Whether you’re a seasoned pro or a newcomer to running payroll, there’s a lot of terminology you need to know. That’s why we’ve created this helpful list of common terms that you’ll come across in the business of payroll.
401(k) plan is an employer-sponsored retirement plan that employees can have money deducted from their paychecks on a post-tax and/or pretax basis. Some employers choose to match the amount employees save up to a certain percentage.
Accrual In payroll processing, an accrual occurs any time there is a difference between the pay cycle allocation and the actual expenses paid.
ACH In payroll processing, an accrual occurs any time there is a difference between the pay cycle allocation and the actual expenses paid.
For employees working on a part-time or hourly basis, the annualized salary is a calculation of the amount any given employee can expect to earn in a single year. Essentially, one week’s earnings are multiplied by the number of weeks worked in a year, or often, one month’s salary is multiplied by 12 to determine the annualized salary.
The IRS defines an independent contractor as any worker who is self-employed, as opposed to traditionally employed by a company. In terms of payroll, independent contractors are significant in that they do not require money to be withheld for Social Security or Medicare.
CPP stands for Certified Payroll Professional. This professional designation is provided for those who successfully complete the certified payroll professional examination.
Any time a predetermined amount of money is taken from an employee’s check at the end of the pay period, it is referred to as a deduction. Most often, deductions are made for items such as health benefits and union dues.
Disposable earnings refer to any wages that are left over after all government taxes and defined deductions have been taken out of the paycheck. This amount is then used to determine the level of pay subject to garnishment or child support withholding.
The Electronic Federal Tax Payment System (EFTPS) was created in hopes of automating the otherwise clumsy process of handling physically mailed tax payments. With EFTPS, employers and taxpayers can pay their taxes by phone or online free of charge. This program has greatly reduced costs for employers while making it easier for individual taxpayers to get their taxes in on time.
The employee identification number is a tax code for employers and is somewhat similar to the Social Security number given to individuals. This identification number is used by both the IRS and by individual state tax systems.
Passed in 1938, the Fair Labor Standards Act (FLSA) instituted a number of regulations over working conditions designed to keep employees safe and fairly paid. This act mandates that all non-exempt employees working overtime (over 40 hours in a week) be paid time and a half. The FLSA also established the federal minimum wage and provided several mandates related to child labor. The individual regulations in FLSA may, under certain circumstances, be superseded by state and local laws.
First passed in 1993, the Family Medical Leave Act (FMLA) allows employees to take leave from work in order to care for themselves or family members. When these employees return to work, their prior salary and health benefits must be fully restored.
The Federal Insurance Contributions Act (FICA) mandates a payroll tax to be imposed on both employees and employers. This tax is then used to fund such programs as Social Security and Medicare. The amount an employee pays in payroll taxes over the course of his or her career may be indirectly related to the level of benefits for which he or she is eligible.
These employees are paid a salary (not an hourly rate) and must perform executive, administrative or professional duties. They are not paid overtime rates for hours exceeding 40 in a week.
Form 1099NEC refers to a set of tax forms used to report income outside of traditional employee wages. This form is most often used by freelancers and independent contractors. Unlike the Form W-2, Form 1099NEC does not require a company to withhold taxes or other deductions.
The W-2 form is a lot like a 1099, but it is used to report wages earned for traditional employees. The W-2 also contains information pertaining to taxes withheld (such as Social Security) and compensation outside of wages (such as moving allowances).
The W-3 form is completed by employers, and summarizes employee wages and tax information from the W-2 form. Also known as “Transmittal of Wage and Tax Statements”, it’s sent to the Social Security Administration (SSA) every year at the same time as the W-2.
Form W-4 is filled out by employees to indicate the number of allowances they want to take. The employer uses the form to calculate how much of an employee’s salary is withheld for tax purposes.
When an employee’s wages are garnished, he or she is forced to forfeit a given portion of the paycheck to a debtor. Garnishments are most common for employees who have failed to pay their debts (such as student loans) and for child support payments.
A high-deductible health plan (HDHP) is a health insurance plan that has lower premiums and higher deductibles than a typical health insurance plan. Participating in an HDHP is a requirement for having an HSA.
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. When they pair the HSA with a high-deductible health plan (HDHP), employees contributing to an HSA are given a certain level of personal control over their spending on health care costs.
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.