Supplemental Pay: Why It Matters for Hourly Teams

Supplemental pay is extra money you give your team on top of their regular wages. As a small business owner, your first question is probably why you should bother with supplemental pay. After all, you already pay your team a salary!

But the benefits of supplemental pay are countless. Offering bonuses or commissions can help you stand out as an employer, especially when competition for talent is tough.  

The morale boosters don’t end there! Supplemental pay can be a great way to offer flexible rewards for team members putting in extra effort, whether they’re staying late, covering a holiday shift, or hitting performance goals. 

But before we dive into all the benefits,  let’s break down what supplemental pay is, the different types you can offer, and how to make the most of it. You’ll also learn how this extra compensation can benefit your business and your employees and help you build a stronger, more engaged team.

What is supplemental pay?

Supplemental pay is any additional income given to employees on top of their regular wages or salary. It’s a way for employers to reward their teams beyond their base pay, often for things like overtime work, bonuses, or special achievements.

This form of compensation can take different forms. Usually, it’s  given in specific situations, like when an employee earns a commission on a sale or receives a holiday bonus. Commissions and overtime are more classic forms of supplemental pay, but even severance pay, back pay, and payments for unused vacation time can be considered supplemental pay. 

The key to supplemental pay is in the name: it’s meant to supplement an employee’s usual paycheck and provide extra financial incentive and recognition for their contributions.

What's the difference between supplemental and regular pay?

The key difference between supplemental pay and regular pay lies in their structure and purpose. 

Regular pay refers to the wages or salary employees earn for the standard hours they work, typically based on an hourly rate or a fixed salary. It’s predictable, consistent, and serves as the primary source of income. 

Supplemental pay, on the other hand, is additional compensation on top of regular wages. It’s usually tied to specific circumstances like overtime, bonuses, or commissions. It’s meant to reward extra effort or special achievements.

Note that when it comes to taxes, supplemental pay is treated differently from regular pay. While regular wages are taxed at the employee’s normal income tax rate, supplemental pay might be taxed at a flat rate. 

In many states, employers withhold 22% for federal income tax on supplemental wages, though this can vary depending on the total earnings and the state. This separate tax treatment helps simplify the process for employers and ensures supplemental payments are appropriately taxed.

Common supplemental pay types

Still wondering about the different forms supplemental pay can take? Look no further! We’ve broken down even more ways to reward your team beyond their weekly pay.

Bonus pay

Bonus pay is a type of supplemental income that rewards employees for meeting specific goals, such as performance targets or company-wide objectives. This can be a one-time or recurring payment, depending on the structure set by the employer. 

Bonus pay is often used to incentivize employees. It can vary in amount based on the company’s profits or the employee’s individual performance.

Commission

Commission is a common form of supplemental pay for employees in sales roles. It’s typically a percentage of the revenue or profit generated from sales made by the employee. 

Unlike regular pay, commission directly ties an employee’s earnings to their sales performance. This encourages them to close more deals and drive company growth.

Overtime pay

Overtime pay compensates employees who work more than 40 hours per week. In most cases, employees working overtime receive pay at a rate of time and a half, meaning they earn 1.5 times their regular hourly rate. 

Overtime pay is a significant form of supplemental compensation for hourly employees.It’s regulated by federal and state labor laws and isn’t available to all employees—especially employees paid hourly instead of salaries.

Severance pay

Severance pay is given to employees who are leaving a company, typically due to layoffs or company restructuring. It’s meant to provide financial support during the transition period. Severance pay is usually calculated based on the employee’s length of service, position, and salary.

Holiday pay

Holiday pay refers to additional wages given to employees who work on holidays or during hours outside regular business days. Many companies offer extra compensation (such as double-time or time and a half) to employees who work on designated holidays.

Shift differentials

Shift differential pay compensates employees who work less desirable shifts, such as late nights, early mornings, or weekends. This form of supplemental pay is common in industries like healthcare and retail, where operations run 24/7 and companies offer incentives to ensure they fill all shifts.

Tips or gratuities

Tips or gratuities are common in industries like hospitality and food service, where employees receive additional compensation from customers. These earnings are supplemental to their base hourly wages and vary widely based on service quality and customer satisfaction.

What isn't considered supplemental pay?

Regular pay—the fixed hourly wage or salary employees earn for their standard workweek—is not considered supplemental pay. This type of income is what employees rely on for their routine earnings. 

Additionally, benefits like health insurance contributions, retirement savings contributions, and non-monetary perks (such as company cars or gym memberships) are not classified as supplemental pay since they don't directly increase an employee's paycheck.

Another thing to note is that reimbursements for expenses, such as travel or office supplies, are not considered supplemental pay. These are merely compensations for costs employees incur while performing their jobs, not extra income.

Why is supplemental pay important for hourly teams?

Even small businesses can benefit from offering their team bonuses or commissions! Here are just a few reasons to consider offering your team supplemental income.

Boost employee morale and productivity.

One of the main reasons supplemental pay is important for hourly teams is its ability to boost morale and productivity. Offering bonuses, overtime pay, or commissions gives employees extra motivation to go above and beyond their basic job responsibilities. 

Hourly employees in particular can face more uncertainty about their schedules and earnings. Giving them the opportunity to earn additional income provides your team with a clear incentive to work harder. With supplemental pay, employees are rewarded for their contributions, which can result in increased engagement and performance.

Enhance employee retention and reduce turnover.

Supplemental pay can play a crucial role in employee retention and reducing turnover rates. High turnover can be costly for businesses, especially in industries that rely heavily on hourly workers. 

Offering supplemental pay to employees shows them that their hard work is valued, making them more likely to stay with the company longer. Whether it’s providing holiday pay or performance-based bonuses, this extra compensation encourages employees to remain loyal, reducing the need for constant hiring and training. 

In short, employees benefit from the extra income while your business benefits from the added stability!

Industries where supplemental pay is beneficial

Supplemental pay is particularly useful in industries that rely on hourly employees, such as hospitality, retail, and healthcare. In these sectors, where schedules can vary and shifts are often outside of traditional hours, bonuses, shift differentials, and tips help attract and retain staff. 

For example, in the restaurant industry, tips are a significant part of an employee’s earnings. In retail, seasonal bonuses may encourage employees to stay through busy periods. In healthcare, offering overtime or holiday pay ensures critical positions are covered, even during less desirable shifts.

By offering different forms of supplemental pay, businesses in these industries can keep employees engaged, motivated, and committed to the team.

How to calculate and track supplemental pay for hourly employees

Calculating and tracking supplemental pay for hourly employees can sometimes be straightforward. However, it's important to ensure accuracy to avoid payroll mistakes and compliance. Here’s a guide on how to handle bonuses, commissions, and overtime for hourly teams.

Bonuses

When calculating bonus pay, start by determining the criteria for the bonus. Bonuses can be based on individual performance, company profits, or reaching specific milestones. For hourly employees, ensure that the bonus is prorated or adjusted based on the hours worked or specific achievements. 

For instance, if an employee earns a performance-based bonus, the calculation could be a set percentage of their gross pay. Make sure you track the bonus pay separately from regular wages, as it is subject to different tax withholding rules.

Commissions

For sales roles or employees whose earnings include commissions, the calculation will depend on the agreed-upon commission structure. A common approach is to offer a percentage of the sales revenue generated by the employee. 

For example, if an employee earns 5% commission on sales and they bring in $10,000 in revenue, their supplemental pay for that period would be $500. Always track commissions in addition to regular pay, and remember that commissions are subject to income tax withholding.

Overtime pay

To calculate overtime pay, start by determining the employee’s regular hourly wage. Overtime is typically paid at a rate of 1.5 times the employee’s regular hourly wage for any hours worked beyond 40 hours in a workweek. 

For instance, if an employee’s hourly rate is $15 and they worked 45 hours in a week, the 5 hours of overtime would be paid at $22.50 per hour. This would add $112.50 in supplemental pay to their paycheck for that week. Be sure to track all overtime hours and payments carefully to ensure compliance with labor laws.

Tracking supplemental pay

To accurately track supplemental wages, it's essential to use payroll software or a time tracking tool that records hours worked, bonuses earned, and any additional pay. By using software to help you keep track of the details, you’ll ensure that all types of supplemental compensation are properly categorized and taxed. 

That’s not all software is helpful for. These kinds of payroll tools can also generate detailed reports, helping you stay compliant with labor laws and tax regulations.

Supplemental pay and legal compliance

When offering supplemental pay, businesses must ensure they remain compliant with federal, state, and local regulations. If you don’t, you might be facing fines, penalties, and legal action. Below are some key compliance considerations to bear in mind:

Fair Labor Standards Act (FLSA) compliance

In the U.S., the Fair Labor Standards Act (FLSA) governs minimum wage, overtime pay, and other employment standards. Any supplemental pay, such as bonuses or overtime, must be factored into an employee’s regular rate of pay to determine if they are eligible for overtime. 

For example, if an hourly employee earns bonuses or commissions, these need to be included when calculating their overtime rate. This ensures they receive the correct overtime compensation under FLSA.

Tax withholding on supplemental pay

The IRS requires that supplemental wages be taxed differently from regular wages. Employers can either apply a flat percentage (currently 22% for bonuses) or aggregate the supplemental pay with regular wages and withhold taxes at the employee’s normal rate. 

This distinction is important to avoid under- or over-withholding taxes on bonuses, commissions, or overtime. Be sure to also stay compliant with state and local tax requirements, as these can vary depending on the jurisdiction.

State-specific labor laws

While federal regulations like the FLSA set the baseline for payroll compliance, many states have their own laws governing supplemental pay. For instance, certain states have specific rules on when bonuses must be paid and how overtime should be calculated. 

Businesses need to stay updated on these regulations to ensure compliance across different states, especially if they operate in multiple locations.

Examples of supplemental pay structures in different industries

Hospitality 

In the hospitality industry, supplemental pay is often vital for retaining staff and ensuring smooth operations. Employees from servers and bartenders to kitchen staff rely heavily on tips as a significant part of their income. 

In some cases, bonuses may also be provided for hitting sales targets or during peak seasons like holidays. Shift differentials are another common form of supplemental pay, where employees who work late-night or early-morning shifts receive extra compensation.

Retail 

Retail businesses often provide overtime pay and holiday pay as part of their supplemental compensation packages. During peak seasons, such as Black Friday or the holiday season, retail workers may receive performance bonuses for exceeding sales goals. 

Additionally, many retail workers earn commission on sales, which acts as both an incentive to increase revenue and as supplemental income.

Healthcare

In healthcare, overtime pay is frequently offered to nurses, doctors, and support staff working long hours or on-call shifts. Shift differentials are also common, especially for employees working night shifts or weekends. 

Retention bonuses are sometimes used to keep critical staff in high-demand positions. This supplemental pay can help cover hard-to-fill positions and ensure that patient care is maintained at high levels.

Construction

In the construction industry, supplemental pay may come in the form of hazard pay for working in dangerous environments or overtime pay for working beyond standard hours. 

Bonuses may be offered for completing projects ahead of schedule or under budget. This industry may also use per diem payments to cover the costs of employees traveling or working away from home for extended periods.

Manufacturing

Piece rate pay is common in manufacturing, where employees are paid based on the number of units they produce. This acts as supplemental income, especially when demand spikes.

Education

In some private schools or tutoring centers, teachers might receive performance bonuses as supplemental income based on student test scores or evaluations.

Streamline supplemental pay for hourly teams.

In this article, we’ve covered the essential aspects of supplemental pay, including how it differs from regular pay and industries that rely on these forms of extra compensation. We’ve also discussed how businesses can calculate and track supplemental pay for hourly employees, ensuring legal compliance while boosting morale and retention.

In short, supplemental pay is a great way to motivate performance and maintain a positive workplace culture. By implementing the right supplemental pay strategies and staying compliant with legal requirements, you can provide meaningful compensation that supports your employees and drives your business forward.

Fortunately, services like Homebase Payroll are here to help you manage your employee supplemental pay, from tracking to reports to ensuring compliance. Boost your team’s morale and try Homebase for free today.

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