Table of Contents
What Is Proration?
The dictionary defines proration as to divide, distribute, or assess proportionately. When you need to calculate wages for an employee who didn’t work an entire pay period or who receives a change in pay in the middle of one, you are prorating their time. Not every calculation is done in the same manner, and not every change involves a calculation, so it is important to understand which calculation to use and when.
More often than not, proration calculations (also referred to as pro-rata salaries) are used for the salaried employee population, since hourly employees are paid based on the number of hours worked in the period.
Why Is Proration Important?
When an employee is expecting an increase in base wage, proration is often the sticking point as to how much additional money is due to the employee depending on the effective date of the change. The same is true for an employee expecting a proration of wages due to unpaid time off. As the voice of the employer and the employee at the same time, HR and Payroll are expected to follow the rules and regulations by country and state surrounding prorating wages.
Three other important features of proration include:
- Calculation type. The type of calculation that is used to arrive at the amount due depends on the payroll schedule, the employee’s FLSA status and the effective date of the change.
- Supplemental tax. The reason for the calculation is also of importance. If the calculation is for the current pay cycle, the proration will not expand beyond the current cycle’s dates. However, if retroactive proration is included in the calculation, the amount will be taxable at the supplemental rate as per IRS rules.
- Setting precedent. Once a proration calculation is completed for a specific set of circumstances, future instances of similar circumstances must be treated in the same manner, regardless of written policy. Therefore, it is extremely important to make sure the correct proration calculation is used.
When to Use Proration
Salary or wage proration is given to all employees who receive a change in their base pay amounts with effective dates not equal to the first day of the pay cycle, regardless of their pay frequency or FLSA status.
The most beloved start date for a new job is Monday. Be mindful of the pay period start and end dates. If the company is on a semi-monthly payroll schedule, a salaried employee starting on Monday, August 29th would receive a three-day prorated wage amount for the 29th, 30th and 31st of August. Because a bi-weekly payroll schedule always has 14 calendar days and 10 business days, the salaried new hire has either no proration (because the full two-week salary amount is paid) or has a proration of an even one-half of base salary for the second week of the two-week pay cycle.
When an employee is given an increase in the middle of a pay cycle, the base wage is prorated to reflect the prior rate on the appropriate days and the new rate for the remainder of the days.
Unpaid Time Off
From time to time, salaried employees may require time away from work that does not qualify for any paid-time-off policies. In these cases, the employer can prorate a reduction in the base rate for the number of unworked days. If the employer offers unlimited paid time off, reductions for unpaid leave require supporting documentation in case of an audit.
Like new hires, employee terminations are not always scheduled for the last day of a pay-cycle. Bi-weekly payrolls are typically paid on Fridays, making it an easier day for processing terminations. On a semi-monthly schedule, coordination between HR, Payroll and the firing manager is crucial to ensuring the proper calculations are used.
How to Calculate Proration
It is always a best practice to use annual salary as the starting point for proration calculations. Let’s break the proration calculation down into the following four steps.
Step 1: Determine weekly salary
Divide the annual salary amount by 52. *
Step 2: Determine daily or hourly rate
Divide the weekly salary by 7 or 40. *
* For semi-monthly cycles, divide the annual salary by 260 for daily or 2,080 for hourly
Step 3: Determine days or hours
For weekly or bi-weekly pay cycles, use the weekly rate for calculating full weeks and daily rate for calculating full days.
For semi-monthly pay cycles, do the calculation for number of days worked AND for the number of days not worked, and pay the one more beneficial to the employee (typically first half or second half of semi-monthly cycle).
Step 4: Determine Prorated Amount
Using the rate from steps 1 or 2 and the days or hours from step 3, calculate the total amount to be paid. If the employee is salaried non-exempt, remember to include the regular rate of pay overtime calculation as well.
The following examples show the steps for prorating one unpaid day in the bi-weekly pay cycle and the semi-monthly pay cycle.
Example 1: Bi-weekly at $52,000 per year
$52,000 / 26 pay cycles = $2,000 per pay cycle
$52,000.00 / 52 weeks = $1,000 week
$1,000 / 40 hours = $25.00 per hour
$25.00 * 8 hours = $200.00 per day
Bi-weekly salary $2,000 – one unpaid day $200 = $1,800 prorated salary
Example 2: Semi-monthly at $52,000 per year
$52,000 / 24 pay cycles = $2,166.67 per pay cycle
$52,000.00 / 2,080 hours = $25.00 per hour
$25.00 * 8 hours = $200.00 per day
Semi-monthly salary $2,166.67 – one unpaid day $200 = $1,966.67 prorated salary
How Proration Affects Payroll
Any and all changes to the base wages of employees should be updated in the HRIS or payroll system. Prorated paychecks are different from the regular paychecks the employee may have become accustomed to since salary payments are the same each pay cycle regardless of the number of days in the period. An increase in gross wages may not always equal a higher paycheck.
An increase in gross wages increases taxable wages and tax amounts withheld. All taxes are calculated by percentages—some fixed, some not—but because they are percentages, higher earnings equal higher taxes. It is always a good idea to recommend that the employee follow up with a tax advisor.
Most retirement savings plans are also based on percentages. Be sure to advise employees to check their current contribution levels when they receive increased or reduced prorated paychecks to help them maximize the tax-savings benefit.
Coordination of Information
Working together with the right stakeholders not only makes the proration process more manageable, but it helps teams understand how integral they are to one another. Human Resources is tasked as the guardian of employee information. Payroll is tasked as the guardian of employee payments. The coordination of these two teams is not only crucial to the management of proration within an organization, but to the very existence of the organization.
Questions You’ve Asked Us About Proration
Is proration only for salary or for benefits too?
Proration is the calculation of any amount paid to or on behalf of an employee. Benefits are often prorated upon new hire and termination.
When is it legal to prorate salary?
In the U.S., it is legal to prorate the salary when a salaried employee performs no work for the employer for an established and recognized period of time (regardless of the reason) during the pay period. Note that the reduction may only be taken within the first 31 days of the non-worked time. After the 31st day, the amount changes to “imputed income.”
A twenty-something year payroll veteran, Christine was adopted into the payroll profession from Human Resources when it was discovered that she had a knack for rules, details and numbers. She is a results-driven and accomplished global payroll enthusiast with broad experience in both domestic and global payroll teams, ensuring accurate payroll operations through efficient leadership of staff. Joining the American Payroll Association (APA) and getting her CPP certification in 2011, Christine has thrown herself head-first into volunteering for the APA at the local, state and national levels. She obtained her Global Payroll Certification in 2011 as one of the first 50 recipients, and her professional vision is to lead the drive towards global payroll quality assurance procedures that provide simple solutions for compliance, accuracy and timeliness.