Understanding Payroll, Bonuses, and Commissions in Business
As a business owner, you may be wondering what the difference is between payroll, bonuses, and commissions and when it’s appropriate to offer them.
The three main types of compensation are payroll, bonuses, and commissions. It’s important to understand these terms so you can properly reward your employees and ensure your business is operating in compliance with local, state, and federal regulations. Let’s take a closer look at each type of compensation to get a better understanding of how they differ from one another.
Payroll
Payroll is the form of compensation you’re likely most familiar with. It refers to the salaries or wages an employee receives for their services during a given period of time, usually on a biweekly or monthly basis. This type of compensation is typically based on hours worked or job duties completed, and it may also include overtime or holiday pay, if applicable. Payroll is also used to pay taxes, insurance premiums, retirement contributions, and other benefits due to employees by law. This includes Social Security taxes (FICA), Medicare taxes (FIT), state income tax withholding, unemployment insurance taxes (FUTA), local income tax withholding (if applicable), workers’ compensation insurance premiums (if applicable).
In addition to wages and taxes, there are other benefits associated with payroll such as health insurance contributions, vacation time accrual, 401(k) matching contributions, etc. These benefits should be managed properly so that they are properly tracked and reported on both employee pay stubs as well as any required tax forms. Additionally, there may be deductions taken out of the employee paycheck such as health insurance premiums or retirement plan contributions which should also be tracked accordingly in order for the company or organization to remain compliant.
Bonuses
A bonus is an additional one-time payment given to employees for achieving certain goals or milestones set by management. They are often used as an incentive to encourage employees to stay motivated and reach higher levels of performance throughout the year.
Bonuses are not considered part of an employee’s regular salary and do not need to be included in payroll calculations; however, bonuses may be subject to withholding taxes depending on the amount paid out.
Discretionary v. Non-Discretionary Bonuses
Whether you give a holiday bonus, an annual bonus, or a signing bonus—they all fall under discretionary and non-discretionary bonuses.
Discretionary bonuses are given at the discretion of management and are typically awarded to top performers and those who go above and beyond their job descriptions. Non-discretionary bonuses, on the other hand, are predetermined by an organization’s policies or procedures and may be given out to all employees regardless of performance. Examples of non-discretionary bonuses include holiday bonuses, end-of-year bonus payments, signing bonus payments, and employee referral bonus payments.
Commissions
A commission is a payment made to employees based on the sales they generate for their employer in addition to their base salary or wages. They are commonly associated with a sales role or a position where results are easily quantifiable. These payments vary depending on the type of commission structure offered. From a pretty standard base pay plus commission to a residual commission plan, each structure has its own benefits and drawbacks. If you intend to offer different types of commission, ensure all policies are clearly outlined to prevent potential misunderstandings and disputes.
Commissions are typically separate from base salary but may be included in payroll calculations if they are recurring payments made over time rather than one-time rewards for exceptional performance.
Payroll, bonuses, and commissions all have their place in an employee compensation plan. Knowing the difference between each type of payment will ensure you’re providing your staff with fair and equitable rewards for their contributions while staying compliant with applicable laws and regulations governing employee compensation. Ultimately, having an effective system in place for rewarding your team will help keep morale high and productivity levels up so your business can continue growing!
Whether you decide to use payroll alone or mix up different types of payments, we can help you manage it all. Contact us to learn more about our payroll services and how we can help you streamline your employee compensation process.