Compensation definition

Compensation is typically used to refer to wages of some kind, including salary, hourly rate, commissions and bonus. It is the period amount paid to employees by an employer and is the amount upon which taxes and employer contributed benefits are calculated. An employees annual compensation is reported on IRS Form W-2.

For a self-employed person, which is anyone who owns a business that is a sole proprietorship or general partnership, compensation is the net profit from the operation of the business. In a partnership, compensation is divided based on ownership percentage.