Types of employee remuneration
Remuneration means everything a worker is paid for their work.
- Salary: a fixed amount per year or month, whatever the hours (a teacher, an accountant).
- Hourly wage: rate × hours. Hours above the normal limit (often 40 or 44 a week, 48 in India) are overtime, usually paid at 1.5 times (“time and a half”) or 2 times the rate.
- Commission: a percentage of sales made, common for sales staff. It may be on top of a small base salary.
- Piece rate: pay per item made or delivered (a tailor paid per shirt).
- Bonus: extra pay for good results or at festivals (for example a Diwali or year-end bonus).
- Benefits: paid holidays, health cover, pension matching. Some are taxable.
Gross pay = all earnings for the pay period before deductions.
Payroll deductions
Deductions are amounts the employer takes off gross pay and sends to someone else.
- Statutory (required by law): income tax withheld (TDS in India, PAYE in the UK); pension or social security (EPF in India, CPP in Canada, Social Security in the US, National Insurance in the UK); employment or health insurance (ESI in India, EI in Canada, Medicare in the US).
- Voluntary (the worker agrees): union dues, extra pension savings, group insurance, charity, loan repayments.
Net pay = Gross pay − Total deductions. The deductions are not the employer’s money: they are liabilities until paid to the government, fund or union.
For many schemes the employer also pays its own share (for example matching the pension 1 : 1, or paying 1.4 times the worker’s EI in Canada). That extra is the employer’s payroll tax expense.
Payroll transactions and journal entries
Each pay period, a payroll register lists every worker: hours, rate, gross pay, each deduction and net pay. Each worker gets a payslip (pay stub) with the same details. Then the business records:
- Record the payroll: Dr Wages (or Salaries) expense (gross); Cr Income tax payable, Cr Pension payable, Cr Insurance payable, Cr Union dues payable (each deduction); Cr Cash or Wages payable (net).
- Record the employer’s share: Dr Payroll tax expense; Cr Pension payable, Cr Insurance payable.
- Remit by the due date: Dr each payable account; Cr Cash.
At the end of the year the employer gives each worker a yearly earnings and tax statement (Form 16 in India, T4 in Canada, W-2 in the US). Payroll software and online government portals now do most of these steps.
Try it: read your own payslip
Ask a family member if you may look at an old payslip with the name and numbers covered. Find: the gross pay, each deduction, and the net pay. Check that gross − deductions = net. Mark each deduction as statutory or voluntary. Then try the sliders in the 3D: what happens to net pay if overtime hours go up?
Key formulas and definitions
- Regular pay = Normal hours × Hourly rate
- Overtime pay = Overtime hours × Hourly rate × 1.5
- Gross pay = Regular pay + Overtime + Commission + Bonus
- Net pay = Gross pay − Total deductions
- Total payroll cost to employer = Gross pay + Employer contributions
Worked examples
1. Maya earns 20 per hour and works 45 hours (normal week 40 hours, overtime 1.5×). Find gross pay.
Regular: 40 × 20 = 800. Overtime: 5 × 30 = 150. Gross = 950.
2. From 950 deduct income tax 10%, pension 5%, insurance 2% and union dues 10. Find total deductions and net pay.
Tax 95 + pension 47.50 + insurance 19 + union 10 = 171.50. Net = 950 − 171.50 = 778.50.
3. A sales person earns a base of 1,500 a month plus 4% commission on sales of 30,000. Find gross pay.
Commission = 4% × 30,000 = 1,200. Gross = 1,500 + 1,200 = 2,700.
4. A tailor is paid 35 per shirt and finishes 120 shirts in a month. Find gross pay.
120 × 35 = 4,200.
5. Write the payroll entry for Maya (gross 950; tax 95; pension 47.50; insurance 19; union 10; paid in cash).
Dr Wages expense 950.00; Cr Income tax payable 95.00; Cr Pension payable 47.50; Cr Insurance payable 19.00; Cr Union dues payable 10.00; Cr Cash 778.50.
6. The employer matches the pension (47.50) and pays insurance at 1.4 times the worker’s share (19). Record it and find the total cost of employing Maya this week.
Employer insurance = 1.4 × 19 = 26.60. Dr Payroll tax expense 74.10; Cr Pension payable 47.50; Cr Insurance payable 26.60. Total cost = 950 + 74.10 = 1,024.10.
Common mistakes
- Recording only net pay as wages expense. The expense is the full gross pay; deductions are part of it.
- Paying overtime at the normal rate, or applying 1.5 times to all hours instead of only the extra ones.
- Treating amounts withheld from workers as the employer’s income. They are liabilities until sent on.
- Forgetting the employer’s own contributions, which are an extra expense on top of gross pay.