Payroll can be confusing for everyone, especially for small business owners who are new to it. It’s important that you understand these terms and acronyms to be confident that you’re processing payroll for your employees accurately.
Understanding these terms can help make the payroll process far less stressful and can also help you avoid making potentially costly mistakes.
Here are the top 50 payroll terms we think you should know before running payroll:
Tax & Compliance
1. Withholding Tax
Withholding tax refers to the portion of an employee’s wages deducted by the employer and paid directly to the government as a partial payment of income tax. The amount withheld is determined by the employee’s earnings and the information provided on their W-4. It’s the employer’s responsibility to correctly withhold and remit taxes.
2. EFTPS (Electronic Federal Tax Payment System)
EFTPS stands for the Electronic Federal Tax Payment System, which is a free system offered by the U.S. Department of Treasury to pay your federal taxes.
3. Employer Identification Number (EIN)
The EIN is a unique nine-digit number assigned to all employers that submit an IRS EIN application; it helps identify businesses as they file taxes, apply for business loans, and open business bank accounts. It’s like a Social Security number for businesses and is required for any business processing payroll.
Check our article on how to get an EIN for more specific instructions on this process.
4. Federal Insurance Contribution Act (FICA) Taxes
FICA taxes are Social Security and Medicare taxes the federal government charges on each employee’s earnings. Employers must reduce employee paychecks by 7.65% (6.2% for Social Security + 1.45% for Medicare), and pay the money to the IRS; they also have to pay that same amount from their business funds.
Additionally, they must withhold an additional 0.9% for Medicare on any employee earnings that exceed $200,000 in the year ($250,000 for couples married and filing jointly). For Social Security, the maximum amount that can be taxed is $168,600 per year.
5. Federal Unemployment Tax Act (FUTA)
The Federal Unemployment Tax Act (FUTA) tax is a payroll tax that employers are required to pay to the federal government to help fund unemployment benefits. The tax is 6% of the first $7,000 that an employee earns; however, most businesses do not pay the full 6%.
Businesses can qualify for a 5.4% FUTA credit reduction after paying their state unemployment taxes, bringing the FUTA tax rate down to 0.6%.
6. State Unemployment Tax Act (SUTA) taxes
The State Unemployment Tax Act (SUTA) tax is a payroll tax that states require employers to pay in order to provide unemployment benefits.
Each state sets its own SUTA tax wage base, which is the maximum amount of an employee’s income that can be taxed. In addition to the wage base, each state then establishes the rates, which can vary anywhere from 0.5% to 7% depending on the state. Rates are determined based on a few different factors, and often many states give new employers a standard rate.
7. W-2 Form
The W-2 Form is a tax document that reports all employee earnings in addition to taxes and deductions withheld. Employers must send this document to all employees by January 31 following the year that’s being reported.
A copy should also be sent to the IRS and state tax agency, if applicable. The information provided helps employees complete their tax returns with accurate information.
Learn how to fill out a W-2 Form in our guide.
8. W-3 Form
The W-3 form is a summary of all W-2 forms issued by your company in a calendar year. This form reports total earnings, Social Security wages, and Medicare wages for all employees. It’s submitted to the Social Security Administration.
9. W-4 Form
The W-4 form is completed by employees to indicate their tax withholding status. Changes in personal circumstances, like marriage or the birth of a child, may necessitate updates to the form.
10. W-9 Form
The W-9 form is used to collect taxpayer information from independent contractors and other vendors or entities you pay for services. This form is crucial for accurately reporting payments to the IRS. Before engaging with any vendor or contractor, ensure you have a completed W-9 on file.
11. 1099-NEC
This form reports non-employee compensation of $600 or more within the year. Unlike traditional employees, contractors do not have payroll taxes withheld by the business. Instead, they manage their own tax obligations. It’s important to understand whether you need to issue 1099-NEC forms to your independent contractors.
12. Payroll Taxes
These are mandatory contributions deducted from employees’ wages and matched by employers. These taxes fund Social Security, Medicare, and unemployment insurance programs. Small business owners must calculate and remit these taxes to the appropriate government agencies on time.
13. Back Pay
Back pay refers to any wages owed to an employee for work previously performed but not paid at the time. Situations requiring back pay can arise from administrative errors, incorrect pay rates, or overtime miscalculations.
14. Bonuses
Bonuses are additional compensation given to employees as a reward for outstanding performance or achievement. They can motivate employees and enhance productivity. When processing bonuses, small business owners must consider the tax implications and ensure they’re reported correctly in payroll calculations.
Payroll Processing
15. ACH (Automated Clearing House)
ACH is an acronym for automated clearing house. An ACH is a computer-based electronic network for processing bank-to-bank wire transactions. These transfers often include payroll direct deposits as well as tax remittances.
16. Payroll Authorization Form
The payroll authorization form is a document that authorizes payroll changes, such as salary adjustments, bonus payments, or terminations. It serves as a formal record, ensuring all payroll adjustments are approved by the appropriate team member.
17. Timesheet
Timesheets record the number of hours worked by an employee, serving as the basis for calculating wages, especially for hourly employees. Accurate timesheet management is essential for small business owners to ensure employees are paid correctly for their time.
If you need a template, check our free timesheet templates—we offer several downloadables depending on your needs.
18. Disposable Income
Disposable income refers to the leftover wages after all taxes and deductions have been taken from an employee’s paycheck. This amount is then used to determine the level of pay subject to garnishment or child support withholding.
19. Garnishment
Payroll garnishments are court orders directing employers to withhold a certain amount from an employee’s paycheck to pay an outstanding debt.
Employers are responsible for withholding and sending the money as directed on the garnishment notice; in addition, the earnings withholding order will sometimes have an ending date that business owners can reference before stopping the collection process. It’s imperative to act quickly after receiving a notice because employers can be held liable.
20. Gross Pay
Gross pay is the amount of an employee’s paycheck before payroll deductions are withheld. 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.
For salaried employees, gross pay is usually the same each payday; it’s their annual salary divided by the number of pay periods in the year.
Check our guide on how to calculate gross pay to ensure accurate computations. We also provide a calculator to make this easier for you.
21. Net Pay
Net pay is the final amount you pay your employees for their work after all deductions have been made.
22. Pay Stub
A pay stub is a document accompanying an employee’s paycheck, detailing their earnings and deductions for the pay period. It serves as proof of income and is crucial for financial planning and tax purposes.
Use our free pay stub generator if you don’t have a template for your next payroll cycle.
23. Pay Periods
A pay period is the time frame of work for which you’re paying an employee. If you pay every other Friday, the pay period could be from the prior two weeks, with the last day being the Friday that’s also payday. Some employers prefer to push the pay period back a week, meaning the current week is always paid on the next paycheck; this gives them time to process payroll without having to predict work hours.
Employee Classification & Compensation
24. Employee
Employees are workers formally hired to fulfill a specific position within a company. They should not be confused with independent contractors, which we will cover below.
Employers pay a reasonable wage and may offer benefits, especially if employees work at least 40 hours weekly; you must also pay and withhold taxes on employee earnings. In exchange, these employees must abide by company rules such as when and how to work.
25. Independent Contractor
Independent contractors are workers who are hired to perform a specific job or project. They’re not employees, so they aren’t protected by federal labor laws or the federal government’s minimum wage requirement. In turn, employers don’t pay payroll taxes on their earnings; instead, they complete a 1099-NEC form for all contractors paid over $600.
It’s important not to confuse contractors and employees. Unlike employees, employers aren’t allowed to dictate how or when contractors complete their work.
Learn more about the difference between employees and independent contractors in our W2 vs 1099 comparison.
26. Exempt Employees
Exempt is a classification that employers typically assign to employees who are paid on a salary basis versus hourly (although in some circumstances, hourly workers can be exempt). Exempt employees are not entitled to overtime pay.
27. Non-exempt Employees
Non-exempt employees are entitled to overtime pay at a rate of at least 1.5 times their regular rate of pay for all hours worked beyond 40 in a workweek. Note that some states require higher overtime rates and require overtime for daily hours worked over eight, so make sure you’re following your local regulations.
Learn the difference between exempt vs non-exempt employees.
28. Salaried Employees
A salaried employee receives a fixed annual income, divided across pay periods throughout the year. Unlike hourly employees, their pay isn’t based on the number of hours worked. This model offers stability for both the employee and employer; however, it requires clear communication regarding expectations and responsibilities. Salaried employees can be exempt from overtime, but they aren’t always, so make sure you’re classifying your workers correctly.
29. Hourly Employees
Hourly employees are paid based on the actual hours worked, making their paychecks vary each pay period. It’s vital to accurately track working hours to ensure fair payment and compliance with labor laws, especially overtime. Hourly employees are most often non-exempt, meaning they are entitled to overtime pay.
Learn more about Salaried vs Hourly employees and how to classify them in our guide.
30. Base Pay
Base pay is the initial rate of compensation an employee receives before any extras, like bonuses or overtime. For salaried employees, base pay is their regular annual salary. For hourly workers, it’s their hourly wage.
31. Severance Pay
Severance pay is compensation offered to employees upon termination of employment beyond their final paycheck. Unless specified in an employment contract or collective bargaining agreement, severance pay is not usually mandatory.
32. Overtime (OT) Pay
Overtime pay is the additional hourly money you pay an employee in excess of their regular pay rate, usually for time worked over 40 hours in a seven-day period.
Per federal law, these hours are paid 1.5 times the employee’s regular hourly pay rate. California law, however, requires double-time pay for all hours worked over 12 in a day and for all hours worked over eight on an employee’s seventh consecutive day of work. Use our free overtime calculator for an easier time computing OT pay.
33. Shift Differential
A shift differential is a premium amount 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.
34. Compensation
Compensation is a broad term that refers to all benefits that a company provides to its employees. Some common types of compensation can include:
- Regular salary or hourly wages
- Bonuses
- Transportation Benefits
- Stock Options
- Tip Income
35. Tip Credit
A tip credit is a provision that allows employers to count a portion of employees’ tips toward their minimum wage obligations. Be aware, however, that not all states allow tip credits, and some states require higher tipped minimum wages than others.
36. Non-taxable Wages
Non-taxable wages are specific types of compensation exempt from income taxes. These can encompass certain benefits and reimbursements. Understanding which wages are non-taxable allows small business owners to provide added benefits to their employees efficiently.
37. Reimbursement
Reimbursement is a payment made to employees for expenses incurred on the company’s behalf. These are not part of the employee’s regular compensation and are not subject to payroll taxes. It’s crucial to have a clear policy outlining allowable expenses and the process for submitting reimbursement requests.
38. Deductions
Deductions are funds taken from an employee’s paycheck. Deductions can be voluntary or mandatory. Voluntary deductions might include health insurance premiums and mandatory deductions include income taxes. These items can be considered pre-tax or post-tax, depending on the nature of the deduction.
Benefits & Regulations
39. Accrue
This means to build up or accumulate over time. Payroll accruals are funds owed to workers for hours they previously worked but haven’t yet been compensated for.
Accruals also often happen as part of an employee benefits package. Many employers offer paid vacation, sick, and personal time, which is often earned on an accrual basis. This means a certain amount of time off is earned per pay period.
40. Benefits Administration
Benefits administration is the process of managing the benefits offered to your employees. This could include health insurance, retirement plans, commuter benefits, and any other benefit you offer.
41. Fringe Benefits
Fringe benefits are additions to compensation that can be offered to employees. Some employers choose to offer these benefits universally to all employees, while others award them to high-level employees as an additional incentive. Some fringe benefits are taxable, and others aren’t.
Fringe benefits include:
- Subsidized health insurance plans
- Gym memberships
- Tuition assistance programs
- Commuting benefits
42. FSA & HSA
Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA) are tax-advantaged accounts for medical expenses. FSAs are employer-established, whereas HSAs require a high-deductible health plan. Offering these benefits can make small business employment packages more attractive.
43. Retirement Benefits
Retirement benefits are voluntary benefits provided to employees to help them secure their financial future. Offering options like 401(k) plans and Individual Retirement Accounts (IRAs) can support your team’s financial well-being and position your business as a strong employer.
44. 401(k) & IRA
Both of these retirement plans offer employees a way to save for retirement with tax advantages. A 401(k) is an employer-sponsored retirement plan, while individuals can open an IRA independently. Small business owners offering these benefits can attract and retain high-quality employees by contributing to their long-term financial security.
45. Fair Labor Standards Act (FLSA)
You’ll hear this thrown around quite a bit and also referred to as FLSA. The Fair Labor Standards Act (FLSA) is a federal act that consists of numerous laws meant to assure that employees are treated well and paid fairly. The federal minimum wage and overtime rules fall under this act as do recordkeeping rules and child labor laws.
46. Paid Time Off (PTO)
Paid time off is the time your employees don’t spend working but still earn a paycheck (at their regular pay rate). It consists of any paid leave, like vacation or sick time, and even jury duty and holidays. Federal law doesn’t have strict guidelines or requirements regarding PTO; you choose whether you want to offer paid vacation time or not.
State laws, however, differ; for instance, California requires employers to provide at least 24 hours (three days) of paid sick leave each year.
47. New Hire Reporting
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).
All information is stored in the National Directory of New Hires and helps child support agencies locate parents who owe money. Before you can begin reporting, you must register under your state’s New Hire Reporting Program.
48. Year-to-Date
Often abbreviated as YTD, year-to-date represents the total sum for the year. This can be an employee’s earnings, a company’s profit, tax payments, or any other payroll expense. Monitoring your YTD figures is essential for budgeting and ensuring compliance with tax and benefit obligations.
49. Taxable Wage
Taxable wage is the portion of an employee’s earnings subject to income tax. It includes their gross pay minus any pre-tax deductions like retirement or health insurance.
50. Minimum Wage
Minimum wage is the lowest hourly pay rate you’re legally allowed to pay an employee. Per the Department of Labor (DOL), the federal minimum wage rate is currently $7.25 an hour, but state rates vary. There are exceptions, such as for minors and interns. Tipped employees are another group you’ll find the law makes exceptions for. Federal tipped minimum wage is $2.13 an hour, but employers must ensure that employee tips make up for the differential.
If you’re curious about which states have their own minimum wages in place or are looking for a specific rate applicable to you and your employees, check out our state payroll guides.
Frequently Asked Questions (FAQs) About Payroll Terminology
Workers’ compensation is an insurance program that provides benefits to employees who suffer job-related injuries or illnesses. Its costs depend on payroll size, industry risk factors, and claims history. Accurately reporting your payroll is essential to determine the correct premium.
A timekeeping system tracks the hours each employee works, which is crucial for accurately calculating paychecks. It helps ensure compliance with wage laws and manage overtime effectively. Automating the timekeeping process can significantly reduce errors and administrative work.
Payroll processing involves calculating the total earnings of each employee, deducting the appropriate taxes and other withholdings, and issuing payments. This complex task requires up-to-date knowledge of tax laws and regulations. Using payroll software can streamline this process, ensuring accuracy and compliance.
Employee onboarding is how you introduce your new employees to your business and their roles. It also includes collecting necessary tax forms, setting up payment details, and benefits enrollment. A smooth onboarding process ensures compliance and enhances the employee experience.
Bottom Line
Understanding basic payroll terminology is essential to processing payroll successfully. 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 January 31. By implementing payroll terms into your vocabulary, you make it easier to digest related laws and concepts.
