Payroll From Gross to Net (Introduction to Processing Payroll)

By Maria Parry (Published in NJASBO Key Post January 2020)

Payroll is a key responsibility of a School Business Administrator, yet many have little experience in this area. This article outlines a typical school district payroll, including the district agency account (agency), which holds all payroll deductions and transmits them on the employee's behalf to the federal government, state government, etc. This article is just a guide for informational purposes; please check with your auditor or software company for detailed guidance.

 Districts have options regarding payroll. They can outsource to a payroll company, or if keeping it in house, various software programs are available to streamline the process. Although software and outside companies can increase efficiency, a BA still needs to understand the theory, calculations, and regulations behind the data.

Salaries
Income is broken down into two sides: pensionable and non-pensionable (extra) income. Determining which side the monies should be allocated can be a challenge. If you are unsure how to determine if additional pay is pensionable, I recommend calling the State of New Jersey Pension Program (609-292-7524).

Additional pay (stipends, overtime, etc.) has set federal withholding rates. When inputting the additional pay into the payroll system, you can select to have this included as part of the regular check or paid on a separate check. Sometimes it is easier to make the payment on a separate check and attach a copy of any backup you have for the additional pay.

 Starting in July of each year, after all salaries have been approved for the upcoming year, the 10-, 11-, and 12-month salaries should be entered into the system. Once they are entered, have someone else (a different set of eyes) run a report and double-check against the resolution/contract to make sure the information is accurate. When this information is confirmed, it also is a good time to double-check the health benefits withholdings and coverage for all employees.

Overtime/Daily Rate
The calculation for overtime/additional pay is set by contract and also guided by statute. The US Department of Labor states that any hours worked over 40 (not including exempt employees) should be paid at a rate of time and one half. Calculating the hourly/daily rate does vary.
Let's look at a sample (and simple) calculation:

• 10-month employee, salary $20,000, works 9am – 3pm, including lunch. Daily/Hourly rate: 20000/200 days (NJSA 18A 30-6) = $100/day/6 hours = $16.67/hour.

You also should check to see how calculations have occurred in the past – are the days/hours set by contract? Are they in a resolution/policy?

Superintendents and Business Administrators have a mandatory denominator of 260 days (NJAC 6A:23A-3.1-10), where most 10-month employees are 200 days and 12-month are 240 days. Those who are 11-month employees should follow how they are being paid/work.

 If calculations of hourly/daily rates are not clear, consider creating a guide (approved by the board and bargaining units) for such calculations, to avoid any confusion in the future.

Sick/Vacation Pay Upon Retirement/Leave
 The amounts for sick/vacation pay are set by contract/statute. Although there are options regarding payouts (regular check; payment to tax shelter annuity; employer contribution post retirement severance payment to tax shelter annuity), it is most important that you make these payments after the employee has "left the building."

Deductions
At some point there will need to be a calculation for a salary deduction (leave without pay/docked pay). The suggested way is to use the same calculation to get to the daily rate and then multiply it by the number of days not paid. As with additional pay, keeping a copy of the calculation with the payroll check stub should lower the number of questions on payday.

 So, this concludes my tutorial on salary. Now onto agency (deductions). There are two types of deductions: taxes and payroll withholding's.

Taxes
All school employees are subject to FICA (.062), Medicare (.0145), Federal Withholding (per table), State Income Tax, and Unemployment/Family Leave. For many school districts, Disability is not taken out because the district has opted out of the disability fund. FICA and Medicare have employer share responsibilities (same percentages as employees). Employers have unemployment responsibilities as well.

There are limits to deductions which should be pre-loaded into your payroll software, but at a minimum you should know the amounts.

• Payment: Withhold funds and transfer into agency account. Payments are made electronically each pay period. There are quarterly reports due the 30th of the following month after the end of the quarter (March, June, September, and December). Year-end reports are W2's, due before January 31st of each year.

Payroll Withholding's Pension
Most employees should be enrolled in the state pension system. For a new employee, enrollment is done online. If an employee has transferred, the paperwork is completed and sent to the pension system.

There are many moving parts to enroll into the pension system. This link takes you to the employer section of the state pension system, which is a comprehensive site with excellent webinars on enrollment, transfers, reports, and frequently asked questions. Additionally, you can contact the pension system (609-292-7524) with enrollment questions.

The key point about pensions as they relate to payroll is that payroll deductions are not taken out until you receive the deduction paperwork (blue forms) – this is for pension, loans, back pay, etc. Additionally, pension deductions can only be sent to the state in full-month increments. Consequently, if an employee is leaving the district, either the employee has to complete a full month's deduction or is given one deduction back and loses pension credit for that month.

• Payment: Withhold funds (by category – pension/back/arrears/loan/contributory life insurance) and transfer into agency account. Payments are made electronically at the end of each month except the last month of the quarter (more on that in the quarterly section). There are quarterly reports due the 7th of the month following the end of the quarter (March, June, September, and December), so April 7, July 7, etc.

Tax Shelter Annuities
Most districts allow participation in tax shelter annuities (TSAs) - a 403B and 457 pretax (federal only) deduction savings plan. There are federal limits for each plan. Your office likely begins receiving calls in September from representatives of these plans who want to meet with your employees.

Because these plans are regulated, it is a good recommendation to use a third-party administrator (TPA) to manage them. Without the use of a TPA, the district administrator is the point person for signing off on transfers, loans, withdrawals, etc. In 2020, the regulations governing compliance are getting tighter – so if your district does not have a TPA, this might be a good time to explore this option.

• Payment: Withhold funds and transfer into agency account. Payments are made either by manual check, or electronically, at a minimum at the end of each month.

Disability Insurance
As noted earlier, most districts do not participate in disability state withholding's. Most short and long-term private disability employee- or employer-paid insurance is available through companies such as AFLAC. Union members are able to purchase such insurance through companies endorsed by their union. Most of these deductions are not taken during the summer.

If an employee goes on leave without pay, they (the employee) must contact the disability insurance provider to notify them that they want to resume payroll deductions. To keep the lines of communication open, it is a good idea for your office to send an email to the employee asking them to do so.

• Payment: Withhold funds and transfer into agency account. Payments are made either by manual check, or electronically, at a minimum at the end of each month. 

Dues 

NJEA dues vary by type (active, part-time, on leave, etc.). This link provides the type and amounts. When an NJEA member is hired and is eligible to join the NJEA, the union building representative handles completing and remitting the paperwork. Payroll should receive a copy of that paperwork. The NJEA will process the application/transfer and send the completed form to the payroll office. This is the authorization to withhold dues; withholding typically begins the first month of employment. An invoice is sent for reconciliation each month. If there are any changes for dues-paying members, the payroll department completes an activity form that must be submitted to the NJEA explaining why dues are not being remitted.

• Payment: Withhold funds and transfer into agency account. Payments are made either by manual check, or electronically, at the end of each month.

Credit Union 

Employees can participate in a local credit union. This often is a good option for employees if the district does not participate in "summer pay" (summer pay takes 10% of each gross pay as a deduction to equal two months of salary).

• Payment: Withhold funds and transfer into agency account. Payments are made either by manual check, or electronically, each pay period.

Garnishment
From time-to-time, the payroll office may receive information from various agencies, including law enforcement and the IRS, about a payroll garnishment. Typically, this is a set amount per pay or a percentage of each pay (which includes a worksheet to calculate the amount). Follow the payment schedule as it has been set by law enforcement or agency. Provide the employee with a copy of the paperwork so they are aware of the payroll deduction. Do not deviate from the payment schedule unless, or until, you receive paperwork that states that the garnishment has been satisfied.

• Payment: Withhold funds and transfer into agency account. Payments are made either by manual check, or electronically, at the end of each pay period.

Flexible Spending
Flexible spending accounts (FSAs) enable employees to withdraw funds – pretax – to pay for uncovered health care expenditures and dependent care. There are limitations to the amount of money that can be put in each account during the calendar year. As the BA, you must confirm enrollment and the amount of money for each participant, each year. There is a monthly fee for participating in the FSA that is sometimes passed through to the employee. (A new law requires employers to provide a new FSA type account for employees' commuting expenses as of March 1, 2020.)

• Payment: Withhold funds and transfer into agency account. Information on the deductions is transmitted electronically to the FSA website. The funds withheld (and sitting in agency) are transferred monthly to an FSA checkbook if a separate account is maintained by the district.
   Participants receive a debit card (for which the FSA website records the payroll deductions) and, upon use, the monies are deducted from the FSA and notification is sent to the administrator of the account for recording in the FSA checkbook. The fees are paid out of the FSA checkbook by the district.

Health Benefits
These are the employee deductions for health benefits as per the bargaining unit contract.

• Payment: Withhold funds and transfer into the agency account. Payments are made either by manual check, or electronically, at a minimum at the end of each month.

 Although I am sure there are other deductions I have not included, you can see that there is a pattern most of them follow.

Direct Deposit
Effective July 1, 2014 – per njleg.state.nj.us/2012/ Bills/A1000/720_R3.PDF – all employees must participate in direct deposit if the Board passes a resolution to require it. Most payroll systems can split net payroll checks into multiple checking/ savings accounts. With the increase in cyber fraud, I want to note that it is recommended that all payroll changes (especially changing financial institutions) should be done in-person and not through e-mail.

Quarterly Reports
There are four reports that must be completed each quarter. Typically, payroll software makes filing these individual reports more convenient:

• 941 – This covers FICA/Medicare and Federal tax withholding amounts. All four quarters should tie-out to total salaries for W-2 reporting. These reports are due the 30th of the month following the end of the quarter.
• NJ WR30 – This reports New Jersey Income Taxes. The due date is the 30th of the month following the end of the quarter.
  
• NJ 927 – This reports on unemployment/ disability/family leave insurance for New Jersey and is reported electronically with the quarter's payment for the employer share. It is due on the 30th of the month following the end of the quarter.
  
• IROC (Internet Based Report of Contributions) – This is the quarterly pension report and is due the 7th of the month following the end of the quarter. The phone number for assistance is 609-777-2115; personnel are very helpful. The report ties-out withholding's on each pension area (loans, life insurance, etc.) as well as contributions. When you tie-out, but before you transmit, you need to submit the amount due via electronic transfer. When the summary worksheet goes to $0, then you can submit and transmit the IROC.

Annual Reports
There are two additional types of reports to be filed annually. These are:

• W-2/W-3 Forms – These must be provided to employees and filed with the IRS and Social Security Administration by January 31st. The deadline to file them with the State of New Jersey is February 15th.
  
• 1095 Forms – The due date for distributing 1095 forms is March 2, 2020. The due date for filing Forms 1094/1095 B and C with the IRS is February 28, 2020 (if not filing electronically) or March 31, 2020 (if filing electronically). For tax year 2019, the same form 1095 must be filed to the state for New Jersey residents. Deadline for filing to the state electronically, is March 31, 2020 using this link.
  • The Affordable Health Care Act introduced three new tax forms relevant to individuals, employers and health insurance providers. They are forms 1095-A, 1095-B, and 1095-C.
  • The 1095-A is a form provided by health insurance companies participating in the health care exchange. It is a health insurance marketplace statement that is used when a person files their taxes.
  • The 1095-B is provided by employers with fewer than 50 full-time employees, as well as health care insurance providers. This form is used to verify, on your tax return, that you and your dependents have at least minimum essential coverage.
  • The form 1095-C is given to employees by the employer with 50 or more full-time employees. This form provides information of the coverage your employer offered and whether or not you choose to participate.

Additional Reports
The federal Bureau of Labor Statistics Data Collection Center report is due on the 15th of each month, which must include total employees, total female employees, and total faculty employees.
On the 30th of each month, you are required to report all new employees (for child support purposes) to this site.

Final Thoughts
Your auditors will spend time on payroll and agency. Just as a reminder, make sure contracts tie-out to payroll and that you have documentation for everything (including errors).
That's it! If you have any questions/concerns, reach out to your fellow Business Administrators. At some point, we all have experienced something or know someone who can assist you. That is what NJASBO is all about.

Maria Parry is the School Business Administrator for Monmouth Regional High School. She can be reached at mparry@monmouthregional.net.