The Employer’s Guide to Paying Bonuses, Overtime & Commission

Payroll is an integral element of any business’s accounting, but it can bring with it a few headaches when it comes to less traditional pay structures such as bonuses, overtime and commission.

Businesses will typically have policies set out that dictate pay structures for these kinds of scenarios, with employee contracts referencing these internal policies - but beyond that, it’s vital for you to know how these types of pay are calculated and managed.

In this no-nonsense guide, we’re breaking down how to pay (and report on) employee bonuses, overtime and commission so you can get to grips with this important accounting task.

Paying employee bonuses

Bonuses aren’t a universal feature of all businesses, but they can serve as a powerful incentive for employees. If you’re looking to implement a bonus scheme for your staff, the first crucial step is specifying the eligibility criteria for your scheme (which should be clearly documented within employee contracts).

As bonuses are considered earnings by HMRC, they must be notified of any bonus payments made to employees. Bonuses are also subject to tax, meaning your business must pay tax on all bonuses and deduct this tax from employee earnings.

For cash bonuses (which include any vouchers that can be exchanged for cash), bonuses should be reported to HMRC alongside standard employee pay, and will be subject to PAYE and Class 1 National Insurance.

For non-cash bonuses, tax rules vary subject to the nature of the bonus. As with the voucher example above, if the bonus can easily be exchanged for cash, it may be subject to PAYE tax.

Christmas bonuses are subject to the same tax rules as outlined here depending on whether they take the form of cash or gifts.

There are some non-cash bonuses classed as ‘trivial benefits’, including non-cash/voucher goods costing less than £50, which are completely exempt from tax reporting laws - so long as they aren’t mentioned in employee contracts or given based on performance.

Paying employee overtime

Overtime pay refers to any money an employee earns outside of their normal working hours or shift patterns. While overtime pay isn’t a legal requirement, it can serve as an effective motivator for employees who would otherwise be resistant to working outside of their usual hours.

Your business’s overtime pay structure and rate must be specified in employees’ contracts in addition to details around salary and wage. It’s also crucial to note that overtime work can only be compulsory if it’s covered in employee contracts, and an employee’s weekly working time cannot exceed 48 hours (inclusive of any overtime work).

Any overtime pay should be paid out alongside regular employee earnings, with payslips clearly showing not only the amount earned but also the details of overtime hours worked.

Paying employee commission

A commission-based salary structure is inherently performance-based and is only legal in circumstances where the employee’s contract ensures they’ll at least earn the appropriate living wage.

As with bonuses and overtime, details of any commission structures should be explicitly laid out in employee contracts and should specify timeframes for how often commission can be both earned and paid.

Commission is subject to the same rules as employees’ regular salaries when it comes to how it’s paid, deducted and reported to HMRC.

How cloud-based accounting software can help

Each of these forms of pay constitutes taxable income and is treated in the same way as regular employee wages, with tax and National Insurance being deducted as appropriate.

With these various benefits being factored into an employee’s gross pay amount, this also affects their income tax. As you can likely imagine, this can complicate the payroll process for any business offering employees overtime, bonuses or commission.

As with most accounting responsibilities, cloud software solutions can take the heavy lifting out of paying bonuses, overtime and commission to your employees.

Ensuring accurate pay calculations, streamlining reporting to HMRC, creating and managing employee payslips, and maintaining legislative compliance, platforms like Xero make light work of this accounting process.

Don’t struggle in silence with employee payroll - lean on purpose-built software and liberate yourself from manual accounting work.

If you’d rather avoid the accounting headache that comes with employee payroll, the Harlands team is here to take this job off your plate. Get in touch now to gain the gift of time by outsourcing your business accounting to the experts.