99 Payroll Terms you should know
Eddy Team — June 11, 2024
Navigating the complexities of payroll can be daunting for any company, but can be especially challenging for smaller businesses who don't have deep payroll experience.
This article will help to demystify the top payroll terms every business needs to know. By familiarizing yourself with these essential terms, you can streamline your payroll processes, ensure compliance with regulations, and ultimately, create a more efficient and effective payroll system for your business.
Basic Payroll Concepts
Understanding the basic payroll concepts is a great place to start to ensure accurate and efficient payroll management. Understanding these basic concepts will help you as you streamline payroll calculations, ensure compliance with tax regulations, and enhance the overall financial health of your business.
- Gross Pay: Total earnings an employee receives before any deductions are made.
- Net Pay: The amount an employee takes home after all deductions have been subtracted from their gross pay.
- Payroll Taxes: Taxes that employers are required to withhold from employees' wages and pay on behalf of their employees.
- Withholding: Amounts taken out of an employee's paycheck for federal, state, and local taxes.
- Pay Period: The regular interval of time over which employee wages are calculated and paid (e.g., weekly, bi-weekly).
- Direct Deposit: Electronic transfer of an employee's paycheck directly into their bank account.
- Pay Stub (aka Earnings Statement): Document provided to employees detailing their gross pay, deductions, and net pay for a specific pay period. Also called a pay stub.
- Pay Rate: The amount of money an employee is paid per hour, day, or other unit of time.
- Piece Rate: A method of pay where employees are compensated based on the number of items they produce or tasks they complete.
- Shift Differential: Additional pay provided to employees for working less desirable shifts, such as night shifts or weekends.
- Base Pay: The basic rate of pay for an employee before any bonuses or additional compensation.
- Take-Home Pay: Another term for net pay, the amount an employee receives after all deductions.
Key Payroll Forms
Accurate payroll management hinges on the correct use of various essential forms, which ensure compliance with federal and state tax regulations and provide necessary information to both employees and the government. In this section, we will explore crucial payroll forms such as the W-2, W-4, and Form 1099, detailing who is responsible for completing each. Employers are typically responsible for completing and distributing W-2 forms, while employees fill out W-4 forms to indicate their tax withholding preferences. Form 1099 is used to report income paid to independent contractors, and it is the payer's responsibility to issue this form. Understanding the purpose and proper handling of these forms is vital for maintaining smooth payroll operations and avoiding costly penalties.
- W-2 Form: A form that reports an employee's annual wages and the amount of taxes withheld from their paycheck. (see more: https://www.irs.gov/forms-pubs/about-form-w-2)
- W-4 Form: A form used by employees to indicate their tax situation to their employer for accurate tax withholding. (see more: https://www.irs.gov/forms-pubs/about-form-w-4)
- Form 1099: A form used to report income paid to independent contractors and other non-employee workers. (see more: https://www.irs.gov/forms-pubs/about-form-1099)
- Form W-9: A form used to provide taxpayer identification information for independent contractors. (see more: https://www.irs.gov/forms-pubs/about-form-w-9)
- Form 941: A quarterly tax return form used by employers to report income taxes, Social Security tax, and Medicare tax withheld from employees' paychecks. (see more: https://www.irs.gov/forms-pubs/about-form-941)
- Form 944: An annual tax return form used by smaller employers to report income tax, Social Security tax, and Medicare tax withheld. (see more: https://www.irs.gov/forms-pubs/about-form-944)
Payroll Taxes and Compliance
Compliance with tax regulations and reporting requirements is a critical aspect of payroll management for business. Understanding key terms such as FICA, FUTA, and SUTA is essential for ensuring that your business properly contributes to Social Security, Medicare, and unemployment insurance programs. Additionally, adhering to reporting obligations under the Affordable Care Act (ACA) and the Equal Employment Opportunity (EEO) regulations is vital for maintaining compliance and avoiding penalties.
- FICA: The Federal Insurance Contributions Act tax, which funds Social Security and Medicare programs.
- FUTA: The Federal Unemployment Tax Act tax, which funds unemployment benefits for workers.
- SUTA: The State Unemployment Tax Act tax, which funds state unemployment benefits.
- ACA Reporting: Reporting requirements under the Affordable Care Act for businesses regarding employee health coverage.
- EEO-1 Report: Mandatory annual report filed with the Equal Employment Opportunity Commission providing a breakdown of a company’s workforce by race, ethnicity, gender, and job category.
- Medicare Tax: A federal tax that funds Medicare, the federal health insurance program for people aged 65 and older.
- Social Security Tax: A federal tax that funds Social Security, which provides benefits for retirees, the disabled, and survivors.
- Federal Tax Deposit (FTD): Payments made by employers to the IRS for federal income tax, Social Security, and Medicare taxes.
- Local Taxes: Taxes imposed by local governments, such as city or county taxes, on wages and salaries.
- State Income Tax: Taxes imposed by individual states on wages, salaries, and other forms of income. (43 U.S. states have a state income tax.)
Employee Classification and Compensation
Classifying employees correctly and understanding the nuances of their compensation is fundamental to effective payroll management. Properly classifying employees ensures compliance with labor laws and regulations, while accurately managing their compensation helps maintain fairness and transparency within your organization.
- Employee Classification: The process of designating a worker as either an employee or an independent contractor based on their job duties and relationship with the employer.
- Exempt Employees: Employees who are not entitled to overtime pay according to the Fair Labor Standards Act (FLSA).
- Non-Exempt Employees: Employees who are entitled to overtime pay for hours worked beyond the standard workweek.
- Salary: A fixed regular payment, typically paid on a monthly or bi-weekly basis, not dependent on hours worked.
- Hourly Wage: Payment based on the number of hours worked by an employee.
- Minimum Wage: The lowest legal wage that can be paid to employees, as mandated by federal, state, or local laws.
- Statutory Employee: An independent contractor treated as an employee for certain employment tax purposes.
- Independent Contractor: A worker who provides services to a business but is not considered an employee and does not receive benefits or have taxes withheld by the employer.
- Freelancer: An independent worker who provides services to multiple clients without long-term commitments.
- Gig Worker: A worker who takes on short-term, flexible jobs, often facilitated by digital platforms.
- Commission: A form of variable pay based on sales or performance, often a percentage of sales made.
- Piecework: Compensation based on the number of units produced or tasks completed by an employee.
Deductions and Benefits
Employee compensation extends beyond wages to include various deductions and benefits that play a crucial role in overall payroll management. This section covers key terms such as deductions, benefits, and specific types of savings accounts like 401(k), HSA, and FSA
- Deductions: Amounts subtracted from an employee's gross pay for taxes, benefits, and other withholdings.
- Benefits: Non-wage compensation provided to employees, such as health insurance, retirement plans, and paid time off.
- 401(k): An employer-sponsored retirement savings plan that allows employees to contribute a portion of their wages on a pre-tax or post-tax basis.
- HSA (Health Savings Account): A tax-advantaged account used to pay for qualified medical expenses, available to individuals enrolled in high-deductible health plans.
- FSA (Flexible Spending Account): A tax-advantaged account used to pay for out-of-pocket health care costs, with contributions made through payroll deductions.
- Cafeteria Plan: A benefits plan that allows employees to choose from a variety of pre-tax benefit options, including health insurance, retirement plans, and other fringe benefits.
- Health Insurance Premiums: Amounts deducted from an employee's paycheck to cover their share of health insurance costs.
- Life Insurance: A benefit that provides a payment to beneficiaries upon the death of the insured employee.
- Dental Insurance: A benefit that covers dental care costs for employees and their dependents.
- Vision Insurance: A benefit that covers eye care costs, including exams, glasses, and contact lenses.
- Short-Term Disability Insurance: A benefit that provides partial wage replacement for employees who are temporarily unable to work due to illness or injury.
- Long-Term Disability Insurance: A benefit that provides partial wage replacement for employees who are unable to work for an extended period due to illness or injury.
- Retirement Plan Contributions: Amounts deducted from an employee's paycheck and contributed to their retirement savings plan.
- Dependent Care Assistance: A benefit that provides financial assistance for employees' childcare or dependent care expenses.
- Adoption Assistance: A benefit that provides financial assistance for employees who are adopting a child.
- Tuition Reimbursement: A benefit that reimburses employees for education-related expenses.
Timekeeping and Attendance
Efficiently managing employee time and attendance is essential for accurate payroll processing and maintaining compliance with labor laws. These will help you make sure employees are compensated fairly for their time, and that benefits like vacation and sick leave are accurately tracked and managed.
- Timekeeping System: A system used to track employee hours worked, often integrated with payroll systems for accurate pay calculations.
- Paid Time Off (PTO): Time off with pay provided to employees for vacation, sick leave, or personal reasons.
- Accruals: Earned but unpaid benefits, such as vacation or sick time, that accumulate over time.
- Comp Time: Compensatory time off given to employees instead of overtime pay for extra hours worked.
- Timesheet: A record of the hours worked by an employee during a pay period.
- Clock In/Out: The process by which employees record the start and end of their work periods.
- Flexible Work Schedule: A work schedule that allows employees to vary their arrival and departure times.
- Attendance Policy: Company rules and guidelines regarding employee attendance and absences.
- Sick Leave: Paid or unpaid time off granted to employees due to illness or medical appointments.
Payroll Processes and Records
Maintaining accurate and detailed payroll records is crucial for financial transparency and compliance. This section covers essential terms related to payroll processes and records, including the payroll register, payroll journal, retroactive pay, and supplemental wages.
- Payroll Register: A detailed record of all payroll information for each pay period, including employee earnings, deductions, and net pay.
- Payroll Journal: A financial record that tracks all payroll transactions, serving as a ledger for payroll expenses.
- Retroactive Pay: Compensation paid to an employee to cover wages from a previous pay period, often due to adjustments or corrections.
- Supplemental Wages: Additional compensation provided to employees beyond their regular wages, such as bonuses and commissions.
- Direct Deposit Authorization: A form employees complete to authorize their employer to deposit their pay directly into their bank account.
- Payroll Reconciliation: The process of comparing payroll records with bank statements to ensure accuracy.
- Year-End Payroll Processing: The process of preparing and distributing W-2 forms and other year-end tax documents to employees.
- Payroll Outsourcing: The practice of hiring an external service provider to handle payroll processing.
- Employee Self-Service Portal: An online platform where employees can access their pay stubs, tax forms, and other payroll-related information.
Special Payroll Situations
This section focuses on key terms related to these unique circumstances, such as overtime, wage garnishment, garnishment fees, third-party sick pay, and imputed income. These terms are all about compliance with legal requirements and accurate payroll processing for various employee scenarios.
- Overtime: Additional pay for hours worked beyond the standard workweek, typically at a higher rate.
- Wage Garnishment: A court-ordered deduction from an employee's wages to pay a debt or obligation.
- Garnishment Fee: An administrative fee charged by an employer for processing a wage garnishment.
- Third-Party Sick Pay: Payments made by a third party (such as an insurance company) to employees who are unable to work due to illness or injury.
- Imputed Income: The value of non-cash benefits provided to employees that must be considered as taxable income.
- Severance Pay: Compensation paid to employees upon termination of employment, often based on length of service.
- Back Pay: Wages owed to an employee for past work, often resulting from a correction or dispute resolution.
- Lump-Sum Payment: A single payment made to an employee, typically for bonuses, back pay, or severance.
- Payroll Advances: A loan or advance of wages to an employee, which is then deducted from future paychecks.
- Expense Reimbursement: Repayment to employees for business-related expenses incurred out-of-pocket.
Advanced Payroll Concepts
A thorough understanding of advanced payroll concepts is essential for managing the various financial and regulatory aspects of employee compensation. This section covers important terms such as taxable wage base, fringe benefits, workers' compensation, payroll liability, and pay stubs. By grasping these advanced concepts, businesses can ensure comprehensive payroll management, from accurately calculating tax obligations to providing valuable employee benefits.
- Taxable Wage Base: The maximum amount of earnings on which a specific tax, such as Social Security tax, is calculated.
- Fringe Benefits: Additional benefits provided to employees, such as company cars, gym memberships, or tuition assistance.
- Workers' Compensation: Insurance providing wage replacement and medical benefits to employees injured in the course of employment.
- Payroll Liability: Amounts owed by an employer related to payroll, including wages, taxes, and benefits.
- Deferred Compensation: A portion of an employee's compensation that is set aside to be paid at a later date, often for tax advantages.
- Gross-Up: Adjusting an employee's gross pay to account for taxes, ensuring the net pay meets a specified amount.
- Shadow Payroll: A payroll process used for expatriates, tracking and reporting hypothetical tax calculations and benefits.
- Split Payroll: A payroll arrangement where an employee's salary is divided and paid in different currencies or locations.
- Equity Compensation: Non-cash compensation that gives employees ownership interest in the company, such as stock options or restricted stock units (RSUs).
- Phantom Stock: A form of deferred compensation that simulates ownership in the company without granting actual stock.
- Clawback: A provision that allows an employer to reclaim compensation paid to an employee, often used in cases of misconduct or financial restatements.
- Payroll Audit: A thorough review of payroll records and processes to ensure accuracy and compliance.
- Wage Assignment: A voluntary agreement by an employee to have a portion of their wages withheld to pay a debt.
- Payroll Service Bureau: A company that provides payroll processing services to other businesses.
Payroll Software
In the digital age, leveraging technology is essential for efficient and accurate payroll management. This section highlights the importance of payroll software, a powerful tool that automates various payroll processes, from calculating wages and taxes to managing deductions and generating reports.
By utilizing payroll software, you can streamline their payroll operations, reduce errors, and ensure compliance with regulatory requirements.
- Payroll Software: Software used to automate and manage payroll processes, including calculating wages, taxes, and deductions.
Additional Resources
HR Encyclopedia
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