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How to pay overtime, commission and bonuses to employees

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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 pay such as overtime, commission and bonuses.

The policies for how to earn these are determined by the company and usually published in the principal statement of the employee contract.

Payroll managers must have a clear understanding of the basic terms to contribute informed expertise when shaping those policies.

This article will guide you through the key definitions and concepts involved with overtime, commission and bonuses, covering:

How to calculate overtime

How to calculate bonuses

How to calculate commission

How overtime, commission and bonuses affect tax codes

First, what is overtime pay?

Overtime pay is money earned outside of regular working hours, or hours outside of the normal shift. UK overtime law requires that the total hours worked must not be below the relevant minimum wage. However, employers aren’t required to pay overtime.

The terms for how employees earn overtime pay and the amount must be included in the employee contract, alongside the details for employee salary and wage earnings.

Employees are only required to work overtime hours if it’s in their contract to do so. And even then, required overtime can’t exceed an average of 48 hours per week (employees can agree to work longer but this agreement needs to be documented).

Overtime pay should be managed and calculated each pay period alongside wage earnings. Overtime hours worked and the amount earned should be itemised on the employee payslip 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.

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.

The company must pay taxes on all bonuses, deduct bonus tax from employee earnings, and report bonus payments to HMRC because bonuses count as earnings.

What you report to HMRC depends on the type of bonus your company pays out:

Cash bonuses

This includes vouchers that are exchangeable for cash. This type of bonus pay should be reported with regular employee pay, and must deduct and pay Pay As You Earn (PAYE) tax and Class 1 National Insurance.

Non-cash bonuses

Tax reporting rules here will vary depending on what you give. In some cases, you’ll have to use PAYE, for example, if the item can be easily be converted to cash.

Gov.uk has a resourceful list of rules for specific items and how to work out their value.

Christmas bonuses

These count as earnings as well. For cash bonuses, add the value to the regular earnings amount, and deduct and pay PAYE and Class 1 National Insurance.

For goods as gifts, you must pay tax and report them all on form P11D, and pay Class 1 National Insurance based on the value.

Trivial benefits are exempt from tax and reporting laws. Goods must meet all of the following criteria to be considered trivial:

  • Costs £50 or less to provide
  • Isn’t cash or a cash voucher
  • Isn’t a performance-based reward
  • Isn’t included in the employee contract.

A commission-based salary is only legal if the employee contract guarantees at least the relevant minimum wage.

The exact terms for how to pay employees commission should also be in the employee contract, for example, how often commission is paid and earned.

Employees must pay, deduct and report commission pay the same as salary or hourly wages.

Overtime, commission and bonuses are taxable income. They’re treated as normal wages from which to deduct tax and National Insurance. Because they factor into gross pay, they also impact how much income tax an employee must pay.

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. But today, doing that doesn’t cut it at all.

You need to upgrade how you work to keep up with a fast-moving world.

The automation built into cloud payroll software does all the heavy lifting for you, meaning errors are reduced and payroll is run as scheduled. The software can help you in numerous ways, including the following:

Data validation and accuracy

The automation therein can quickly calculate your employees’ pay and deductions. A complete validation process can highlight any discrepancies and incorrect information.

Set up your software so your employees are paid the correct amount according to the minimum wage band to which they belong.

Reporting payroll information to HMRC

Send reports with one click and never miss a deadline.

You can send payroll information to HMRC online throughout the year and at the tax year end, as part of the payroll year end process.

HMRC can also send you messages relating to your employees. For example, notification of changes to employee details.

Calculate how much you need to pay HMRC

Enter hourly pay and/or wages and the software will handle all of the calculations.

Create and manage payslips

Print and email employees’ payslips direct from the software. You can re-print payslips for individual employees as needed. There’s also the option for online payslips too.

RTI submissions

Submit your Real-Time Information (RTI) details electronically to HMRC each time you pay your employees.

Error corrections

There’s no need to restore data or reprocess pay runs. You can simply make the corrections using the built-in corrections feature and they’ll be updated in the next pay run.

Make corrections for multiple employees in multiple periods can be done in next to no time. And all changes to employees’ pay are reflected in their next pay run, with updates and amends clearly stated.

Compliance

Automatic updates mean you’ll always be up to date with the latest 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 to manage all of the components involved with confidence and more productively.

Plus, a cloud solution gives payroll managers 24/7 access to payroll data so you can catch errors, make changes and offer support as business needs require.

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