Setting up the payroll structure is a critical task within the payroll function. Aside from regular employee wages, your employees may be entitled to other compensation such as overtime, commission, and bonuses.
The employment contract will outline exactly how each employee is to be paid, as agreed by you and your employee when they were hired. While most of these compensation terms are under your control, rules for overtime compensation may be mandated by the government.
The person, team, or service responsible for managing your payroll must have a clear understanding these terms.
This article will guide you through the key definitions and concepts of overtime, commission, and bonuses, covering:
How overtime, commission and bonuses impact tax codes
How to calculate overtime
First, what is overtime pay?
Overtime pay is money earned beyond regular working hours, or hours outside of the normal shift. In Canada, an employee who works more than 44 hours in a given work week may be entitled to overtime pay at a rate of 1.5 times their regular rate of pay.
However, there are different criteria between non-exempt and exempt employees when it comes to overtime pay. Non-exempt employees qualify for overtime pay and almost always work in hourly wage situations. Part-time workers may also be eligible for overtime pay if they work beyond the number of regularly scheduled hours in the day. Employees who are exempt from qualifying for overtime pay usually work in salaried roles such as managerial, administrative, executive, and sales jobs.
In Canada, labour laws differ for each province and territory so be sure to check with your regional government in order to comply with the rules.
How employees earn overtime pay and the amount must be included in the employee contract, alongside the details for employee salary and wage earnings.
Overtime pay should be managed and calculated each pay period alongside wage earnings. Overtime hours worked and the amount earned should be itemized on the employee pay stub so it’s easy to identify.
It’s best practice to pay out overtime pay at the same time that regular employee earnings are paid.
How to calculate bonuses
Not all companies offer bonus pay, but it’s a proven motivator in the workforce.
Criteria for earning a bonus must be set in advance as part of the employee contract. For example, achieving a certain milestone might earn your employee a $500 bonus at the end of the year, or during a busy holiday period.
Just like regular pay, you’ll likely need to apply the standard employee source deductions for income tax, Canada Pension Plan, and Employment Insurance to the employee’s bonus. Your payroll software will calculate those amounts for you and include it in your regular remittance to the Canada Revenue Agency.
Bonuses should be tied to specific and measurable performance objectives and work achievements. Keep bonuses separate from regular pay and cost-of-living increases so there’s no confusion between the categories.
You can offer different types of bonuses to both motivate and reward your employees:
- Cash bonus is an amount added to the employee paycheque
- Holiday bonus is typically given at year-end.
- A non-cash bonus could be a physical item (like a new iPhone)
- Time off with pay is an extra free day or longer.
Treat all forms of these bonuses as taxable when processing your payroll
How to calculate commission
Some companies offer commission-based compensation to help boost employee productivity, sales, and keep teams engaged. Commissions may help your business to lower wages yet offer employees a chance to earn a higher income.
There are several different ways to pay commission:
- Salary plus commission is typical in retail industries where the employee receives a base pay and a percentage of sales.
- Straight commission does not involve base pay and there’s no income cap for the worker – real estate agents earn commission only
- Draw against commission provides an advance payment on future sales
- Residual commission is an amount the employee earns after the customer makes an initial purchase – insurance agents will earn residual income for each year a customer renews their policy.
The exact terms for how to pay commission should be in the employee contract.
As you would for wages and salaries, employers must also deduct income tax, CPP, and EI from commissions.
How overtime, commission and bonuses impact tax codes
Overtime, commission and bonuses are taxable income. They’re treated as normal wages from which to deduct tax, CPP contributions, and EI premiums.
Because they factor into gross pay, they also impact how much income tax an employee must pay.
For example, an employee earning a base salary plus sales commission might be bumped into a higher tax bracket after a really good quarter.
Managing all of these figures is tedious even for a small team, especially if you’re using spreadsheets to record everything. Managing payroll manually might have worked in the past.
The automation built into cloud payroll software does all the heavy lifting for you, meaning errors are reduced and payroll is run as scheduled.
Payroll software can help you in numerous ways, including the following:
- Data validation and accuracy
The automation can quickly calculate your employees’ pay and deductions. A complete validation process can highlight any discrepancies and incorrect information.
- Report payroll information to the Canada Revenue Agency
Never worry about calculating how much you should remit to the CRA. Simply run your remission report to get the numbers.
When it comes to tax filing season, easily generate your T4s or RL-12s to give to your employees. You can upload your submission file to the CRA in just a few clicks.
- Calculate how much you need to pay CRA
Enter hourly pay and salaries and the software will handle all of the calculations.
- Create and manage paystubs
Print and email employees’ paycheque information direct from the software.
You can re-print paystubs for individual employees as needed. There’s also the option for online pay information too.
- Compliance
Automatic updates to your cloud-based payroll software mean you’ll always be up to date with the latest government legislative changes.
Final thoughts
In summary, managing overtime, commission, and bonuses is critical – but it doesn’t have to be problematic.
A payroll software solution will help you or your payroll specialist to manage all payroll functions with confidence.
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