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Payroll in Practice: 12.5.2022

Dec. 5, 2022, 3:54 PM

Question: Semimonthly and monthly pay periods are usually longer or shorter than 14 or 28 days. How is overtime calculated when seven-day workweeks do not fit evenly within a pay period?

Answer: When employees are paid on a semimonthly or monthly basis, workweeks and pay periods will be out of sync with each other.

The workweek is used to determine whether a nonexempt employee has been paid at least minimum wage for all hours worked during the week and whether any additional compensation is due to the employee for hours worked exceeding the maximum hours. Under the Fair Labor Standards Act, the maximum hours an employee may work without receiving overtime compensation is 40 hours during a workweek.

Each workweek stands alone when determining compliance with the FLSA’s minimum wage and overtime requirements. To determine whether an employee has been paid at least the minimum wage, the amount of compensation the employee earned during the workweek is divided by the number of hours the employee worked during the workweek. The average pay per hour is the employee’s regular rate of pay.

An employee who has worked overtime during the workweek is entitled to 1.5 times the regular rate of pay for each overtime hour worked.

The FLSA defines a workweek as a regularly recurring period of seven consecutive 24-hour periods or 168 consecutive hours. Once the beginning of the workweek is set for an employee, it generally does not change. For example, an employer might set the workweek to start at 12 a.m. Sunday and conclude 12 a.m. the following Sunday when the next workweek begins.

The pay period is used to compute tax withholding and ensure employees are timely paid. Timely payment is usually governed by state wage and hour laws. Generally, payment is considered timely if it is made within a specified number of days after the work was performed.

Workweeks and pay periods are not always in sync, even for weekly or biweekly pay periods. Different employees or different groups of employees may have different workweeks but the same pay period.

Generally, nonexempt employees are paid their regular hourly rate of pay or regular pay period salary for all hours worked during a pay period. However, overtime compensation is computed and paid in the pay period for each workweek that ended during the pay period.

For example, assume workweeks start (and end) at 12:00 a.m. Sunday and employees are paid semimonthly. The pay period that ends December 15, 2022, contains parts of three workweeks: Nov. 27-Dec. 3, Dec 4-10, and Dec. 11-17.

The payroll department knows the amount of overtime worked for the first two workweeks by the end of the pay period on Dec. 15. However, the amount of overtime worked for the third pay period will not be known until the end of the third workweek at 12:00 a.m. Dec. 18.

Although the pay for regular hours worked from Dec. 11-15 are included in the pay period of Dec. 1-15, those same hours are used to determine overtime compensation for the workweek of Dec. 11-17. The regular pay for hours worked on Dec. 16 and 17 and any overtime compensation for the workweek of Dec. 11-17 are paid in the pay period of Dec. 16-31.

Question: An employee was eligible to participate in an employer’s 401(k) plan during 2022 did not make contributions. Should the retirement plan check box in Box 13 of the employee’s Form W-2 be left unchecked?

Answer: The retirement plan check box in Box 13 of Form W-2, Wage and Tax Statement, must always accurately reflect the status of an employee’s retirement plan. The box should be checked if the employee is an active participant in a qualified pension, profit-sharing, or stock-bonus plan. Qualified plans include 401(k) plans, 403(a) annuities, 403(b) plans, SEP plans, SIMPLE retirement accounts, 501(c)(18) trusts, or federal, state, or local plans other than a 457(b) plan.

An inaccurate check box entry could expose the employer to penalties for failure to file and failure to furnish a correct information return. The check box entry affects the employee’s ability to prepare a correct individual income tax return and may affect the IRS from the standpoint of tax administration and compliance enforcement.

If the box is checked for an employee who was not an active participant, the amounts of contributions and tax deductions for an IRA may erroneously be limited or denied for the employee or employee’s spouse.

If the box is not checked and the employee was an active participant, the employee might make disallowed contributions to an individual retirement account or claim excess deductions.

An employee may be an active participant without having made any contributions during the year. For example, an employee is an active participant in a defined benefit plan for any tax year the employee is eligible to participate in the plan.

For a defined contribution plan, such as a 401(k) plan, an employee is an active participant for any tax year that funds are added to the account. The funds may be contributed by the employer or employee. Forfeitures allocated to the employee’s account also count as contributions, and the employee may be unaware of any employer contributions or forfeitures.

Forfeitures are unvested funds left in an employer’s plan after an employee leaves a company. The unvested funds are forfeited by the employee and remain in the 401(k) account. Unvested funds arise from employer contributions, not from employee salary deferrals.

Many employers make employer contributions, matching or otherwise, to their 401(k) plans. Such contributions make the employee an active participant when added to their account. While employee contributions are vested immediately, employer funds frequently have a vesting period during which the employee is precluded from owning the funds for a defined period. Often, this is intended as an incentive for the employee to remain with the company.

When leaving the company, an employee may withdraw or rollover vested funds. However, funds that have not vested are removed from the employee’s account and remain in the employer’s plan. Forfeited funds must be used up by the end of the plan year or the following plan year, depending on the plan’s provisions. The plan may provide options that allow the funds to pay allowable plan expenses, reduce employer contributions, or increase employer contributions to employee accounts.

An employer may also make profit-sharing contributions. This contribution is allocated to all eligible employees, even if they did not have deferrals that year.

For example, an employer plans a $50,000 profit-sharing contribution and has $10,000 of forfeitures in the plan. The employer may contribute $50,000 to the plan, and take a corresponding tax deduction of $50,000, and add the forfeitures to the allocation. This results in an allocation of $60,000 to employee accounts.

Alternatively, the employer could contribute and take a corresponding tax deduction of $40,000 and use the forfeitures to bring the total allocation to $50,000. The employer can claim a $40,000 tax deduction. The $10,000 forfeiture contribution was previously deducted by the employer as plan contributions to former employees and is not deductible as an additional employer contribution. It is simply a reallocation of funds that increases the plan account balances of the remaining employees.

Where such increases in employee accounts occur, employees who did not make salary deferral contributions are still participating in the plan for purposes of the retirement plan check box. The plan administrator or trustee should be able to provide information as to whether additions were applied to specific employee accounts.

This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., or its owners.

Author Information

Patrick Haggerty is the owner of a tax practice in Chapel Hill, N.C., and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

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

To contact the editor on this story: William Dunn at wdunn@bloombergindustry.com