Payroll Terminology Small Business Payroll Glossary

payroll terminology

The federal minimum wage and overtime rules fall under this act as do recordkeeping rules and child labor laws. Payroll taxes include Social Security, which takes out 6.2% of your income up to $132,900. Payroll taxes also pay for Medicare, which takes out 1.45% of your income. They pay 6.2% of your income, so the government gets 12.4% of your total income, and your employer pays 1.45% of your income toward Medicare. Payroll is the process of paying the company’s employees after calculating their due amount. Processing payroll involves the employees’ names, wages, hours worked, deductions, benefits, and taxes.

payroll terminology

A mechanism to factor in tip payments when calculating minimum wage. It permits an employer to apply a percentage of an employee’s tips towards the employer’s obligation to pay the minimum wage. A non-exempt employee is entitled to overtime pay when they work more than 40 hours in a week. Overtime pay is equal to 1 ½ times the employee’s regular rate of pay. The W-2 form is a lot like a 1099, but it is used to report wages earned for traditional employees.

Section 125 plan

Its job is to administer both Social Security and the Supplemental Security Income (SSI) program. 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. This professional designation is provided for those who successfully complete the certified payroll professional examination.

Supplemental wages may be subject to different tax rules than regular wages are. The FLSA sets federal minimum wage, overtime, child labor and recordkeeping standards. In some cases, the FLSA may be superseded by state or local labor laws. 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 Jan. 31 following the year that’s being reported.

  1. If you are a new business owner, you may come across specific payroll terms that you should understand.
  2. Supplemental wages include any earnings employees incur outside of the agreed-upon pay rate.
  3. From common terms and lingo to federal laws impacting payroll, give employees this resource to help them better grasp the process affecting them most.
  4. This term encompasses all your company’s payroll filing obligations under federal, state and local laws.
  5. A payroll tax holiday is a deferral of payroll tax collection until a later date, at which point those taxes would become due.

Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team. Supervisors approve employee timesheets to ensure their accuracy. Compensation is an overarching term that encompasses all the types of payments an employee earns. Payroll might not be a foreign country, but new small business owners should nonetheless familiarize themselves with these standard payroll terms and abbreviations. Solve the mysteries of terminology with this informative resource. Updated regularly with industry-specific vocabulary and concepts, the Glossary provides easy-to-understand definitions of tax-related terms.

Once the company purchases the software, there are no additional monthly fees. Software programs usually include printable tax forms and withholding tables. The payroll service may also maintain a record of how much vacation or personal time employees have used. 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.

Labor burden

Larger firms may need to invest in a custom enterprise resource planning  (ERP) system for their accounting and payroll functions. Federal law protects an employee from being fired because their wages have been garnished for one debt, and it limits how much can be deducted from an employee’s paycheck each week. 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.”

payroll terminology

W2 are the amounts that are have been withheld from the payments included in W1. All employees (including part-time and casual employees) are entitled to 5 days unpaid family and domestic violence leave each year. This leave is typically unpaid but may be paid leave depending on the industry, award, enterprise or agreement. Staff are entitled to the full 5 days from commencement of work. This renews each 12 months but doesn’t accumulate from year to year if unused. Employees will receive different entitlements based on their type of employment.

How to Calculate Payroll Taxes

The U.S. Department of Labor reduces the credit reduction for businesses in states that are late on repaying federal advances to fund their state unemployment program. For the past few years, the Virgin Islands has been the only state or territory designated as a credit reduction state. The Fair Labor Standards Act (FLSA) requires employers to pay employees regularly. Your pay-period options are weekly, biweekly, semimonthly, or monthly. It comprises the employer’s portion of Federal Insurance Contributions Act (FICA) taxes, unemployment taxes, and workers’ compensation. Supplemental wages include any earnings employees incur outside of the agreed-upon pay rate.

Imputed Income

If the company does not pay in arrears, then the paychecks will be for the current workweek, even though it hasn’t yet ended. Just like states have their minimum wages, they also set their corresponding tip credits. Businesses can run payroll manually or outsource the task to payroll software or an accounting firm. 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. In payroll processing, an accrual occurs any time there is a difference between the pay cycle allocation and the actual expenses paid.

An Income Statement is a report provided to the employee at the end of the financial year to provide the yearly totals for wages, tax and superannuation. Allowances are amounts paid that cover anticipated costs or as compensation for conditions of employment. For example, you may provide your employee who travels to customers a Fuel Allowance of $50 a week. Variable pay refers to any program that awards individual employees or entire teams based on performance, which is further defined by variables outlined by an employer. Shift differentials are extra wages awarded to an employee for working an undesirable shift and are added to their base pay before deductions. Pay stub is a document accompanying each paycheck that details gross pay and deductions.

W1 is the total salary, wages and other payments from which you are usually required to withhold PAYG. Specific inclusions and exclusions can be found on the ATO website. Part time employees are usually employed on a permanent basis or on a fixed term contract. They work a fixed number of hours (less than 38 hours per week). Is a minimum amount an employer must pay their employee for the work performed.

A closely held payee or employee, is someone who is directly related to the business that they are paid by, or not ‘at arms length’. Examples of closely held entities are family members of a family business, trust beneficiaries, or directors of a company. Closely held entities are required to be Single Touch Payroll compliant. Within each industry award are a series of classifications according to skill level and/or qualifications which are applied to each employee. Withholding is a payroll deduction that is given directly to a federal, state or local authority for the purpose of paying applicable taxes. Pay period is the window of time — usually biweekly or monthly — that determines when paychecks go out.