Payroll Vocabulary: Common Payroll Terms You Should Know

payroll terms

Exempt means “exempt from overtime.” Exempt and non-exempt employees are categorized typically by the work they do. Most exempt employees work in professional, managerial, or executive positions, sometimes referred to as a “white-collar exemption.” Withholding doesn’t have to be approved by employees because these amounts are required by law. But all deductions from an employee’s paycheck except for deductions ordered by a court must be approved by the employee in writing. Terms, conditions, pricing, special features, and service and support options subject to change without notice.

payroll terms

The Social Security Administration is the government body set up by the Social Security Act. Its job is to administer both Social Security and the Supplemental Security Income (SSI) program. When employees are terminated through no fault of their own, they may be eligible for a special payment known as severance pay. This is designed to tide recently terminated employees over until they are able to obtain employment again. When hiring independent contractors, employers must be able to provide proof, or reasonable basis, that the contractor label is actually justified.

Federal Insurance Contribution Act (FICA) Taxes

For hourly employees, this is their hourly rate multiplied by the number of hours they’re being paid for the period—plus any overtime, bonuses, and additional pay. Compensation includes total cash and noncash payments made to an employee in exchange for his or her services rendered. Increasingly, payroll is outsourced to specialized firms that handle paycheck processing, employee benefits, insurance, and accounting tasks, such as tax withholding. Many payroll fintech firms, such as Atomic, Bitwage, Finch, Pinwheel, and Wagestream, are leveraging technology to simplify payroll processes. Disposable earnings are an employee’s wages after all legally required deductions — including payroll taxes — have been subtracted from his or her gross wages. Employers don’t match income tax deductions, but they pay federal unemployment taxes.

payroll terms

How you calculate payroll taxes will depend on your business and your local laws. However, here are some general guidelines provided by QuickBooks. The first step is to calculate your employees’ gross pay. Payroll can also refer to the list of a company’s employees and the amount of compensation due to each of them. Payroll is a major expense for most businesses and is almost always deductible, meaning the expense can be deducted from gross income lowering the company’s taxable income. Payroll can differ from one pay period to another because of overtime, sick pay, and other variables.

New hire reporting is a process employers undergo to report new hires to their state. Federal law requires that all new hires be reported within 20 days of their hire date, but some states are stricter (Alabama requires seven days). Net pay is the final amount you pay your employees for their work, after all deductions have been made. Hopefully these definitions help to round out your payroll vocabulary and gain a better understanding of what goes into the payroll process.

Health benefits

Companies might also face tax penalties for errors made by the payroll service. The law requires overtime—hours worked in excess of 40 hours per week—to be paid at one-and-a-half times the regular hourly rate. Some employees are exempt from the FLSA, and the Act does not apply to independent contractors or volunteers because they are not considered employees. The IRS provides income tax withholding tables you can use to calculate federal income tax withholding. Consult your state for information on state income tax withholding.

Pay periods refer to how frequently a business runs payroll. The Fair Labor Standards Act (FLSA) requires employers to pay employees regularly. Your pay-period options are weekly, biweekly, semimonthly, or monthly. The term “pay period” refers to the frequency with which an employer chooses to pay employees and contractors.

  1. Each state sets its own SUTA tax wage base, which is the maximum amount of an employee’s income that can be taxed.
  2. You don’t have to be an expert to know that both you and your employees pay FICA taxes or that all W-2s should be mailed by Jan. 31.
  3. Variable pay, or incentive pay, is a far-reaching term for employee payments made to influence employee behavior or reward meeting specific goals.
  4. Salaried employees are paid an annual salary, while hourly employees are paid an hourly rate times the hours they’ve worked.

SUTA is an employer-paid tax, except in Alaska, New Jersey, and Pennsylvania, where both employers and employees chip in. The individual retirement account (IRA) offers employees greater control over their retirement savings. With this retirement plan, employees can deposit funds and enjoy access to tax advantages. Health Savings Account (HSA) funds can be used for qualified medical expenses and are wholly owned by the employee. Those funds are not subject to certain taxes at the time of deposit.

Payroll Terms Every Small Business Owner Should Know

Share this useful glossary with your peers and coworkers, and let us know what other concepts you want to see defined. Whether you are a Business Owner, Finance Director, HR Specialist or Office Manager, there are certain terms relating to payroll that you should absolutely become familiar with. Business owners love Patriot’s award-winning payroll software.

The annual salary is divided by the number of pay periods in the year to determine gross pay for a pay period. A shift differential is a premium amount that you can pay employees who work outside of normal business hours. For some companies, this is the overnight shift and weekends. The additional pay is usually calculated as a percentage of the employee’s pay rate, like 30% extra, or a flat dollar amount, like an extra $3 per hour.

The individual regulations in FLSA may, under certain circumstances, be superseded by state and local laws. These types of payments are taxable, so you must separate them out when you’re doing payroll accounting and include them in the employee’s taxable wages for the year. Overtime is the additional amounts paid to hourly employees who work over 40 hours in a week, who work on weekends, or other additional tax concerns when your nonprofit corporation earns money amounts. Overtime must be paid at one-and-a-half times the person’s hourly pay rate for employees who work more than 40 hours in a workweek. Courts sometimes issue garnishment orders for debts like student loans, small claims judgments, child support, or other amounts the employee owes. You must comply with the order if you receive a garnishment notice ordering your business to garnish wages.

Most employers offer direct deposit, but does it mandatory? Set payroll to a schedule, so your team gets paid on time, every time. A copy should also be sent to the IRS and state tax agency, if applicable.

Fringe Benefits

In most circumstances, resident aliens can only be employed by organizations or companies that have sponsored their admission into the United States. Upon the resident alien’s admission, the sponsor is required to sign an affidavit agreeing to support the admitted individual. Now that business is expanding, get tools to simplify new demands and set everyone up for success. Attract skilled applicants, retain your best employees, and help them grow with you. Give us some basic information about yourself and your business goals, and we’ll find a provider who is customized to your unique business situation, be it industry, locale, etc.

These articles and related content is the property of The Sage Group plc or its contractors or its licensors (“Sage”). Accordingly, Sage does not provide advice per the information included. These articles and related content is not a substitute for the guidance of a lawyer (and especially for questions related to GDPR), tax, or compliance professional. When in doubt, please consult your lawyer tax, or compliance professional for counsel. This article and related content is provided on an” as is” basis. Sage makes no representations or warranties of any kind, express or implied, about the completeness or accuracy of this article and related content.

Leave a Comment