Question

in order to accurately calculate an employee's pay, it is important that payroll clearly understands the different types of employee remuneration. In your own words, list and define the four categories of employment income, such as earnings, allowances, benefits, and expense reimbursements, providing an example (other than regular pay) for each category.

Answer 1

Earnings: Any money that is received by an employee for rendering his services to the employer are termed as earnings. Earnings are generally in the nature of fixed basic pay which every employee is entitled to received for the number of days served during the month. However, Earnings may also be in the nature of variable pay where payment is made on the basis of targets achieved. For eg. Mr. A is entitled to get 10% of his annual basic as a variable one time bonus if he manages to achieve the sales growth target of 10%, the variable pay may exceed to maximum of 20% if the growth in sales target is 20% or more.

Allowances: Allowances are payments made for specified purposes to the employee. For eg. House Rent allowance (HRA), HRA is given to an employee as an allowance for payment of his house rent. These allowances are generally given to provide tax deduction under the income tax laws.

Benefits: Benefits can be in the nature of short term or long term in nature. For eg. Short term benefits like giving gift vouchers to employees which can be used for shopping or long term benefits which are in the nature of post employment benefit plan under which gratuitous payment is made to employee for serving the organization for a long period of time at the time of his leaving the organization.

Expense Reimbursement: Employee Reimbursements are in the nature of reimbursements made to employee for the business expenditures that he/she has paid from own pocket. For eg. Expenditure incurred by employee for traveling to client location is reimbursed by the organization to the employee.