Decoding Compensation: Legal Perspectives and Tax Implications

Current compensation is the wages, salaries, bonuses, and other forms of remuneration that are paid or are directly provided to employees in the year in which they perform services for the employees (Lassila & Kilpatrick, 2003). According to Lassila & Kilpatrick (2003), it si typically the largest segment of the total compensation package provided to rank-and-file employees and executives alike.

Current compensation is the largest segment because most employees rely on it to satisfy their current consumption expenditure requirements. At private foundations, unreasonable (excessive) compensation is a form of self-dealing that can lead to penalty taxes – these legal issues may have to be tempered by outside appearances: a form of compensation may in fact be “reasonable” and perfectly “legal” and still draw public criticism as being “excessive” (Hopkins, 2004).

It is specified that compensation in general, is includible in the gross income of the recipient. Taxable wages for income tax withholding purposes includes “all remuneration for services performed by an employee for his employer including the cash value of benefits paid in any medium other than cash (qtd.

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in Lassila & Kilpatrick, 2003). Therefore, wages, bonuses, salaries, commissions on sales or insurance premiums, certain fringe benefits, and pre-retirement leave benefits are taxable and subject to payroll taxes.

In general, the term “wages” is defined as current compensation paid to employees on the basis of a certain rate per hour; it is typically paid to rank-and-file employees (Lassila & Kilpatrick, 2003). Salaries represents the amount paid over a period of time, sometimes regardless of the actual amount of time spent by the employee, which are typically paid to executives and professional and managerial employees; however, whether compensation is called wages or salary, it is subject to tax withholding.

According to Lassila & Kilpatrick (2003), in some cases employees who work more than the normal hours during a particular day or other pay period will receive remuneration at a higher than normal rate; overtime pay is treated the same as any other wages and salaries; that is, it is taxable when received. Bonuses are payments made to employees in addition to their regular salary as a reward for services performed (Lassila & Kilpatrick, 2003). They are generally based on such factors as profitability, length of time, productivity and others.

Whatever the cases, bonuses, as additional compensation, are includible in gross income of the employee and are also subject to income tax withholding (Lassila & Kilpatrick, 2003). Employees frequently provide some of their employees with vacation time and, in some cases, pay them some compensation for that; such vacation pay directly received by the employee is taxable like other salaries and wages, whether the employee takes the vacation odr work s during the vacation period (Lassila & Kilpatrick, 2003).

Vacation allowances that are paid to an employee from a vacation fund are taxable to the employee as compensation to the extent that they are based on services rendered. According to Hopkins (2004), in many respects, commissions are subject to the same rules as bonuses: both are forms of incentive compensation. Commissions and other percentage-based compensation, however, can result in heightened inquiry. By nature, they are computed using percentages and, to the IRS, they get close to the concept of private inurement.

The IRS is likely to carefully scrutinize compensation programs of non-profit organizations that have incentive features whereby compensation is a function of revenues received, is guaranteed, or is otherwise outside the boundaries of conventional arrangements (Hopkins, 2004). References Lassila, D. R. & Kilpatrick, B. G. (2003). U. S. Master Compensation Tax Guide. New York: CCH Tax and Accounting. Hopkins, B. R. (2004). Starting and Managing a Nonprofit Organization: A Legal Guide. New York: John Wiley & Sons.