As a business owner or employer, you have probably heard of the term, “pro-rata”. However, what you might not have known is that its use case goes beyond the world of business and finance. Here is everything you need to know about pro-rata. What pro-rata means? How to apply it to your system of compensation? Do you have any ideas on how to work it out and why you should consider a pro-rata payment system?
What is Pro Rata
A pro-rata pay is the payment you make out to an employee in proportion to how much work is done by the whole. This is a Latin term which means “in proportion”. While the term can be used in any space, it is mostly used in business and finance today. This means that a worker working pro rata’s pay would get a fair share
When should you use Pro-Rata?
As an entrepreneur, you might have to pay pro-rata in the following situations:
- when your employee’s employment is terminated before the month ends or in the middle of work.
- In cases where a new employee begins work in the middle of the work week or month.
- When an employee takes more days off than what you have already allowed.
- Where a business doesn’t offer paid time-off and your employee has to take some time off-duty.
- When employees are being punished for breaking any safety rules that keep them out of work for at least a whole day.
When You Shouldn’t Pay Pro-Rata?
While the concept of paying pro-rata is to ensure that you’re remunerating an employee for their fair share of work done. There may be extenuating circumstances that can keep a worker out of work and would not require you to pay pro-rata. where an employee is called out of work to perform a civil duty like serving as a witness in a criminal case or fulfilling military obligations. However, you can save your business by deducting the time lost from your taxes to offset it and balance your account.
Who Needs to Work Out a Pro-Rata Pay?
Working out a pro-rata pay is suitable for small business owners. This calculation allows them to fairly compensate an employee in proportion to hours spent working. That way, as an entrepreneur, you get to only pay for hours worked and save the company extra expenses from what she is not profiting. Both the employer and employee go home, feeling content with the fairness in the deal.
How to Work Out a Pro-Rata Pay For Your Employees
The primary means of working out an employee’s pro-rata pay is the same and requires three major steps:
- Determine the employee’s pay per hour.
- Multiply the employee’s hourly pay by the number of work hours missed.
- Subtract the value gotten from step 2 from the employees’ regular pay, assuming he/she worked completely.
There’s no precise measure for working out an employee’s pro-rata pay and this figure will depend on whether you pay per hour, per day, per week, or monthly. The bottom line is that an employee’s pro-rata pay is derived from dividing the staff’s pay in proportion to the number of hours worked.
A Possible Example of a Pro-Rata Pay Calculation
If you’re still unclear about working out your employee’s pro-rata pay, here is an example.
Suppose your employee earns $10,000 and works 40hours per week and you pay $384.62 every two weeks. If this staff takes 10 unpaid hours off work, how much will be the pro-rata pay?
pro rata salary formula
Pro rata pay= full-time pay-[hourly pay x pro-rata hours]
hourly pay= Weekly pay/normal work hours
weekly pay= Annual pay/52 weeks in a year
- The first step is to divide this employee’s pay by 52 weeks that make one year. Meaning $10 000 divided by 52weeks to give us $192.31
- Now that we have worked out the weekly pay, we shall divide the weekly pay by the number of normal working hours that is 40hours to get the employee’s hourly pay. This would mean $192.31 divided by 40 hours to give us $4.81
- If this employee missed 10 hours from work, we would then multiply $4.81 by 10 hours to give us $48.08
- We will subtract $48.08 from the employee’s normal biweekly payments of $384.62. In this case. $384.62 minus $48.08 which gives us $951.9.
Therefore, this employee’s pro-rata pay is $951.9
How to Manage Your Employee’s Payroll?
Having learned how to work out your employee’s pro-rata pay, there are other factors worthy of consideration. Factors like tax liability will decrease since the employee’s gross pay has also decreased with the pro-rata pay. You might also have to reduce the amount that you withhold on social security and healthcare taxes. Also, the amount you have to withhold on federal income tax will likely be reduced. This will depend on how many work hours that the employee missed. State and local income taxes might also have to be adjusted, depending on the presenting circumstances.
How Pay Stubs Now Can Help You With Your New Payroll and Pay Stubs?
If you’re using an online paystub generator for paycheck stubs, you will need to make sure that you fill in the employee’s pro rata pay in the appropriate column. The software automatically factors in the employee’s updated paycheck to keep your financial documents organized. You can use paystubs updated system to settle all your paystubs needs. You can also generate other financial documents such as 1099, w-2 forms, and invoices for your business too.
FAQS: What is pro rata?
What is pro rata
In business and financing, pro-rata is how payment is calculated on a proportional basis. This is based on how much individual work is done in correspondence with the whole.
Where does the word pro-rata come from
The word pro rata is a Latin term that translates to “in proportion” and its use cases go beyond the world of business finance.
What does pro rata salary mean?
A pro-rata salary means the salary calculated and paid to you for hours worked in correspondence with the entire work done. This is how an employer calculates a fair wage.
How does pro-rata work?
A pro-rata pay is good for setting job expectations from workers concerning the hours of input at work. It’s a great way to keep things fair and ensure that the business isn’t overpaying for input hours not received.