Greenshades Payroll supports multiple types of earnings, which can be selected when creating an Earning Code. You may configure the wage type on an earning code by using Greenshades Online and navigating to: Settings -> Payroll -> Codes -> Create Code and then using the Wage Type dropdown on the New Earning Code screen.
Different wage types have different implications for the calculation of taxes, overtime, double-time, and much more. It is important to select the right type of wages for each earning code that you select. Below is a listing of various types of earnings and the recommended wage types for each.
Different Earnings and Their Appropriate Wage Types
Standard Earnings (Hourly or Salary) should be classified as "Regular"
Wages that represent an employee's regular wages during a pay period should be classified as "Regular" Wage Type.
Overtime and Double-Time codes should also be set as "Regular"
Overtime/doubletime codes will also be set as Regular: these earning should be treated just like regular wages for withholding purposes. You will choose a more precise Earning Category using the the "Calculation Details" setting of the earning code
Bonuses and Commissions should normally classified as "Supplemental" but can be set as "Regular"
Supplemental pay is earnings paid to an employee in addition to their regular earnings or regular paycheck.
Extra money paid to an employee due to holidays, unexpected work, or as a result of performance goals, are considered "Supplemental Pay" by the IRS. Assigning bonus earning codes the "Supplemental" earning type will inform Greenshades Payroll to withhold tax from these earnings according to the Supplemental Tax Rate (which is set separately by Federal, State, and Local governments).
Some employers will make a decision to pay bonuses alongside regular wages, and withhold according to the regular rates (which are typically higher). This is called the "Aggregate Method" by the IRS. There is a full article dedicated to determining how to classify bonuses and pay bonuses, and the tax implications of each. Employers who choose this option should set the bonus wage type to "Regular Pay".
Greenshades recommends using the Supplemental Wage Type for these earnings.
Paid Time-Off Payouts should normally be classified as "Supplemental", but can be set as "Regular"
Paying an employee out for unused Paid-Time Off (including Sick Time, Vacation Time, etc.) is normally considered "Supplemental". Some employers will choose to classify these earnings as "Regular" so they are taxed according to the "Aggregate Method" (as described in the section above).
Greenshades recommends using the Supplemental Wage Type for these earnings.
Expense Reimbursements MAY be classified as either "Tax-Exempt" or "Supplemental"
If the expense reimbursements are for reasonable work-related expenses AND your business has an "accountable" plan in place, then the expense reimbursement earning should be set to "Non-Taxable". Briefly, the IRS gives 3 criteria for ensuring that the business reimbursement plan is accountable.
- The expense must occur during the course of services offered by the employee to the employer
- The employee must provide the employer with evidence of the amount, the time, the place, and the business purpose of the expense. The employee must provide that information in a reasonable amount of time after the expense was incurred.
- If the employer overpays the employee for the amount that the employee spent, then the employee must return any excess amounts to the employer within a reasonable amount of time.
See IRS Publication 15 for full details on expense reimbursements and accountable plans.
Typical business expenses include:
- Business Supplies
- Travel Expenses
- Meals & Entertainment
If the employer has an accountable expense reimbursement plan in place AND the expense is a valid business expense, then it should be paid out according to a "Non-Taxable" wage type.
Otherwise, business expense reimbursements should be classified as "Supplemental" and tax will be withheld at the supplemental income tax rates.
Prizes, Awards or Taxable Fringe Benefits should be classified as "Supplemental"
If you win a special award or distinction from your employer or a professional association that comes with a monetary incentive, that prize/award is considered Supplemental by the IRS.
Taxable fringe benefits include gift cards, income from exercise of nons-tatutory stock options, taxable income from issuance or vesting of restricted stock, employer-provided cell phone (non-business use) and gym memberships. You will need to use a Supplemental earning type for these earnings.
Tips should be classified as "Tips"
Tips is used to represent any tipped wages earned by the employee for the current pay period. Tips will be treated as treated as regular earnings for tax purposes. However, it is still important to classify tip earnings as "Tips" for a number of other payroll calculations, such as calculating Tip Credits.
Qualified Disaster Relief Payments and Certain Educational Assistance should be classified as "Tax-Exempt"
Payments or reimbursements made to employees to cover expenses resulting from a qualified disaster, including family, personal, or repair expenses, should be classified as Tax-Exempt.
The first $5,250 of payments or reimbursements for educational expenses that meet specific IRS criteria should also be classified as "Tax-Exempt".
Backpay
Regular Earnings from a prior pay period should classified as "Backpay Regular"
Greenshades Payroll supports a "Regular" and "Backpay Regular" wage type. The backpay type should be used when paying employees Regular earnings that they were owed from prior pay-periods but did not yet receive. Please note that the IRS treats all back pay to be wages in the year they are paid.
Supplemental Earnings from a prior pay period should classified as "Backpay Supplemental"
Greenshades Payroll supports a "Supplemental" and a "Backpay Supplemental" wage type. The backpay version should be used when paying employees Supplemental earnings that they were owed from prior pay-periods but did not yet receive. Please note that the IRS treats all back pay to be wages in the year they are paid.