What Common Payroll Terms Do I Need to Know About

In the complex world of payroll management, understanding the terminology is crucial for business owners and HR professionals alike. Navigating through the sea of acronyms and jargon can be overwhelming, but it’s essential for compliance and effective business operations. In this guide, we break down the common payroll terms you need to know to ensure smooth payroll processing and compliance with United States guidelines.

Classifying Your Workers

Do You Work With “Employees” or “Independent Contractors”?

Determining whether your workers are employees or independent contractors is fundamental. The classification impacts tax obligations, benefits eligibility, and legal responsibilities. Independent contractors are self-employed and responsible for their taxes, while employees have taxes withheld by the employer.

Is Each Employee “Exempt” or “Nonexempt”?

Employee classification as exempt or nonexempt is based on whether they are eligible for overtime pay. Nonexempt employees are entitled to overtime, while exempt employees are not. Understanding this classification helps in complying with the Fair Labor Standards Act (FLSA).

Do Your Employees Receive “Salary” or “Hourly” Wages?

Differentiating between salaried and hourly employees is crucial. Salaried employees receive a fixed amount regardless of hours worked, while hourly employees are paid based on the number of hours worked. This affects how you calculate overtime and manage work hours.

Common Terms for Running Payroll

Pay Period

The pay period is the timeframe during which employees earn wages. Common periods include weekly, bi-weekly, semi-monthly, and monthly. Consistency in pay periods streamlines payroll processes.

Timesheet

A timesheet records the hours worked by employees. Accurate timesheets are crucial for calculating wages, especially for hourly employees.

Off-Cycle Payroll

Off-cycle payroll refers to processing paychecks outside the regular schedule. It’s used for special circumstances like bonuses or corrections to previous payroll runs.

Making Sense of a Typical Pay Stub

Understanding the information on a pay stub is essential for both employers and employees. Here’s a breakdown of common terms:

Gross Earnings

This is the total earnings before any deductions. It includes regular pay, overtime, bonuses, and commissions.

Pre-Tax Deductions/Contributions

Amounts deducted from the employee’s gross pay before taxes are applied. Examples include health insurance premiums and retirement contributions.

Post-Tax Deductions/Contributions

Deductions are made after taxes are applied. This can include union dues or after-tax contributions to retirement plans.

Net Pay

The amount employees receive after all deductions. It’s the actual take-home pay.

Imputed Pay

Non-monetary benefits are provided by the employer, like group-term life insurance. It may be subject to taxation.

Reimbursements

Payments to employees for business-related expenses they’ve covered personally.

Overtime

Additional pay for hours worked beyond regular working hours. Overtime rates vary and are subject to labor laws.

Bonus

A one-time payment is often tied to performance or company achievements.

Commission

Compensation is based on sales or other performance metrics.

Making Sense of Tax Talk

Understanding the tax aspects of payroll is crucial for compliance:

FICA (Federal Insurance Contributions Act) Taxes

Mandatory contributions for Social Security and Medicare. Both employers and employees contribute.

Income Taxes

Taxes are withheld from employees’ paychecks based on their tax filing status and allowances.

The ACA (Affordable Care Act or Obamacare)

Employers with 50 or more full-time employees must offer health insurance that meets ACA requirements.

EIN (Employer Identification Number)

A unique identifier is assigned to businesses for tax purposes.

Withholding (aka “Employee Taxes Withheld”)

Amounts taken from employees’ pay for taxes. Includes federal income tax, FICA taxes, and other deductions.

Quarterly Federal Tax Return

Employers must report employment taxes quarterly using Form 941.

Federal Unemployment Tax Act (FUTA) and State Unemployment Taxes

FUTA is a federal tax to fund unemployment benefits, while state unemployment taxes vary by state.

In conclusion, mastering these common payroll terms is essential for efficient payroll management and legal compliance. Stay informed, consult with experts, and use reliable payroll software to streamline processes and ensure accuracy in your payroll operations.