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Employee Compensation

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Employees of a business are compensated in a number of ways for their labor. Though direct payment is an obvious example, it also includes benefits paid alongside. However, all of these areas are subject to taxation, though some areas are taxed more or less.

The most common form of compensation is a wage or salary, and the Fair Labor Standards Act has established a federal minimum wage that companies must adhere to. Wages are compensation based on hourly work, most often influenced by the market or collective bargaining as a result of labor union negotiations. Prevailing wages are compensation for public projects in the government sector, dependent on local regulations related to different occupations and trades. For example, if the federal government started a project to build a bridge, structural engineers would be paid based on the average wage for structural engineers in that region or state.

Overtime is premium pay resulting from working longer hours than is considered normal for a working period. For many positions, overtime is paid for more than 40 hours worked in a week. Any time worked over 40 hours earns time and a half and may also include work conducted during holidays.

Salaries are a form of compensation founded on fixed amounts and for only a certain number of occupations which are exempt from minimum wage and overtime requirements. In other words, occupations which use a salary are paid a lump sum, no matter how many hours are worked. Occupations which are paid salaries include management, administration, executives, and professionals.

Commissions are a form of compensation based on an employee’s performance, usually determined by sales made for a company. Compensation comes in either a percentage of sales made or a lump amount earned for each sale. Commissions may come with a base salary, though this amount differs between companies or may be excluded altogether. Compensation by commission comes with high risks, as it is an area almost completely dependent on performance. If sales decrease, so does income, and vice versa.

Additional compensation earned outside official pay may include tips earned from customers for service or bonuses for meeting company goals.

Employees may also be compensated with common stock in their company. If the stock increases in value, then the employee will have a more valuable share in the company. Therefore, employees have the incentive to work and further increase that value. Larger companies often only offer stock options to members of management, while smaller companies which have just begun operating may offer stock option to more varied employees when there are less options for compensation.

Two types of stock options commonly offered to employees are incentive and non-qualified stock options. Incentive stock options offer a tax benefit and are not liable for regular income tax when transferred after more than a year. Non-qualified stock options result in taxable income when sold, with the total being what remains when the sale price is compared with the market value. Non-qualified stock options give a user a tax deduction for the amount included on income from the deduction.

Other employee compensation may include benefits. Common benefits include vacation time, holidays off, sick/personal days, insurance, and retirement benefits. Some benefits are required by law and include worker’s compensation insurance, which provides compensation for wages lost when injured on the job. Some businesses offer unemployment compensation, granting former employees wages while looking for work.

A percentage of each employee’s pay is deducted and contributed to Social Security and Medicare. This amount is used to pay for retirement and Medicare for persons who have reached retirement age and disability for persons who are unable to work due to disability.

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