Calculations for Gross pay of an employee

Employee's gross pay

Gross pay is the total amount of money an employee earns before any deductions (like taxes, social security, or other contributions) are made.

Components:

• Basic salary or wages
• Additional earnings like overtime, commissions, and bonuses

Allowances

Allowances are additional payments made to employees to cover specific expenses or to reward certain aspects of their role or performance.

Examples of Allowances:

• Housing Allowance: To assist with accommodation costs.
• Transport Allowance: To cover commuting expenses.
• Medical Allowance: For healthcare-related expenses.
• Responsibility Allowance: For employees in managerial or special roles.

Treatment in Accounting: Allowances are usually added to the basic salary to calculate the gross pay.

Overtime payment

Overtime payment is compensation given to employees for working beyond the standard hours of work as defined by their employment contracts.

Calculation:

• Based on the agreed overtime rate, which is often higher than the standard hourly rate (e.g., 1.5x or 2x the hourly wage).
• Example: If the normal hourly rate is TZS 5,000 and the overtime rate is 1.5x, the overtime rate is TZS 7,500 per hour.

Purpose: Encourages employees to work extra hours when needed.

In payroll accounting

• Gross Pay = Basic Salary + Allowances + Overtime Payment
• This forms the foundation for determining deductions (e.g., PAYE, NSSF) and arriving at net pay.

Example

Mkwakwani Institute is a government agency recently organized in Zanzibar and its surroundings to rehabilitate street children. It has five employees whose salaries are paid according to the normal calendar of the month. The following data relates to the month of December, 2021:

Employee overtime details

S/N	Name of Employee	Basic Salary	Total Overtime Hours Worked	Duration of Overtime Work
1	Riziki Kibo	TZS 1,720,000	4	4:00 p.m. – 8:00 p.m.
2	Zawadi Almasi	TZS 820,000	8	Sunday (8:30 a.m. – 5:30 p.m.)

Additional Information:

1. The management of the institute usually expects a worker to work 40 hours in a week.
2. There were no absentees during the month.
3. All employees are employed on permanent basis.

Required: Compute the overtime amount for each employee.

Solution

Overtime calculations

Overtime payment details:

Employee Name	Basic Pay (TZS)	Factor	Overtime Hours Worked	Hours per Period	Overtime Payment (TZS)
Riziki Kibo	1,720,000	1.5	4	176	58,636.36
Zawadi Almasi	860,000	2	8	176	78,181.82

Overtime calculations:

$\text{Overtime payment} = \frac{\text{Basic pay}}{\text{Hours per period}} \times \text{Factor} \times \text{Overtime hours worked}$

For: Riziki Kibo

$\text{Overtime payment} = \frac{1{,}720{,}000}{176} \times 1.5 \times 4 = \text{TZS } 58{,}636.36$

For: Zawadi Almasi

\text{Overtime payment} = \frac{860{,}000}{176} \times 2 \times 8 = \text{TZS } 78{,}181.82}