Growing a small business can be tricky, especially when you begin to have more responsibilities on your plate than you can personally manage. It's important to hire help as needed but also keep compensation within your budget so you aren't stressed about the cost of maintaining compensation for your employees over the long haul. Become aware of what counts as compensation and how it all works so you can be a reliable employer with a reputation for treating your employees right.

Compensation Definition in Small Business

Compensation includes more than simply keeping up with payroll for your employees. In fact, it includes the salary you pay your employees plus any additional financial benefits. A robust compensation package could include things like:

  • Base salary
  • Incentives
  • Overtime
  • Longevity pay
  • Shift differentials
  • Unemployment
  • Workers' compensation
  • Paid leave
  • Health insurance
  • Dental insurance
  • Life insurance
  • Disability insurance
  • Retirement plans
  • Extra benefits like gym memberships or tuition assistance

Small businesses that are just now hiring their first employees are unlikely to incur all of these expenses right out of the gate, but it's important to understand that they are all included under the umbrella of compensation.

Compensation Expectations in Small Business  

Compensation expectations depend on the type of employees you are employing and how you are paying them. For instance, if you hire independent contractors when your business is just beginning to grow, you are only responsible for paying their salary. The contracted employees are responsible for paying their own taxes and Social Security and for purchasing their own benefits. Starting out with contracted employees lessens the initial burden on your growing small business.

Eventually, your small business might be ready to handle the financial responsibility of payroll employees. Many of these employees maintain compensation expectations that include benefits like health insurance and life insurance, but more frivolous extras like gym memberships can wait until your budget can realistically handle the added burden.

At the very least, once you have your first payroll employee, your small business is responsible for keeping up with local, state and federal payroll taxes. This means that you are responsible for withholding FICA, FUTA and sometimes even disability insurance depending on the state.

Calculating Compensation in Small Business

When calculating a compensation package for new employees, remember to include all forms of compensation and not just the base pay. If you are able, it really helps to have an accountant manage payroll and compensation for your business. They are usually independent contractors, and the initial investment you make in their services can save you from the heartache of budgetary or tax mistakes later. A good accountant can even help you make financial projections and avoid hiring employees before your budget is truly ready to sustain them.

If you must calculate compensation yourself, add together employee base pay plus every other benefit you are providing to your employee. For instance, an administrative assistant might have the following compensation package:

  • Base salary: $35,000
  • Health insurance: $10,000
  • Retirement matching: $5,000
  • Disability insurance: $1,000

Even though this administrative assistant makes a base salary of $35,000, her total compensation package is worth $51,000 annually.

Taxes and Compensation

When an employee is on your payroll and is not just an independent contractor, you are responsible for calculating tax withholding from his pay. Taxable wages include his base salary and any bonuses, gifts or special pay like overtime and vacation.

Once you know which employees are considered payroll employees and how much taxable income they made, you can calculate tax withholding using federal, state and local tax tables. FICA and FUTA maintain across-the-board withholding rates, making calculation for these items easier.