The ‘Earning Ring of Fire’: Decoding Pay Types

Nearly every week of my payroll career, I’ve been asked by colleagues and clients about earnings and pay types. Not sure what any of that means? Let’s get technical. I’ll give you a crash course on earnings and a few tips on when it’s best to create new pay types.

Earnings

If you’re unfamiliar with running payroll, you might not know what it means to create an earning. Simply put, regular pay, bonuses, commission, vacations, and holidays are all forms of earnings. Most payroll platforms have those types of earnings built in for you. Yet, there are times when you might need to pay an employee outside of those scenarios, something referred to as an “additional” or “miscellaneous” earning.

If your payroll platform has customizable earnings and names, this is where things can quickly get messy. While at the time “Y2K Pay” and “Steve’s Wedding Bonus” might have made sense, these frivolous earnings can quickly add up and make it hard to rectify your payroll registers or quarterly reports.  

Keep it Clean

A good starting point is to see what you have. Look in your payroll program and review what is already offered. There is a good chance that you already have every earning you could possibly need. If you’re unsure about any of them, make a list and contact your payroll professional or representative. They can tell you the use for any earning and share specific tax calculations that might be tied to the pay type.

Once you have a good list of your earnings, your next step would be to determine if you have what you need, or if this is a case for a new earning. When adding a new pay type, always ask if it is something that you’ll likely use again. If you wanted to give your team a bonus for the recent solar eclipse, it might be best to use your built-in “bonus” earning, and then use a note or memo to say “Bonus for the Eclipse.” Memo areas on check stubs are standard in the payroll industry and can be used to record these unique payment situations and save yourself the headache of scrolling through dozens of pay types you no longer need.

Taxes

What if you have the earning, but the taxability doesn’t seem right? This can happen when paying out bonuses where the employee wants additional federal taxes to be withheld. However, instead of creating an earning labeled “Bonus Fed Additional,” you should instead add additional taxes on a standard bonus earning in the employee’s profile. This can get highly technical, so it’s best practice to speak with your payroll provider if you want to accomplish a tax increase or suppression properly.

Creating Pay Types

Of course, there are situations where you’ll actually want to create pay types. For example, it makes sense to have something like “Used Car Commission” and “New Car Commission” exist separately. While both earnings carry the same tax liability, they are unique enough that you might want to track how much money is paid out in one or the other. In this scenario, the earnings types will be reused and can be easily reported on. Before creating a new pay type, always consider these two criteria.

What if you’re unsure? In this case, it is always best to call your payroll professional, or check and see what your company has done in the past. Stock payments, housing allowances and severance can all be tricky if you are not experienced with these pay types. While these tend to pop up around year-end, it’s never too early to think about what earnings you might need.

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There you have it—your primer on pay types and when to create them. In the end, no company is the same and it’s always going to come down to your unique payroll and payday needs. Be sure to consult with your in-house payroll team or technology vendor if you’re unsure of how to handle or create earnings. Determining what to add will always come down to what makes the most sense for your payroll.