Compensation refers to all forms of pay an individual receives for work or services, whether as an employee or an independent contractor. It generally includes wages, salaries, bonuses, commissions, and certain taxable benefits.
💰 Types of Compensation
Wages and Salaries – Regular pay for work performed
Bonuses and Commissions – Extra pay based on performance, goals, or sales
Tips – Income received by employees who earn tips (must be reported)
Fringe Benefits – Taxable perks such as company cars, housing, or gym memberships
Stock Options – May be taxable when exercised or sold, depending on the type
Deferred Compensation – Income earned now but paid later (for example, some retirement plans)
🧾 How It’s Reported
- Employees receive Form W‑2 from their employer
- Independent contractors receive Form 1099‑NEC
- Most compensation is subject to federal income tax and may also be subject to Social Security and Medicare taxes
🛠️ Example
An employee earns:
- $50,000 salary
- $5,000 bonus
- $2,000 in taxable fringe benefits
Total taxable compensation = $57,000