489: Construction Company Employee Compensation And A Note On Taxes

This Podcast Is Episode Number 489, And It's About Construction Company Employee Compensation And A Note On Taxes There are a few different methods that employers use to pay their employees, and while they may have similarities, they each also have implications for your construction business and employees. On top of that, there may be a blended model at play, in which you offer two types of compensation at once, such as a wage and bonuses.    When paying employees, laws and the IRS have made the payroll function a time-consuming nightmare for the small business owner.   Small business owners spend an average of eight hours monthly performing payroll functions. That's 12 full business days a year that could be spent generating sales, prospecting for new business opportunities, improving products or services, or servicing customers.  

How you pay your construction employees will impact your finances and your reporting requirements. Read on to learn the differences between the main ways of earning money in the workplace.

Wages

Most entry-level positions offer an hourly wage in exchange for work. An hourly wage might be $20. So if the employee works 8 hours that day, they would be compensated $160 for that day.

The minimums set by law vary depending on where the business operates. Typically, the minimum wage is directly related to the cost of living in that area. 

Generally, a set number of hours can be worked in a week, and working beyond that maximum entitles the employee to a higher pay rate. There may be premiums associated with working undesirable shifts or an even higher pay rate that employees are entitled to for working on holidays.

Because of the number of hours worked, the specific days worked, and overtime, the amount an employee will potentially earn each year can vary widely when paid with hourly wages.

Salary

A salary is the standard compensation for management and upper-level positions. It is an agreed-upon annual total, where a certain number of hours worked per week is expected – typically 35 to 40. Other requirements will be outlined, such as how many days per week are expected.

Depending on the schedule, the total salary is divided into equal payments for each pay period. Often, compensation is agreed to as an annual figure, with each paycheck equally divided by the number of payments. If you pay an employee a salary of $60,000 yearly once a month over 12 months, you will pay $5,000 each, not accounting for any deductions.

How a company manages its payment schedule will vary from company to company.

Other pay, such as overtime, commissions, or bonuses, are separate from salary. Many companies don't offer overtime pay for extra hours worked, but they may offer commissions or bonuses for performance.

Commission

This is a form of compensation that is based on performance. The amount an employee receives can vary drastically, depending on how well they perform in a pay period.

The commission is typically a calculated percentage of goods or services sold. It is meant as an incentive to drive employees to make sales. For example, you may offer to pay $100 as a commission for each deal closed. An employee selling ten service subscriptions in the pay period would receive a $1,000 commission. 

All earnings made by commission are counted as taxable income.

Some salaried or hourly positions offer a commission on top of regular earnings. However, some positions, especially those in sales, can be based solely upon commission. This means that employees don't get paid if they don't sell anything.

Bonuses

A bonus is a compensation type that is not guaranteed. It is usually tied to some company goal, driven by sales or performance. A bonus might be awarded individually or to a team or other work group.

The idea behind a bonus is to create an incentive to meet a specific goal. It is rewarded when the goal has been reached or evaluated at particular times. Bonuses are offered on top of a wage, salary, or commission. 

Because of the unofficial structure, bonuses are loved by some and loathed by others. It can be motivating to receive a bonus, as it's completely separate from what an employee already earns. However, it can also leave employees feeling disgruntled if they feel they weren't supported well enough to reach the goal and missed out on the bonus. If the goals are unrealistic, employees may also struggle with motivation even if they are offered a bonus. 

Some construction company owners usually decide by the end of the year if their employees deserve a Holiday or Year-End Bonus. 

The key questions to ask yourself:

Can I afford to give a bonus? Can I afford to provide a reward for my employees? Do I want to give a bonus to each of my employees? How do I decide how much Bonus I should give? Reality Check: Is bonus taxable?

Starting with the last question: In most cases, it may be taxable. All income is subject to State, Federal Payroll Taxes and is part of the employee's W-2. All forms of income, including bonuses, are income to your employee. 

The most common is to give your employee a set amount known as a 'Net Check". It would not seem the same to say, "here is your bonus for $200.00," but the actual check received is $169.04. Your employee will think you are tacky and cheap, and you can afford to give them a Big Bonus. 

Instead, you give the employee a check for $200.00, and the company pays all the payroll taxes. The bonus value is much higher when a check is grossed up (meaning you, the employer, pay all the taxes, company half, employee half of Social Security, Medicare, Federal Withholding, State, and Local Taxes).

Final Thoughts

We know that when it comes to compensation and payroll service, no one size fits all. Whatever payment structure your construction company follows, ensure you are consistent and fair as an employer and obey all applicable laws. We offer payroll solutions that meet your business's needs and enable you to spend time doing what you do best - running your company.

As we have been where you are now, we know that as construction business owners, you are selling your time first and your skill second. Your time as the contractor is the most valuable, so I hope you are doing tasks that only you can do. Contact us to learn more about different forms of compensation and what they mean for your bottom line.

About The Author:

Sharie DeHart, QPA is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on how to manage the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com