A common question new employers have when hiring employees is about compensation. Should the employee be salaried, hourly, or commission? What other pay should be included in the employee's overall compensation?
What you end up paying your employee can depend on a number of factors, including:
- Job duties
- Federal and state wage and compensation requirements
For some general guidelines and advice on pay and other compensation, check out the U.S. Department of Labor website or your state labor agency for more information.
Our payroll service pay types
In our payroll service, you can set up the following types of pay for your employees:
Salary and hourly
An hourly employee is paid for each hour worked and is generally a non-managerial, service, retail, or part-time employee. Most hourly employees are considered non-exempt from federal labor laws, which means they receive overtime pay whenever they work more than 40 hours a week.
A salaried employee is hired based on a prearranged compensation for work performed, usually as an annual amount. Salaried employees are exempt from overtime pay and minimum wage requirements and often have managerial or professional responsibilities.
Commission is a form of compensation that's typically based on an employee's sales performance or completion of a task. Commission can be paid in addition to a salary or instead of a salary. Hourly employees who also receive a commission must be paid at least the minimum wage for hourly workers.
You can add multiple types of commission pay and give each one a unique name. The custom pay types will then be available when you set up your other employees.
Cash tips are gratuities that are paid to employees in cash, rather than through their paycheck. You enter the reported cash amount so that we can withhold the taxes for these tips when you create paychecks.
Use the Cash tips pay type:
- To track cash tips reported to you by your employee
- For tips charged on credit cards that you pay out to employees in cash (for example at the end of each shift)
Paycheck tips are gratuities that are paid to the employee on their paycheck, rather than in cash.
Use the Paycheck tips pay type if the patron included the tip on a credit card charge and you pay the tip to the employee through their paycheck when you run payroll. We withhold taxes and include Paycheck tips in wages.
A bonus is compensation over and above the amount of pay specified as a base salary or hourly rate.
You might want to give bonuses to thank employees or a team for reaching a significant goal, or to improve employee morale, motivation, and productivity. Bonuses can be distributed randomly as the company can afford to pay a bonus, or as specified by an employment contract.
An allowance is a taxable payment to an employee that's separate from regular wages.
It's typically paid with each payroll to cover job-related costs, such as uniforms or auto usage, but it's taxable because it's not dependent upon actual receipts. Allowance amounts are not included in the pay base for calculation of percentage-driven deductions such as 401(k).
Reimbursements are nontaxable payments to an employee used to repay business-related expenses that the employee has paid out-of-pocket.
Don't include expenses that have tax implications, such as moving expenses. Typically this includes expenses incurred for limited or regular business travel. (Industries that require extensive travel typically use nontaxable per diem payments instead of expense reimbursements.)
Because these payments aren't taxable, they don't appear on payroll tax or other tax reports, or on W-2 forms. They're also not included in the wage base used to calculate percentage-driven deductions such as 401k amounts. For guidelines on reimbursements, check the Employee business expense reimbursements section of IRS Publication 15, Circular E: Employer's Tax Guide.
You can add multiple reimbursement pay types and keep the default name we provide, or give them each a unique name. In addition to being available for this employee, the custom pay types will also be available when you add or edit your other employees.
Per Diem (Nontaxable)
Nontaxable per diem amounts are fixed, nontaxable daily allowances to pay for lodging, meals, and incidental expenses incurred during travel. Typically, nontaxable per diem is used in industries where travel is a required part of the job, such as truck drivers.
Unlike expense reimbursements, nontaxable per diem amounts are reported on W-2 forms.
Group-Term Life Insurance (GTLI)
Group-term life insurance is for coverage in excess of $50,000 per employee and is subject to some payroll taxes.
S-Corp Owners Health Insurance (SCORP)
S-corp owner's health insurance is for accident or health benefits provided to 2% shareholders of an S corporation.
It's subject to federal withholding tax, but exempt from Social Security, Medicare, and federal unemployment tax (FUTA). Most states follow the same taxability rules as federal, but there are some states that don't. For more info, contact your state agency (see Payroll Resources: State government resources for contact info).
Company HSA Contribution (Health Savings Account)
A company HSA contribution is the amount you contribute each payday to the employee's Health Savings Account (HSA).
Form W-2 Reporting — on Form W-2, your contributions to an employee's HSA are reported in Box 12 but excluded from federal wages and most state wages. If your contributions are taxable at the state or local level, we include the amount in taxable state wages.
S Corp Limitation — for shareholder-employees who own 2% or more of an S Corporation, do not select Company HSA contribution. Your contributions are taxable at the federal level and in some states.
Personal Use of Company Car (PUCC)
Personal use of company car is for employees who use a business vehicle for personal purposes. It's a taxable benefit provided in-kind, and you must include the value of the personal use in the employee's wages.
Overtime, Double Overtime, Holiday, and Bereavement Pay
Overtime is paid for any hour an employee works beyond an 8-hour workday or a 40-hour work week. Employers must pay hourly employees at least 1.5 times their regular pay rate for every overtime hour worked.
For example, let’s say an employee works 50 hours during a work week. When you run payroll, just enter 40 hours in the regular hourly pay box and 10 hours in the overtime box. We do the math to make sure the overtime is calculated correctly on the employee’s paycheck.
For more information about overtime laws, check the Work Hours: Overtime (United States Department of Labor) web site.
Double overtime is two times an employee's highest, hourly pay rate. Employees must be paid double overtime for:
- Any hour worked beyond a 12-hour workday
- All of the hours worked that go beyond 8 hours on the seventh consecutive day of work in a work week
Holiday pay is paid time off for religious, government, or bank holidays when a business may be closed and the employee is allowed to take the time off from work.
Though the Fair Labor Standards Act (FLSA) doesn't require employers to pay employees for time not worked, many employers provide holiday pay as a benefit and follow the Federal Reserve (bank holiday) schedule, offering employees up to nine paid holidays each year.
Bereavement covers time-off for employees who experience the death of a family member or friend and need to attend a service or grieve.
Other earnings are taxable payments to an employee that are separate from regular wages, such as retroactive pay increases and severance pay. The amounts are included in the wage base and used to calculate percentage-driven deductions such as 401(k).
To pay employees for vacation or sick time, set up a vacation and sick policies for your company and then apply the policies to your employees.