Understanding Employee Compensation and Payroll Management
1. Concept and Types of Compensation
Compensation is the monetary payment an employee receives for services rendered to an employer. This encompasses various forms of remuneration.
2. Remuneration of Dependent Workers
Earnings consist of three primary components: assets, deductions, and net pay.
Assets
Assets include various forms of remuneration and allowances established in individual or collective bargaining agreements. These may include salary, bonuses, commissions, profit sharing, and other incentives.
Definitions According to the Labor Code
- Salary: The fixed monetary stipend paid at regular intervals, as specified in the employment contract, for services rendered.
- Bonus: Remuneration for overtime work exceeding the legal limit.
- Commission: A percentage of the sale or purchase price, or the value of other transactions conducted by the employee on behalf of the employer.
- Profit Sharing: A share of the profits of a business or enterprise, or a specific division thereof.
- Incentive Bonus: A portion of the profits distributed to the employee as a reward.
Deductions
Deductions are amounts subtracted from an employee’s salary in accordance with legal requirements or mutual agreements. These include pension contributions, taxes, judicial withholdings, and voluntary deductions.
Types of Deductions
- Legal Deductions:
- Pension: Contributions to the pension fund, disability insurance, and health insurance.
- Tax: Income tax.
- Judicial Withholdings: Court-ordered deductions.
- Voluntary Deductions:
- Salary advances and loans.
- Union dues, property dividends.
- Other voluntary deductions.
Pension Deductions
Social security contributions are allocated towards social protection for workers and their families, encompassing contributions to the pension fund, health insurance, and survivor’s insurance. The pension fund accumulates monthly contributions to provide a future pension for the worker.
Income Tax Deductions
Income tax is levied on various forms of income, including salaries, bonuses, wages, premiums, allowances, incentives, and similar payments for personal services, excluding mandatory contributions to pension funds. Non-taxable income includes family allowances, pension benefits, severance pay, and retirement compensation up to a maximum of one month’s salary per year of service, or fraction exceeding six months.
Judicial Deductions
These are court-ordered deductions for the benefit of the worker’s immediate family, up to a maximum of 50% of the net compensation.
Voluntary Deductions
Deductions made by mutual agreement between employer and employee, including salary advances and loans, union dues, dividends, purchases of housing and public obligations, and other payments not exceeding 15% of the total remuneration.
Net Pay
The total assets minus deductions, representing the amount due to the employee for periods not exceeding one month, as per labor code regulations.
3. Payroll Calculation and Payment
Process Stages
- Personal Data: Gathering information from individual or collective work contracts, employee records, or resumes (e.g., name, address, etc.).
- Personnel Updates: Incorporating changes in employee status, such as retirements and new hires.
- Calculations: Performing calculations based on permanent data and personnel updates, considering factors like withholdings, compensation laws, and tax regulations.
- Settlement Preparation: Determining the payment period, asset values, deduction amounts, and net pay.
- Remuneration Recording: Documenting settlements in the remuneration book, mandatory for employers with five or more employees.
- Accounting: Recording settlements in the ledger and journal entries.
- Payments: Disbursing payments to employees based on calculated net pay.
4. Cost to the Company
The cost of salaries includes amounts stipulated in individual or collective bargaining agreements, plus employer contributions to social security, and other expenses directly benefiting employees and their families.