Additional pay is any extra financial compensation paid to an employee on top of their base salary or hourly rate. Sometimes also referred to as supplemental wages, additional pay includes back pay, bonuses, severance pay, and some other types of compensation.
Employers may be required by law to pay certain types of additional pay. Depending on the circumstances, an employer may also be required to withhold tax on it.
What’s the difference between base pay and additional pay?
Base pay is the fixed rate that an employee is paid for their work, as stated in their employment contract. It’s typically calculated on an hourly, weekly, or monthly basis or annual salary and is paid at regular intervals.
Additional pay includes any payments outside of an employee’s base salary. It’s usually a one-off or irregular payment of a variable amount.
Additional pay is often taxed differently from base pay.
Why is understanding additional pay important?
It’s important to understand how supplemental pay applies to your workforce to ensure employees are properly compensated for the work they do. If it’s managed poorly, it could lead to a disengaged workforce that feels undervalued.
Understanding your obligations when it comes to additional pay also aids financial planning. By knowing exactly what your employees are owed, you can budget for their pay.
Plus, if a certain type of additional pay is required by law, failing to properly compensate employees may lead to consequences such as civil lawsuits or even criminal charges.
Types of additional pay
The different categories of additional pay include the following.
- Overtime. You may be required by law to give certain employees supplemental pay for any hours worked above the legislated amount. For example, the Fair Labor Standards Act requires US employers to pay employees time and a half (1.5 times their base wage or salary) for any time worked beyond 40 hours per week.
- Allowances. Allowances are payments given for a specific purpose outside of the work an employee does, such as housing, transportation, meal allowances, wellness programs, and healthcare.
- Back pay. If payroll underpays an employee–for example, due to a miscalculation of their wages or forgetting to enter a pay raise–you must pay the employee back pay. Back pay isn’t optional. If an error has occurred, the employee is entitled to it.
- Bonuses. Bonuses are one-off payments made as a gesture of appreciation for an employee’s contributions. They may be provided for in an employee’s contract or tied to certain performance targets.
- Incentive pay. While bonuses retrospectively recognize performance, incentive pay anticipates it. It’s paid to employees to motivate them to reach certain goals.
- Additional responsibilities. When an employee takes on responsibilities above and beyond their job description for a temporary period, they should be paid accordingly. For example, if a longtime employee covers some management responsibilities while their supervisor is on leave, their pay should be temporarily increased to reflect their higher duties.
- Commissions. Commissions are paid to an employee for each sale they make as an incentive to reach sales targets. They may be calculated at a fixed rate or as a percentage of sales.
- Accrued leave. If an employee leaves an organization with unused vacation or sick leave, or they choose either not to take their allocated leave in a year or not to roll that leave over to the next year, they may be able to request to be paid out for it. This lump sum is a form of additional pay.
- Severance. Severance is an amount paid to an employee on their termination. Severance pay may be legally required in certain circumstances, including when it’s provided for under an employee’s contract.
How is additional pay taxed?
In the US, additional pay can be taxed differently from base pay.
When it comes to federal income taxes, employers are typically required to withhold Social Security and Medicare taxes on additional pay. The applicable income tax rate and how the tax amount must be calculated vary according to the circumstances, such as the amount of additional pay and whether an employee’s base and additional pay are combined or kept separate.
Income tax rates on additional pay at the state level also vary.
As an employer, it’s worth seeking professional advice on your tax obligations in relation to additional pay.
How to effectively manage additional pay
The legal framework around compensation in general and additional pay specifically can be complex. It’s best to seek professional legal and financial advice so that you understand your obligations as an employer.
Once you’ve done this, work on developing an additional pay policy that sets out the categories of supplemental pay you might offer employees, the limits on these, and the relevant application and approval procedures.
Make sure to clearly communicate your supplemental pay policy to your employees. They have a right to know what compensation they’re entitled to. Being transparent about payment policies builds trust with your employees and demonstrates your integrity as an employer.
By understanding your additional pay policy, employees can also raise any errors or oversights so they can be fixed quickly.
Setting up the necessary HR and payroll processes to manage employee payments also minimizes the risk of any errors. An online platform is a good way to manage workflows, such as approving additional pay requests and timesheets.
Additional pay is any compensation paid to an employee on top of their base wage or salary, such as overtime, bonuses, and accrued leave payouts. To ensure you pay your employees correctly, it’s important to understand the different types of additional pay and which ones you’re legally required to pay.