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Unit
2
Money
Management
CHAPTERS

6 Pay, Benefits, and Working

Conditions

7 Federal Income Tax

8 Budgets and Financial

Records

9 Checking Accounts and

Banking Services

CASE: Robert (Ted) Turner

PROJECT: Assessing Your

Financial Health

112

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ryan_0538449373_pt02, 12/24/8, 1:8, page: 113

Unit 2 begins with an examination of your pay- records. You will also find out about informal and
© Photodisc/Getty Images

check and benefits, trends in the workplace that formal contracts that you enter into daily.
affect your career, and opportunities for advance- Finally, you will learn how to use a checking
ment. Then you will learn about preparing your account, including writing checks, keeping a check-
income tax. book register, and reconciling your account. You will
Next you will study financial management, begin- discover how to choose the right bank and services
ning with preparing budgets and other financial that meet your needs.

113

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Chapter
6
Pay, Benefits,
and Working
Conditions
6.1 Understanding Pay and Benefits

6.2 Work Schedules and Unions

Consider THIS

Enrique just got a job. When he was hired, his employer provided a packet
containing all kinds of information, from union membership to sick pay. He
will receive two weeks of paid vacation every year, after his first year of
employment. The company allows ten paid sick days per year and will grant a
leave of absence in the case of pregnancy or death of a family member. It also
offers a 401(k) plan, which allows employees to make contributions to a savings
account to help plan for retirement. Also provided for employees is a full
package of group health, dental, vision, and life insurance coverage. In addition,
the company has a child-care facility, altered workweeks, and job sharing.
“Wow, I’m going to need to read that entire packet,” Enrique thought to
himself. “There are a lot of things I need to understand.”

114 Unit 2 Money Management

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6.1

Understanding Pay and Benefits

GOALS

Compute payroll deductions and

TERMS
n n gross pay, p. 115 n self-employment tax, p. 121
net pay. n overtime, p. 115 n incentive pay, p. 121
n Identify optional and required n deductions, p. 117 n vested, p. 123
employee benefits. n net pay, p. 117

GROSS PAY, DEDUCTIONS, AND NET PAY

When you take a job, you agree to perform certain tasks in exchange for
regular pay. Gross pay is the total amount you earn before any deductions are
subtracted. If you work for an hourly wage, any overtime pay you earned
during the pay period must be added to your regular pay to determine your
gross pay.

HOURLY WAGES
Figure 6.1 shows a paycheck for Shari Gregson, who works for $8.00 per hour.
Her employer keeps a record of the hours she works. For this pay period, she
worked 40 regular hours. To determine Shari’s pay for regular hours worked,
multiply the pay rate by the number of hours:
Rate
Hours Worked ¼ Gross Pay
$8:00
40 hours ¼ $320:00

OVERTIME
Shari also worked 4 hours of overtime during this pay period. Overtime is
time worked beyond the regular hours. A standard workday is 8 continuous
hours with scheduled paid breaks plus an unpaid lunch period. A standard
workweek is 40 hours in a five-day period of 8 hours each day. According to
the Fair Labor Standards Act, employers must pay hourly employees overtime
at the rate of 1½ times the regular rate. Shari’s overtime rate is $12.00 an hour
(8.00
1½). Her gross pay is computed as follows:
Regular Pay þ Overtime Pay ¼ Gross Pay
40 hours
$8:00 an hour ðregular payÞ $320:00
4 hours
$12:00 an hour ðovertime payÞ þ 48:00
Gross pay $368:00

Shari’s gross pay appears under “Gross” at the bottom left of her paycheck
stub. The letters “YTD” mean “year-to-date.” The amounts on this line are
cumulative totals up to this point in the year.

Chapter 6 Pay, Benefits, and Working Conditions 115

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FIGURE 6.1 Paycheck with Stub

88-0581
Marshall Manufacturing Co. 1120
14 Ault Street, Bates, OR 97817-2341 PAYROLL CHECK

Co. Code Department File No. Clock No. ID Social Security No. TO THE ORDER OF Pay Date Check No.

R&T 000108 43329 501 A 999 00 7426 SHARI GREGSON 02 10 — BELOW

PAY THIS AMOUNT NET PAY

Two hundred forty-four and 34/100 dollars $244.34

SHARI GREGSON
1133 ELM STREET,
BATES, OR 97817-1234 DISBURSING AGENT FOR ABOVE EMPLOYER

BATES BANK
BATES, OREGON
Jermaine Davis
AUTHORIZED SIGNATURE

Marshall Manufacturing Co.

14 Ault Street, Bates, OR 97817-2341

Co. Code Department File No. Fed. Status Name Pay Period Ending Pay Date

R&T 000108 43329 501 A GREGSON, SHARI 02 10 — 02 10 —

Hours Units Rate Earnings Type Deduction Type Deduction Type

4000 800 32000 REG 2500 CR UN

500 1200 4800 OT 1650 H INS
300 UN DUES

This Gross Fed. With. Tax State With. Tax Social Security Medicare
edicare Other Deductions Net Pay
Pay 368 00 30 00 21 00 22 82 5 34 44 50
YTD 2,208 00 180 00 126 00 136 92 32 04 267 00 244 34

SALARY
Perhaps you will work for a salary rather than an hourly wage. Salaried
employees usually do not receive additional pay for overtime work. Therefore,
your gross pay would be the same as your salary.
Your salary may be stated as an annual (yearly) amount. Your employer will
divide the annual salary into equal amounts to be paid each pay period. If you
work for $24,000 a year and are paid monthly, your gross pay per paycheck
will be $2,000 ($24,000  12). If you are paid every two weeks, your gross
pay per paycheck will be $923.08, calculated as follows:
52 Weeks in a Year  2 Weeks per Pay Period ¼ 26 Pay Periods
$24,000  26 Pay Periods ¼ $923:08 per Paycheck
If you were paid twice a month rather than every two weeks, you would
receive only 24 paychecks (12 months in a year
2 paychecks per month).
116 Unit 2 Money Management

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DEDUCTIONS
Amounts subtracted from your gross pay are called deductions.
Some deductions, such as Social Security tax and federal income tax,
are required by law. Other deductions are optional. For example,
you can have your employer deduct an amount to deposit into your
company-sponsored savings account. In Figure 6.1, Shari has
deductions for a credit union payment, health insurance, and union
dues.
Employers are required to keep detailed records of wages earned
and hours worked for inspection by the Department of
Labor. With each paycheck, you will receive a detailed list of all
deductions taken from your gross pay. Optional deductions
may not be withheld without your written consent except by
court order. This does not apply to taxes, Social Security, and
other deductions required by law to be withheld from all
paychecks.

© Photodisc/Getty Images
NET PAY
When all deductions are taken out of your gross pay, the
amount left is your net pay. It is the amount of your
paycheck, which is often referred to as “take-home pay.” It Why would an employer track the number
is the amount you can actually spend as you wish. Stated of hours that an employee works?
mathematically:
Regular Pay ðWages or SalaryÞ þ Overtime Pay ¼ Gross Pay
Gross Pay  Deductions ¼ Net Pay
Figure 6.2 shows Shari Gregson’s withholding sheet. It lists weekly gross pay,
deductions, and net pay. Save your withholding sheets or paycheck stubs that
list the amounts withheld from your gross pay. You can use these to check the
accuracy of the Form W-2 your employer gives you for your income tax
return. Required deductions include federal, state, and local income taxes, as
well as Social Security and Medicare taxes. In Figure 6.1, the deductions for
Shari appear at the bottom of the paycheck stub.

GLOBAL View
Article 7 of Mexico’s Federal and the foreign workers are required to train
Labor Law requires employers the Mexican workers in the specialty. Article 7 is
to employ at least 90 percent not applicable to company directors, admin-
Mexican workers in their enter- istrators, and general managers.
prises. All technical and profes-
sional workers must be Mexican, THINK CRITICALLY
unless there are no Mexican workers
qualified in a particular specialty. In that case, Does Article 7 help or hinder development of
the employer may employ foreign workers, but the Mexican workforce? What might be its
only to the extent of 10 percent of the labor impact on emigration from foreign countries
force engaged in the specialty. The employer to Mexico?

Chapter 6 Pay, Benefits, and Working Conditions 117

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FIGURE 6.2 Employee Withholding Sheet

EMPLOYEE WITHHOLDING SHEET

Employee Name Shari Gregson Social Security Number 999-00-7426

Pay Period: x weekly bimonthly monthly

Number of allowances: 1 married x single

GROSS PAY

1. Regular Wages: 40 hours at $ 8.00 /hr. = $ 320.00

or

2. Regular Salary: =

3. Overtime: 4 hours at $ 12.00/hr. = 48.00

GROSS PAY $ 368.00

REQUIRED DEDUCTIONS

4. Federal Income Tax (use tax tables) $ 30.00

5. State Income Tax (use tax tables) 21.00

6. Social Security Tax (use 6.2% gross pay, up to $87,900) 22.82

7. Medicare Tax (use 1.45% gross pay) 5.34

OTHER DEDUCTIONS

8. Insurance 16.50

9. Union Dues 3.00

10. Credit Union 25.00

11. Savings

12. Retirement

13. Charity

14. Other:

TOTAL DEDUCTIONS (total lines 4 through 14) $ 123.66

NET PAY (subtract total deductions from gross pay) $ 244.34

The amounts to be withheld are determined from tax withholding tables.

Figure 6.3 shows part of the weekly withholding table for the state of Oregon.
Figure 6.4 shows part of the weekly federal withholding tax table. If you were
paid monthly, you would use tax tables provided for a monthly pay period.
To determine the proper amount to withhold, first identify the appropriate
withholding table for your pay period. For example, Shari Gregson in Figure 6.2
is being paid weekly, so you can use the weekly table in Figure 6.3 to find her
state withholding. Move your finger down the left side of the table to the range
that includes the employee’s gross pay. Shari’s gross pay of $368.00 falls in the
table’s range of $360–$380. Then run your finger to the right until you get to

118 Unit 2 Money Management

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FIGURE 6.3 State Tax Withholding Table—Weekly Payroll

Weekly payroll period (Oregon)

Amount of tax to be withheld
Wage Number of Withholding Allowances
But Two or Less Three or More
At Less Single Married Single or Married
Least Than 0 1 2 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
0 – 20 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
20 – 40 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
40 – 60 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
60 – 80 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
80 – 100 3 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0
100 – 120 4 1 0 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0
120 – 140 5 2 0 3 0 0 0 0 0 0 0 0 0 0 0 0 0 0
140 – 160 7 4 1 4 1 0 0 0 0 0 0 0 0 0 0 0 0 0
160 – 180 8 5 2 5 2 0 0 0 0 0 0 0 0 0 0 0 0 0
180 – 200 9 7 4 6 3 0 0 0 0 0 0 0 0 0 0 0 0 0
200 – 220 11 8 5 7 4 1 0 0 0 0 0 0 0 0 0 0 0 0
220 – 240 12 10 7 9 6 3 0 0 0 0 0 0 0 0 0 0 0 0
240 – 260 14 12 9 10 7 4 1 0 0 0 0 0 0 0 0 0 0 0
260 – 280 16 13 11 11 9 5 2 0 0 0 0 0 0 0 0 0 0 0
280 – 300 17 15 12 12 10 7 4 0 0 0 0 0 0 0 0 0 0 0
300 – 320 19 16 14 14 11 8 5 2 0 0 0 0 0 0 0 0 0 0
320 – 340 20 18 15 15 12 10 6 3 0 0 0 0 0 0 0 0 0 0
340 – 360 22 19 17 16 14 11 8 5 1 0 0 0 0 0 0 0 0 0
360 – 380 23 21 19 18 15 12 10 6 3 0 0 0 0 0 0 0 0 0
380 – 400 25 23 20 19 17 14 11 8 5 2 0 0 0 0 0 0 0 0
400 – 420 26 24 22 21 18 16 13 10 7 4 1 0 0 0 0 0 0 0

the proper number of allowances and marital status. Shari’s form shows that
she is single and claims 1 allowance. In Figure 6.3, the number that falls in the
column for a single person with 1 allowance, making between $360 and $380,
is $21. Notice that $21 shows in the state income tax line on Shari’s with-
holding sheet.
Following the same process, you can find Shari’s federal withholding from
Figure 6.4. Try it. Did you find the number $30 in the table, as shown on
Shari’s withholding sheet for federal income tax?
The Social Security deduction is withheld at the standard rate of 6.2 percent
of the first $102,000 (for 2008). The Medicare tax deduction is withheld at
the rate of 1.45 percent of all pay earned. Employers must contribute
matching amounts into each employee’s Medicare and Social Security
accounts. For example, Figure 6.2 shows Shari’s Medicare tax withholding as
$5.34 this week. As a result, Shari’s employer will also contribute $5.34 into
Shari’s Medicare account. Congress periodically increases the withholding rate
and maximum amount as needed to keep enough tax money coming in to pay
Social Security benefits.
In addition to required deductions, the optional deductions an employee has
authorized will be subtracted from gross pay to arrive at net pay. The most
common of these deductions are insurance payments, union dues, credit
union payments, savings deposits, retirement contributions, and charitable
contributions.
Chapter 6 Pay, Benefits, and Working Conditions 119

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FIGURE 6.4 Federal Tax Withholding Table—Weekly Payroll

SINGLE Persons—WEEKLY Payroll Period

(For Wages Paid in 2008)

If the wages are – And the number of withholding allowances claimed is —

At least But less 0 1 2 3 4 5 6 7 8 9 10

than
The amount of income tax to be withheld is —
$0 $55 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
55 60 1 0 0 0 0 0 0 0 0 0 0
60 65 1 0 0 0 0 0 0 0 0 0 0
65 70 2 0 0 0 0 0 0 0 0 0 0
70 75 2 0 0 0 0 0 0 0 0 0 0
75 80 3 0 0 0 0 0 0 0 0 0 0
80 85 3 0 0 0 0 0 0 0 0 0 0
85 90 4 0 0 0 0 0 0 0 0 0 0
90 95 4 0 0 0 0 0 0 0 0 0 0
95 100 5 0 0 0 0 0 0 0 0 0 0
100 105 5 0 0 0 0 0 0 0 0 0 0
105 110 6 0 0 0 0 0 0 0 0 0 0
110 115 6 0 0 0 0 0 0 0 0 0 0
115 120 7 0 0 0 0 0 0 0 0 0 0
120 125 7 0 0 0 0 0 0 0 0 0 0
125 130 8 1 0 0 0 0 0 0 0 0 0
130 135 8 1 0 0 0 0 0 0 0 0 0
135 140 9 2 0 0 0 0 0 0 0 0 0
140 145 9 2 0 0 0 0 0 0 0 0 0
145 150 10 3 0 0 0 0 0 0 0 0 0
150 155 10 3 0 0 0 0 0 0 0 0 0
155 160 11 4 0 0 0 0 0 0 0 0 0
160 165 11 4 0 0 0 0 0 0 0 0 0
165 170 12 5 0 0 0 0 0 0 0 0 0
170 175 12 5 0 0 0 0 0 0 0 0 0
175 180 13 6 0 0 0 0 0 0 0 0 0
180 185 13 6 0 0 0 0 0 0 0 0 0
185 190 14 7 0 0 0 0 0 0 0 0 0
190 195 14 7 1 0 0 0 0 0 0 0 0
195 200 15 8 1 0 0 0 0 0 0 0 0
200 210 16 9 2 0 0 0 0 0 0 0 0
210 220 17 10 3 0 0 0 0 0 0 0 0
220 230 19 11 4 0 0 0 0 0 0 0 0
230 240 20 12 5 0 0 0 0 0 0 0 0
240 250 22 13 6 0 0 0 0 0 0 0 0
250 260 23 14 7 0 0 0 0 0 0 0 0
260 270 25 15 8 1 0 0 0 0 0 0 0
270 280 26 16 9 2 0 0 0 0 0 0 0
280 290 28 18 10 3 0 0 0 0 0 0 0
290 300 29 19 11 4 0 0 0 0 0 0 0
300 310 31 21 12 5 0 0 0 0 0 0 0
310 320 32 22 13 6 0 0 0 0 0 0 0
320 330 34 24 14 7 0 0 0 0 0 0 0
330 340 35 25 15 8 1 0 0 0 0 0 0
340 350 37 27 17 9 2 0 0 0 0 0 0
350 360 38 28 18 10 3 0 0 0 0 0 0
360 370 40 30 20 11 4 0 0 0 0 0 0
370 380 41 31 21 12 5 0 0 0 0 0 0
380 390 43 33 23 13 6 0 0 0 0 0 0
390 400 44 34 24 14 7 1 0 0 0 0 0
400 410 46 36 26 15 8 2 0 0 0 0 0
410 420 47 37 27 17 9 3 0 0 0 0 0

SELF-EMPLOYED REQUIREMENTS
People who are self-employed do not have employee deductions and with-
holdings. Instead, they must make estimated tax payments quarterly (four times
during the year). To do this, self-employed people estimate the total amount
they will owe in taxes for the coming year. They divide this number by 4 to
determine the amount to pay each quarter. The IRS credits each payment
toward their tax obligation for the year.
Like other workers, self-employed people must pay Social Security tax and
Medicare tax. However, since self-employed people are both employee and
employer, they must pay both the employee and employer-matching contributions
120 Unit 2 Money Management

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to Social Security and Medicare. Thus, for Social Security tax, self-employed
people pay 12.4 percent of gross income (6.2%
2). For Medicare tax, they
pay 2.9 percent (1.45%
2). The total of 15.3 percent is called the self-
employment tax. It is the total Social Security and Medicare tax, including
employer-matching contributions, paid by people who work for themselves.

BENEFITS AND INCENTIVES

Many employers offer benefits, which are forms of employee compensation in
addition to pay. Common benefits include health insurance, retirement sav-
ings plans, pension plans, paid sick leave and vacations, and profit sharing.
Some of these benefits are required by law (such as unemployment compen-
sation, workers’ compensation, and matching Social Security and Medicare
taxes). Others are at the option of the employer. Benefits are often offered to
full-time employees only.

PROFIT SHARING
Profit sharing is a plan that allows employees to receive a portion of the
company’s profits at the end of the corporate year. The more profits the
company makes, the more the company has to share with employees. Profit
sharing is considered incentive pay—money offered to encourage employees
to strive for higher levels of performance. Employers offer profit sharing
because it links part of employee pay with company profit goals, giving
employees an incentive to work harder and reduce inefficiencies.

PAID VACATIONS AND HOLIDAYS

Most businesses provide full-time employees with a set amount of paid
vacation time. This means that while you are on vacation, you are paid as
usual. It is not uncommon to receive a week’s paid vacation after a year of full-
time employment, two weeks after two years, three weeks after five years’
employment, and so on.
A benefit that you are likely to receive for any full-time job is paid time off for
holidays. Paid holidays typically include:
n Christmas
n Thanksgiving
n Fourth of July
n Labor Day
n Memorial Day
Other holidays that many companies consider paid holidays are New Year’s
Day, Veterans Day, Martin Luther King Day, and Presidents Day. An
employee required to work on a holiday is usually paid double or more than
double the regular hourly rate of pay.

EMPLOYEE SERVICES
Employee services are the extras that companies offer in order to improve
employee morale and working conditions. Many companies offer employee
discounts, social and recreational programs, free parking, tuition reimbursement
for college courses, wellness programs, and counseling for employee problems.
Chapter 6 Pay, Benefits, and Working Conditions 121

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CHILD CARE
Child care is a major issue for working parents. Many companies provide on-
site child-care facilities as well as coverage of child-care expenses as a part of
employee benefit packages. In years to come, federal laws are likely to include
more child-care incentives for employers of working parents.

SICK PAY
Many businesses also provide an allowance of days each year for illness, with
pay as usual. It is customary to receive three to ten days a year as “sick days”
without deductions from pay.

LEAVES OF ABSENCE
Some employers allow employees to temporarily leave their jobs (without
pay) for certain reasons, such as having children or completing their education,
and return to their jobs at a later time. While a leave of absence may be
unpaid, it has an important advantage: it gives job security and permits you to
take time off for important events in your life. In addition, employers
sometimes allow personal days (absences for personal reasons) so that
employees can attend to important matters without calling in “sick” when they
aren’t sick.

INSURANCE
Most large companies provide group insurance plans for all employees.
(All kinds of group insurance are covered in more detail in Chapter 27.)
A few plans are paid for almost
entirely by the employer, as a part
of employee compensation. Most
plans require that employees pay
for part of their own coverage,
as well as to cover dependents
(spouse and children).
n Group Health Insurance. Most
employers provide full-time
employees with one or more
options for group health insurance
plans.
n Group Life Insurance. Many
companies offer group life
insurance. However, when you
leave your current employment,
© Image Source/Getty Images

the group policy may not go

with you. The employer may
pay an amount each month for
standard coverage for each
employee. Employees who want
additional coverage often can
pay for it through payroll
What types of group insurance plans do employers usually offer? deductions.
122 Unit 2 Money Management

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n Group Dental Insurance. Most dental plans provide a maximum benefit

per year per family member. Orthodontia (braces) often is not covered.
n Group Vision Insurance. Vision insurance covers the cost of prescription
lenses and eye examinations once every few years.

BONUSES AND STOCK OPTIONS

Bonuses are incentive pay based on quality of work done, years of service, or
company sales or profits. Holiday bonuses are often based on years of service.
If a company reaches its sales and profit goals in a year, employees may receive
bonuses to reward their efforts in achieving those goals.
Stock options give employees the right to buy a set number of shares of the
company’s stock at a fixed price. The employees benefit as long as the stock
price goes up. Many types of stock option plans exist.

PENSION AND SAVINGS PLANS

Some employers provide pension plans for retirement. Pension plans are
funded by the employer. When an employee retires, he or she receives a
monthly check. Employees become vested (entitled to the full retirement
account) after a specified period of time, such as five years.
Employer-sponsored retirement savings plans include the 401(k) for private
employers or a 403(b) for government employers. Employers do not bear the
full cost of these plans, and as a result, many companies are switching from
pensions to these savings plans. Employees put money aside in these accounts;
the employer may also (but is not required to) contribute money to the
employee’s account. Generally, withdrawing funds from savings plans before
retirement will result in financial penalties. However, some 401(k) plans allow
employees to take out loans without penalty based on certain restrictions.

TRAVEL EXPENSES
Companies that require employees to travel in the course of their work often
provide a company car or a mileage allowance if employees use their own car.
Generally, car insurance, gasoline, and repair and maintenance expenses for
the company automobile are also provided. While out of town, employees may
receive a daily allowance to cover their hotel, meals, and other travel expenses.
In some cases, expenses may be charged to a company credit card. Other
times, employees will have to submit an expense report along with receipts for
reimbursement at a later date.

EVALUATING EMPLOYEE BENEFITS

Many of these optional benefits are of great value to employees. Benefits
generally are not taxable to employees (except bonuses and other benefits paid
in cash), yet they provide valuable coverage and advantages. Generally, large
companies provide more extensive optional benefits than do small companies.
In recent years, employee benefits have been expanded to meet the needs of
different life situations. Cafeteria-style employee benefits are programs that allow
workers to select from a range of employer-paid benefits up to a certain total
value, based on personal needs. Flexibility in the selection of benefits has
become quite common. For example, a married employee with children might
opt for increased life and health insurance, while a single parent may choose
child-care services.
Chapter 6 Pay, Benefits, and Working Conditions 123

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Planning a Career in... Payroll

Payroll clerks may work in human What's it like to work in. . .

resource departments, or they may Payroll
work for large corporations that
Carolyn works a typical 40-hour
specialize in outsourced payroll
week job. She sometimes works
services. Wherever they work, they
overtime if a new payroll contract is
perform vital functions—ensuring
signed. As a payroll specialist for a
that employees get paid on time and
large corporation that provides out-
that their pay is accurate.
sourced payroll services, Carolyn
Payroll clerks are found in or for
knows the importance of doing
every business or industry. Workers
accurate work and meeting
train on the job and have very good
deadlines.
computer skills. They process large
Her cubicle looks a lot like
amounts of data and perform a
that of the other 45 workers on her
variety of tasks, from entering data
floor of the office building. It’s clean,
to preparing federal tax forms (for
pleasant, and comfortable. Her
reporting payroll and its deductions).
computer is state-of-the-art. She
The work of payroll clerks is
knows the best and newest software
more difficult with the advent of
programs available in the payroll
new types of work benefits, from
industry.
401(k) accounts to HSAs (Health
Carolyn understands the need
Savings Accounts). They must
for privacy and confidentiality. Her
always be on top of change.
work involves very sensitive infor-
Employment Outlook mation about employees for many
companies.
l Slower than average employ-
In her spare time, Carolyn is
ment growth is expected.
preparing to take an exam to
Job Titles become certified. A CPP (certified
payroll professional) is a designation
l Payroll clerk
that will bring her a raise and pos-
l Timekeeping clerk sibly a promotion. After three years
l Payroll office specialist on the job, she is eager to move into
a supervisory role.
Needed Skills
l A high school diploma or GED What About You?
is required. Do you have an aptitude for math
l Excellent computer skills and an and accounting? Do you like learn-
aptitude for math are needed. ing to use new computer programs?
l Good interpersonal and com- Would you consider a career in
munication skills are helpful. payroll?

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6.1

Assessment
KEY TERMS REVIEW
Match the terms with the definitions.
1. Time worked beyond the regular
hours a. deductions
2. Money offered to encourage b. gross pay
employees to strive for higher
c. incentive pay
levels of performance
d. net pay
3. Amounts subtracted from gross pay
e. overtime
4. The total amount earned before
f. self-employment tax
any deductions are subtracted
g. vested
5. The amount left after deductions
are taken out of gross pay
6. The point at which employees have full rights to their retirement
accounts
7. The total of 15.3 percent for Social Security and Medicare tax paid by
people who work for themselves

CHECK YOUR UNDERSTANDING

8. What is included in gross pay? List optional and required deductions from
gross pay.
9. What are some employee benefits and incentives provided at many
workplaces?

APPLY YOUR KNOWLEDGE

10. Based on the following information, compute gross pay: Regular hours
worked are 40; overtime hours worked are 5. Regular rate of pay is
$8.55 per hour.

THINK CRITICALLY

11. Some people work for companies because they want lots of overtime.
Other people avoid jobs that require overtime. While overtime hours pay
1½ times the regular rate, they take away personal time. What is your
position regarding overtime? Explain your answer.
12. Employee benefits are worth a large sum and, in some cases, are more
important to workers than the amount of take-home pay. List benefits
that are of value to you, in order of importance. Give a reason for each
choice.

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6.2

Work Schedules and Unions

n Describe flexible work arrange- n flextime, p. 126 n labor union, p. 128

GOALS

TERMS
ments for employees. n compressed workweek, n collective bargaining, p. 128
n Describe the role of unions and p. 127 n seniority, p. 128
professional organizations. n job rotation, p. 127 n lobbying, p. 129
n job sharing, p. 127

FLEXIBLE WORK ARRANGEMENTS

Many employers are responding to the changing lifestyles and needs of their
employees. By designing more flexible jobs, employers can reduce absenteeism,
burnout, and turnover.

ALTERED WORKWEEKS
Many firms have experimented with altered workweeks to get away from the
standard eight-hours-a-day, five-days-a-week work schedule.

Flextime
Flexible scheduling, or flextime, is a type of work schedule that allows
employees to choose their working hours within defined limits. Flextime plans
generally require all employees to be present during a core time period.
Employees can then choose the rest of their work hours around this core
period. Employees negotiate their starting times, usually within a three- to
four-hour period. They may begin working as early as 6 a.m. or as late as
9 or 10 a.m.
Even though starting times are flexible, most employers require employees to
work a set number of hours per day. For example, a person arriving at 6 a.m.
would be finished by 3 p.m. (having a one-hour unpaid lunch break), while a
person arriving at 10 a.m. would be finished at 7 p.m. The core time period is
a crucial time during the day when all employees must be working. This core
period may be between 10 a.m. and 3 p.m., the peak hours for business
activity.
Flextime is good for business because employees are responsible for working a
full day regardless of when they arrive on the job. Employees experience
greater job satisfaction because flextime helps them fulfill their personal needs.
For example, employees who need to pick up children from school would find
it convenient to be off at 3 p.m. Flextime also allows for the scheduling of
medical or other appointments, and it reduces stress caused by the pressure of
meeting strict work schedules.

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Compressed Workweek
A compressed workweek is a work schedule that fits the normal 40-hour
workweek into less than five days. The typical compressed workweek is ten
hours a day for four days, followed by three days off. Some types of work are
better suited to a compressed schedule than are others. For example, some
kinds of strenuous physical or mental work are probably not suitable for a
compressed workweek.

JOB ROTATION
Job rotation is a job design in which employees are trained to do more than one
specialized task. Employees “rotate” from one task to another. Job rotation gives
employees more variety in their work and allows them to use different skills. It
reduces boredom and burnout, leading to greater job satisfaction. A major
advantage of job rotation for both employer and employee is that information and
ideas are freely exchanged among employees, so that everyone knows how to do
each task. If one worker is absent, another can take over and keep the work flowing.

JOB SHARING
Job sharing is a job design in which two
people share one full-time position. They
split the salary and benefits according to
each person’s contributions. Job sharing is
especially attractive to people who want
part-time work. By satisfying employees’
needs for more personal time, job sharing
reduces absenteeism and tardiness, lowers
fatigue, and improves productivity.

PERMANENT PART-TIME
Many employees choose to work only part
time (16–25 hours a week). Companies can
save on salary and benefits by hiring per-
© Digital Vision/Getty Images

manent part-time employees. Part-time

work usually provides some benefits to the
employee, such as job security, while allow-
ing freedom to spend more time away from
work. Parents with small children, older
employees, and others may find that per-
manent part-time work best meets their
needs. Why would a worker want to participate in job sharing?

TELECOMMUTING
Advances in technology have made telecommuting possible. Telecommuters
can work at home or on the road and stay in contact with their manager and
coworkers through e-mail, fax, and cell phone. They may participate in
meetings through videoconferencing technology, allowing them to see and
interact with other meeting participants. Employees who telecommute often
do computer-related work, such as data entry, Web design, information
processing, or software development. Working at home is convenient and
gives the worker flexibility. Telecommuting does not work well in jobs that
Chapter 6 Pay, Benefits, and Working Conditions 127

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require frequent face-to-face interaction among employees or that require

employees to work together in one place to create a product.

LABOR UNIONS AND PROFESSIONAL

ORGANIZATIONS
Many jobs involve union membership or participation in a professional
organization as a requirement of employment. Unions are groups of people
joined together for a common purpose. A labor union is a group of people
who work in the same or similar occupations, organized for the benefit of all
employees in these occupations.

FUNCTIONS OF UNIONS
Labor unions have four major functions:
n Recruit new members
n Engage in collective bargaining
n Support political candidates who support members’ interests
n Provide support services for members
Unions support their members by helping to keep them employed, negoti-
ating wages and working conditions, providing credentials for job-seeking
employees, and providing the training members need to obtain and keep jobs.
The main function of unions is collective bargaining, which is the process
of negotiating a work contract for union members. Terms of the contract set
working conditions, wages, overtime rates, hours of work, and benefits. The
contract also spells out a grievance procedure. A grievance is a formal com-
plaint, by an employee or by the union, that the employer has violated some
aspect of the work contract.
Work contracts often provide for seniority rights. Seniority refers to the
length of time on the job and is used to determine transfers, promotions, and
vacation time according to most union contracts. Under this policy, the longer
you work for an employer, the more job security you have. If layoffs become
necessary, the most recent hires will
be the first to lose their jobs.
When the union and employer can-
not agree on the terms of a new con-
Starbucks Coffee Company is the largest coffee chain in tract, the dispute can be mediated.
the world. The Starbucks Workers Union is an organization Through mediation, a neutral third
of Starbucks employees united to improve their wages and party (the mediator or arbitrator) helps
working conditions. Access [Link]/school/ the two parties reach a compromise. If
pfinance/mypf and click on the link for Chapter 6. Browse they still cannot agree, the union may
the union home page and list some of the union’s specific decide to strike, or refuse to work until
goals. With which larger labor organization is the Starbucks an agreement is reached.
Workers Union affiliated? (Hint: Click the About Us link at
the left of the home page.) Do you think Starbucks workers TYPES OF UNIONS
are justified in wanting to unionize? Explain.
Unions are self-governing organ-
izations that can be classified into three
[Link]/school/pfinance/mypf
types: craft unions, industrial unions,
and public-employee unions. Elected
union leaders often work full time in
128 Unit 2 Money Management

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their positions. Unions often employ their own

lawyers, doctors, economists, educators, and public
relations officials. Dues collected from members pay
for the services of these professionals.
Membership in a craft union is limited to those
who practice that craft or trade (for example,
bricklayers, carpenters, or plasterers). Major craft
unions exist in the building, printing, and mari-
time trades, and for railroad employees.
Members of industrial unions are skilled, semi-
skilled, or unskilled employees in a particular
place, industry, or group of industries. Examples
include the AFL-CIO, Teamsters, and United Auto
Workers. Most of this country’s basic industries
(steel, automobiles, rubber, glass, machinery, and
mining) are heavily unionized.
Municipal, county, state, or federal employees

© Photodisc/Getty Images
such as firefighters, teachers, and police officers
may organize public-employee unions. These unions
are organized much like craft and industrial unions
except that they generally do not hire outside
officers. Members serve as union representatives
and officers, sometimes with pay from union dues.
What kinds of workers could be members of a craft union?

PROFESSIONAL ORGANIZATIONS
A professional organization consists of people in a particular occupation that
requires considerable training and specialized skills. Professional organizations
also collect dues from members and provide support services. Notable pro-
fessional organizations include the following:
n American Bar Association (for lawyers)
n American Medical Association (for doctors)
n National Education Association (for educators)
In some cases, membership in a professional organization is required. For
example, the IMA (Institute of Management Accountants) administers a
national exam for the CMA (certified management accountant), but individual
state Boards of Accountancy rather than the AICPA (American Institute of
Certified Public Accountants) administer the CPA (certified public accoun-
tant) exam. Both the IMA and the AICPA provide most other functions of a
professional organization.
Professional organizations provide the following types of services for members:
n Establish and maintain professional standards
n Administer exams, accreditations, and admission requirements
n Publish professional journals to help keep members up to date
n Provide pension, retirement, and insurance benefits for members
n Participate in political action activities, such as lobbying, which is an
attempt to influence public officials to pass laws and make decisions that
benefit the profession

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ISSUES IN YOUR WORLD

STARTING A SUMMER BUSINESS

It’s the American dream—owning your own business and working for yourself. As a
student in high school, you can also share a part of that dream by starting a summer
business. You’ll gain valuable experience, know what it’s like to work independently,
and maybe even pave the way for owning your own company in the future.
If a summer business sounds exciting to you, consider these questions:
n Do you have a skill that you could offer to others, such as light housekeeping,
mowing lawns, or delivering newspapers?
n Can you make and/or sell a product that others would be interested in buying—
for example, flower planters, gift baskets, or crafts?
To start a summer business, here are some steps to take.
n Get organized. Capture your business idea on paper. Write down what you wish
to accomplish and how to finance it.
n Talk with people who can help you get started. These people may be parents,
relatives, friends, or others who can assist you with ideas, financing, and/or
finding potential customers.
n Decide how to advertise your business and find customers. Will you go door
to door? Place an ad in the paper? Sometimes you have to spend money to make
money. Can you save some money between now and summer to give you that
needed cash?
n Start small and build a solid customer base. When someone places trust in you
and hires you to provide a product or service, do a great job. Your business will
grow from word of mouth.
n Keep good records. Keep track of money you spend, money you earn, and who
owes you money.
n Give good value to your customers. Provide a quality product or service and take
pride in your work.
n Keep a list of what went well and what went wrong. You can learn from your
past experience.

THINK CRITICALLY

1. Have you ever wanted to own your own small business? If so, what type of
business would you like to have?
2. Do you know people who own their own business? If so, ask how they got
started. If not, go into a small business and ask the owner to answer those
questions for you. What advice did you receive?

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6.2

Assessment
KEY TERMS REVIEW
Match the terms with the definitions. Some terms may not be used.
1. A policy where the longer you work
for an employer, the more job a. collective bargaining
security and rights you have
b. compressed work-
2. A schedule that allows employees to week
choose their working hours within
c. flextime
limits
d. job rotation
3. An attempt to influence public offi-
cials to pass laws and make decisions e. job sharing
that benefit a particular group f. labor union
4. The process of negotiating a work g. lobbying
contract for union members h. seniority
5. A job design in which employees
are trained to do more than one
specialized task
6. A work schedule that fits 40 hours of work into less than five days
7. A group of people who work in the same or similar occupations,
organized for the benefit of all employees in these occupations

CHECK YOUR UNDERSTANDING

8. Explain what is meant by an altered workweek. Give several examples.
9. Name several types of labor unions. What is the purpose of a labor union?

APPLY YOUR KNOWLEDGE

10. Interview a person who is working full time and belongs to a labor union
or a professional organization. Ask what benefits members receive and
what it costs to participate.

THINK CRITICALLY

11. Today’s workers may be offered flexible work arrangements such as

flextime, compressed workweek, job rotation, job sharing, permanent
part-time status, or telecommuting. Why do you think employers offer
these alternatives to their employees?
12. Compare and contrast flextime, a compressed workweek, job rotation,
and job sharing. List the advantages and disadvantages of each. At which
stage in life would you want to have one or more of these options?

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Chapter Assessment
SUMMARY

6.1
n Gross pay includes your regular pay (wages or salary) plus overtime wages
earned during the pay period.
n Deductions (both required and voluntary) are subtracted from gross pay
to determine net pay—the money you actually take home.
n Self-employed people pay both the employee and employer portions of
Social Security and Medicare taxes.
n Benefits in addition to pay may include paid time off, employee services,
child care, sick pay, leaves of absence, insurance plans, and retirement
plans.
n Employees become vested in pension plans and employer-funded savings
plans after they have worked a specified number of years for the
company.
n Incentive pay offered to encourage employees to strive for higher levels of
performance may include profit sharing, bonuses, and stock options.
n Cafeteria-style plans allow employees to choose the benefits that best
meet their needs.
6.2
n Flextime, a compressed workweek, job rotation, job sharing, permanent
part-time jobs, and telecommuting offer employees flexibility.
n Labor unions—including craft unions, industrial unions, and public-
employee unions—use collective bargaining to negotiate the terms of
work contracts with employers on behalf of their members.
n Negotiated work contracts often provide for seniority rights.
n Professional organizations serve people in highly skilled occupations.
These organizations maintain standards and keep members current in
their fields.
n Through lobbying, professional organizations try to influence public
officials to take political action that benefits the profession.

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APPLY WHAT YOU KNOW

1. How much must an employer pay an hourly employee for hours worked
beyond a regular workweek, assuming a regular rate of pay of $12 per
hour and 16 overtime hours?
2. Using the payroll tax withholding tables in Figures 6.3 and 6.4, find the
state and federal withholding amounts for each of the following cases:
n For a single person, one allowance, who made $109 last week
n For a single person, no allowances, who made $222 last week
n For a single person, three allowances, who made $291 last week
3. Compute the self-employment taxes for a self-employed person who
made $40,000 this year. Separate the Social Security and Medicare
components.
4. Visit the Social Security Administration online at [Link] and look
up the current-year Social Security changes. List the maximum taxable
earnings for Social Security and for Medicare, and the current tax rate
on earnings.
5. Visit the American Medical Association online at [Link],
click on the About AMA link, and view its mission and what it hopes to
accomplish. Who is encouraged to join the association? How do members
benefit? What are the AMA’s primary goals?
6. Visit the American Bar Association online at [Link] and list or
print out the goals of the association.

MAKE ACADEMIC CONNECTIONS

7. Research Visit the National Education Association (NEA) online at

[Link]. Click on an article at the home page and read about a
current concern or direction that is the focus of the NEA. Write a report
that explains the purpose of its web site, the mission of the NEA, and
what services are available to members.
8. International Studies Perform Internet research on unions and
professional organizations in other countries, including one country in
Europe and one country in another continent. Find out how working
conditions compare in countries that do and do not have organized
labor.
9. Math Prepare an employee withholding sheet similar to the one shown
in Figure 6.2, using the following information: Mike Anderson, whose
Social Security number is 999-00-9962, is paid weekly. He is single and
has one withholding allowance. He works in Oregon (use Figures 6.3
and 6.4 to determine his income tax withholdings). He worked
40 hours at his regular rate of $7.70 an hour, and 6 overtime hours last
week. In addition to required deductions, he had $22 for insurance,
$12 for union dues, and $10 for charitable contributions withheld
from his paycheck.

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SOLVE PROBLEMS AND

EXPLORE ISSUES
10. Tatum Gibb works for a weekly paycheck. She is single and claims no
allowances. Last week she worked five days for a total of 44 hours. Her
regular rate of pay is $8.40 an hour. In addition to withholding for
federal income tax, state income tax (use Figures 6.3 and 6.4), Medicare,
and Social Security, Tatum also has insurance premiums of $16 a week
withheld and puts 6 percent of her gross pay into a retirement account.
Compute her gross pay, deductions, and net pay.
11. Bret Countryman receives a weekly paycheck. He is single and claims
one allowance. Last week, he worked five days for a total of 48 hours.
His regular rate of pay is $7.80 an hour. In addition to required
deductions, he has $10 a week deducted for his credit union account
and gives $2 a week to a charity fund. Compute his gross pay, deductions,
and net pay.
12. Alina Delgado works for herself. She estimates that her gross income this
year will be $44,000, and she will owe about $12,000 in federal taxes.
How much should she pay when she files each quarterly tax return? How
much Social Security tax and Medicare tax will she owe for the year?
What is the total amount of Alina’s self-employment tax?
13. Tone Chin works for an annual salary and is paid every two weeks. His
annual salary is $20,700. How much is his gross pay for each paycheck?
14. Andrea Ghani makes an annual salary of $31,200. However, she is paid
monthly. How much is her gross pay for each paycheck?
15. Many businesses do not wish to have labor unions at their companies.
While legally they cannot forbid them, they offer wage rates that are
equal to or higher than union wages, thus giving workers little reason to
want a union. The workers enjoy the same benefits as their unionized
colleagues without having to pay union dues. Employees in such companies
are called “freeloaders,” because they benefit from unions but do not
help pay for them. Would you want to join a union if you could avoid
it (thus having more take-home pay)? Why or why not?

EXTEND YOUR LEARNING

16. Ethics Lobbying is often thought to be a legalized form of bribing public

officials. Some groups, such as the American Medical Association and
the National Education Association, do extensive lobbying of legislators,
at both the state and federal levels. Some citizens feel this is an unfair
use of political power. As individuals, they cannot afford to hire a lob-
byist to represent them to gain influence. They argue that big unions and
professional organizations shouldn’t be able to do so either. Do you
agree or disagree? What ethical issues are involved?

For related activities and links, go to [Link]/school/pfinance/mypf

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