Payroll in Practice: 10.21.19

Practitioners’ questions are answered by a payroll and tax consultant who also is an enrolled agent licensed to practice before the Internal Revenue Service.

Question: We are reviewing our policy manual and have a question. Suppose an employee works eight hours on each of six days during a workweek and one day is a holiday. The company pays the employee double time for working on the holiday. How should the overtime compensation be calculated?

Answer: The answer depends on company policy and what the double-time payment for the holiday is intended to cover. As usual, it is best to have this policy in writing and communicated to employees to prevent inconsistencies or misunderstandings.

If the employee received eight hours of holiday wages and would have been paid that amount without regard to whether the employee worked on the holiday, the amount would not have to be included in the regular rate of pay and would not count toward the overtime premium.

For example, suppose the employee worked nine hours on the holiday instead of eight. Under that scenario, the employee would receive eight hours of holiday pay and nine hours of straight-time compensation. This would also add one hour to the original 48 hours and the employee would have to receive overtime pay for nine hours at a minimum of one and one-half the regular rate.

In this case, the eight hours’ pay for the holiday would not have to be included in computing the regular rate and could not be used to cover the employer’s obligation for overtime compensation.

On the other hand, if the employee is paid double time for working on the holiday, works nine hours and is paid double time for nine hours, the premium for working nine hours on the holiday qualifies as an overtime rate. The premium is not included in the regular rate of pay computation, but does count toward the overtime compensation requirement.

In that case, the other 40 hours worked during the workweek could be paid at straight time. However, if the employer has a contractual or statutory obligation to pay a premium for work performed on the sixth day that is not the holiday, or work performed for another special day such as a Saturday or other regular day of rest, additional overtime compensation may be required.

This scenario works regardless of whether the employee is entitled to eight hours of holiday pay for the holiday (idle time) and foregoes that to work at double time or is entitled to eight hours of holiday pay plus double time for all hours worked on the holiday. When the employee forgoes the holiday pay (idle time pay) to work at double time, the employer may pay overtime premium for the Saturday hours, for example, but is not required to by the Fair Labor Standards Act. The overtime requirement is met by paying double time on the holiday.

Under C.F.R. Title 29, Section 778.203, “Premium pay for work on Saturdays, Sundays, and other special days,” if the employer is required to pay a premium for notifying an employee to come in on the employee’s regular day of rest, the premium is not overtime premium, but a penalty to the employer for short notice.

Holiday premium also is distinguished from a shift premium in that the premium is paid for the employee’s regular work hours regardless of any overtime worked and it is paid on all days, while the holiday premium is paid only on holidays. Holidays are included in the special-days regulation that allows overtime treatment of the premium for special days.

Question: A former worker was instructed by the Social Security Administration to have us, as her former employer, complete Form SSA-131, Employer Report of Special Wage Payments. We are trying to determine if we should include all of the vacation wages paid during the year she retired but accrued in the previous year. Would it be better to include only the payout of unused vacation wages accrued in the prior year?

Answer: The purpose of the form is to aid the SSA in determining the amount of income the employee earned in the current year with regard to the Social Security benefits limit for excess earnings.

The idea is to exclude amounts such as the payout of accrued vacation pay that was earned in a prior year but paid in the year of retirement or a later year. If the employer does not report the special wage payments, the employee’s Social Security benefits may be unnecessarily reduced in the year the prior-year accrued benefits are paid.

This does not affect tax withholding or taxes during the current year. The benefits paid, including prior-year benefits, are taxable as income and under the Federal Insurance Contributions Act in the year paid. On that basis, Form W-2, Wage and Tax Statement, for the year of payment would include those amounts.

The retirement year is split into two parts for determining the limit before and after retirement. Earnings before retirement, including accrued vacation, do not count for earnings-limit purposes. Instead, a monthly limit applies to the months after the retirement date.

The reason for including earnings paid because of retirement is that they will not be used in determining the limitation whether that is in the year of retirement or a later year.

For more information, see IRS Publication 957, “Reporting Back Pay and Special Wage Payments to the Social Security Administration.”

By Patrick Haggerty

Do you have a question for Payroll in Practice? Send it to phaggerty@prodigy.net.