1. Implementing Payroll for India
  2. How Prorated Earnings and Deductions are Calculated

How Prorated Earnings and Deductions are Calculated

You can select from a number of different proration conversion rules to calculate standard or supplemental earnings. Select the proration conversion rule when you create an earnings or deduction element using the Manage Elements task.

You can also calculate prorated earnings based on calendar days or work schedules.

This topic covers:

  • How deductions are calculated

  • How prorated earnings are calculated

  • Examples of earnings calculation based on calendar days

  • Example of earnings calculation based on work schedule

How Deductions Are Calculated

Typically, you don't prorate deductions, such as deductions based on a percentage of earnings. You might prorate fixed rate deductions, such as voluntary deduction for a fitness center membership. In most cases, use the predefined global proration formula for deductions (GLB_DEDN_PRORATION). For this formula the proration value is the periodic value multiplied by the number of calendar days in the proration period. This figure is then divided by the number of calendar days in the payroll period.

How Prorated Earnings are Calculated

Creating a recurring earnings element automatically associates it with a predefined proration formula (GLB_EARN_PRORATION). The proration formula determines how to prorate earnings in the proration period based on the proration calculation method you select.

As a guideline the global formula doesn't prorate:

  • Nonrecurring elements

  • Earnings elements with a calculation rule of unit multiplied by rate, if rate and hours are entered in the element entry

Note:

Some predefined legislations provide a different default proration formula and rules.

These examples show how proration calculations are performed on earnings calculations, based on:

  • Calendar days

  • Work schedules

Example: Earnings Calculation Based on Calendar Days

The formula calculates proration results as shown in the following table.

Proration Conversion Rule and Proration Units

Proration Calculation

Standard Rate Annualized rule

Daily proration units

Calendar days in proration period multiplied by annual pay and divided by annual calendar days

Example:

  1. You assign a person to a monthly payroll for a salary basis of 25,000.

  2. You update the salary on 10 December, 2013 to 30,000.

  3. You calculate the December monthly payroll.

  4. The proration formula calculates 2 proration periods with 9 calendar days in the first proration period, and 22 in the second period.

(9 * 25000) / 365 + (22 / * 30000) / 365 = 616.44 + 1808.22 = 2424.66

Standard Rate Daily rule

Daily proration units

Total pay divided by calendar days in the payroll period and multiplied by calendar days in the proration period.

Example:

  1. You hire a person to a weekly payroll in the middle of the payroll period.

  2. The employee works 3 calendar days and receives a location allowance of 500.

  3. The proration formula calculates the employee's location allowance for the 3 days.

(500 / 7) * 3 = 214.29

Example: Earnings Calculation Based on Work Schedule

The formula calculates proration results as shown in the following table. If no working hours are defined, the proration formula checks the assignment definition for the number of working hours and frequency. If no information is found, the formula uses 40 as the number of working hours and 5 as the number of days for the work week.

Proration Conversion Rule and Proration Units

Proration Calculation

Periodic Work Schedule Rate Annualized rule

Workday proration units

Work schedule days in proration period multiplied by annual pay and divided by 260 days, the default number of annual working days.

A day in a work schedule is a 24 hour period.

Example:

  1. You hire a person to a monthly payroll for an annual salary basis of 25,000.

  2. The employee works 5 days a week Monday through Friday.

  3. You increase the monthly salary to 30,000 effective 10 December, 2013.

  4. You calculate the December monthly payroll.

  5. The proration formula calculates 6 working days from 1st December to 9th December, and 16 working days from 10th December to 31st December.

(6 * 25000) / 260 + (16 * 30000) / 260 = 576.92 + 1846.15 = 2423.07

Periodic Work Schedule Rate Annualized rule

Hourly proration units

Work schedule hours in proration period multiplied by the annual pay and divided by 2080, the default number of annual working hours.

Example:

  1. An employee assigned to a weekly payroll receives an annual salary basis of 25,000.

  2. You increase the salary to 30,000 effective 10 December, 2013.

  3. The employee works 10 hours a day from 9 December to 12 December.

  4. You calculate the weekly payroll for the week 8 December to 14 December.

  5. The proration formula calculates 2 proration periods, with 10 working hours for the first period, and 30 for the second period.

(10 * 25000) / 2080 + (30 * 30000) / 2080 = 120.19 + 432.69 = 552.88

Related Topics