This is the time of year when employees are pulling their hair out trying to figure out the taxes they need to pay. Do they report bonus pay along with regular income? Are they taxed on the value of the company car they drive? Unfortunately, the question of what qualifies as total compensation for tax purposes is not always easy. It is downright complicated most of the time.
Total compensation issues are among the things leading companies to turn to third party payroll providers like BenefitMall for. Given the payroll is our specialty, a big part of our responsibility to clients is to fully understand state and federal laws governing total compensation. We are a better choice for payroll processing and compliance because we know the laws and to how apply them.
Different Forms of Compensation
Much of the complexity surrounding total compensation is found in the fact that there are so many different ways to compensate employees. Below is a list of some of the most common forms of compensation. Note that tax laws do not apply equally to each of them.
- Base Pay – Base pay is the minimum amount of financial compensation you pay employees for their work. Normally this is considered hourly wages or salary. It does not include overtime pay.
- Overtime Pay – The law requires all non-exempt employees to be paid overtime pay equal to 1.5 times their normal hourly rate for any hours worked in excess of 40 during a standard work week.
- Commission – Some employees are compensated through a combination of base pay and commission. Others work on straight commission alone. Commission-based pay is typically based on making sales.
- Tip Income – Restaurant servers, bartenders, and other types of service employees are often compensated partially through tips. Tip income does have to be reported one way or another.
- Bonus Pay – Companies may compensate their employees by way of bonus pay intended to reward workers for certain accomplishments. Recognition and merit pay are often viewed as bonus pay.
- Fringe Benefits – Benefits such as health insurance and company contributions to retirement plans are considered part of total compensation even though they are not necessarily taxed as such. They still need to be considered because they affect the company's bottom line.
- Non-Cash Benefits – Examples of non-cash benefits include use of the company car, free gym memberships, etc. These kinds of benefits create plenty of opportunities for payroll mistakes.
- Stock Options, Shares, Etc. – Lastly is compensation given in the form of company ownership. This type of compensation is subject to an entirely different form of taxation.
As you can see from this list, there are lots of ways to compensate employees. Some of them have pretty significant tax implications, which is why it is so important for companies to understand how every form of compensation they utilize is covered under federal and state tax laws.
Staying Ahead of the Law
When it comes to staying ahead of the law in terms of total compensation, it all boils down to actually knowing what the law says. The best place to start is making yourself familiar with the Fair Labor Standards Act. This piece of legislation is the gold standard for guidance on employee compensation. From there, making yourself familiar with state laws is also a good idea.
As a leading provider of payroll and benefits administration services, we are fully competent in all things payroll – including understanding the details of total compensation. We would be happy to design a customized payroll solution for your company if you are having trouble keeping up.