 - Scan to the right in that Number-Of-Payments row to the table factor that most closely responds to the finance charge per $100 calculated in step 1 STEP 4 - Look to the top of the column containing the finance charge per $100 to find the APR of the loan

Steps to calculate the finance charge rebate and loan payoff

STEP 1 - Calculate the rebate fraction Rebate fraction = sum of the digits of the number of payments remaining / sum of the digits of the total number of payments STEP 2 - Determine the finance charge rebate FINANCE CHARGE REBATE = REBATE FRACTION X TOTAL FINANCE CHARGE STEP 3 - Find the loan payoff LOAN PAYOFF = (PAYMENT REMAINING X PAYMENTS AMOUNT) = FINANCE CHARGE REBATE

Steps to calculate gross pay by *DIFFERENTIAL* piecework

STEP 1 - Multiply the number of output units at each level by the rate per unit at that level STEP 2 - Find the total gross pay by adding the total from each level

Steps to calculate gross pay by *STRAIGHT* piecework

STEP 1 - Multiply the number of pieces or output by the rate per unit Total Gross Pay = Output Quantity X Rate per unit

Steps to calculate *INCREMENTAL* total gross pay

STEP 1 - Multiply the total sales at each level by the commission rate for that level STEP 2 - Find the total gross pay by adding the total from each level

Steps to find the finance charge and the monthly payment of an installment loan by using the APR tables

STEP 1 - Using the APR and the number of payments of the loan, locate the table factor at the intersection of the APR column and the Number-Of-Payments row. This factor represents the finance charge per $100 financed STEP 2 - Calculate the total finance charge of the loan FINANCE CHARGE = AMOUNT FINANCED X TABLE FACTOR / 100 STEP 3 - Calculate the monthly payment MONTHLY PAYMENT = AMOUNT FINANCE + FINANCE CHARGE / NUMBER OF MONTHS OF LOAN

Steps to calculate the income withheld by the percentage method

STEP 1 - Using the proper payroll period, multiply one withholding allowance (Exhibit 9-1) by the number of allowances claimed by the employee STEP 2 - Subtract that amount from the employee's gross earnings STEP 3 - (From Exhibit 9-2) Locate the proper segment (Table 1, 2, 3, 4) corresponding to the employee's payroll period. Within that segment, use the *left* side (a) for single employees and the *right* side for married couples (b). STEP 4 - Locate the "Over-" and "But not over-" brackets containing the employee's taxable wages from Step 2. The tax listed to the right as a percent or a dollar amount and a percent

Old Age, Survivors, and Disability Insurance (OASDI)

Social Society Tax (OASDI) - what does OASDI stand for?

True

TRUE OR FALSE Employers are required to MATCH ALL FICA tax payments, both social security and Medicare, made by each employee

TRUE

TRUE OR FALSE FUTA Tax may change from year to year

Hourly Wage, or Hourly Rate

The amount an employee is paid for each hour worked.

Wage Base

The amount of earnings up to which an employee must pay social security tax.

Net Pay / Net Earnings / Take Home Pay

The amount of the employee's paycheck after all payroll deductions have been withheld

What "Revolving Credit" is called revolving

The fact that there is no set number of payments as with installed credit Revolves month-to-month, year-to-year - technically never getting paid off as long as the minimum monthly payments are made

Average Daily Balance

The method most widely used to calculate the finance charge on a revolving credit account for a billing cycle. It is the total of the daily balances divided by the number of days in the cycle

Average Daily Balance

This (credit calculating) method precisely tracks the activity in an account on a daily basis

Billing Cycles

Time periods, usually 28-31 days, used in billing revolving credit accounts. Account statements are sent to the borrower after each billing cycle

Formula for finding Finance Charge

Total Amount of installment payments - Amount Financed

Formula for Gross Pay by Piecework

Total Gross Pay = Output Quantity X Rate per unit

Formula for *Straight* Total Gross Pay

Total Gross Pay = Total Sales X Commission rate

Gross pay (gross earnings)

Total amount of earnings due an employee for work performed before payroll deductions are withheld

Formula for Total Deferred Payment Price

Total amount of installment payments + Down payment

Formula for total gross pay

Total gross pay = Regular Pay + Overtime Pay

Steps to find total gross pay of *sales plus commission*

Total gross pay = find the amount of commission and add it to the salary

Rebate Fraction (formula)

sum of the digits of the number of payments remaining / sum of the digits of the total number of payments