Glossary of Payroll Terms

Purpose: To provide a list of common payroll terms and definitions. 

A B C D E F G H I L M N O P Q R S T V W 1 4  

Actual Deferred Percentage (ADP)

The percentage of wages deferred by employees under a salary reduction arrangement (e.g.401(k) plan). The ADP is reviewed to see if a salary reduction arrangement meets the IRS qualification requirements.

Accruals (Leave)

Any hours that employees accumulate for use at another time in the form of earned vacation time or sick leave, for example.

Advanced Earned Income Credit

Eligible employees can receive the earned income tax credit (EIC) when they file their tax return. Or, by completing Form W-5, Earned Income Credit Advance Payment Certificate, they can get a portion of the credit in advance with their pay. Form W-5 expires on December 31 of each year. A new form must be filed each year in order to continue receiving advance EIC in the next year.

Affordable Care Act (ACA)

The Affordable Care Act is a complex piece of legislation signed into law in 2010 that attempts to reform the healthcare system putting in place comprehensive health insurance reforms.

Annualized Salary

The amount an employee would receive if they were working full time for a full year. All hourly rates of pay for salaried employees are based on an annualized amount in the Payroll System, regardless of Full-Time Equivalent (FTE).

Annuity

Amount of salary reduction to purchase a tax-sheltered annuity (TSA). This is a way to save additional money for retirement. Increasing your annuity will decrease the amount of taxes withheld.

Automated Clearing House (ACH)

Federal Reserve Bank or private financial institution acting on behalf of an association operating a facility that serves as a clearinghouse for direct deposit transactions. Entries are received and transmitted by the ACH under the rules of the association. 

Awards and Prizes

Cash or non-cash awards to employees. Taxation depends on the value of the award or prize and other qualifications.

Circular A

The Agricultural Employer's Tax Guide published by the IRS. The publication provides guidelines and instructions to employers about farmworkers' federal tax responsibilities, which are different than those of the regular employees (those that use the Circular E). Circular A includes the basic IRS rules for withholding and depositing tax and for filing employer tax obligations.

Circular E

The Employer's Tax Guide published by the IRS. The publication provides guidance and instructions to employers about their federal tax responsibilities. It includes the basic IRS rules for withholding and depositing tax and for filing employer tax obligations.

Common-Law Test

A set of guidelines used by the IRS that measures the control that an employer exercises over a worker. A worker that meets this test is considered to be an "Employee."

Compensation

All cash and non-cash remuneration given to an employee for services performed for the employer.

Compensatory Time

A form of overtime awarded to nonexempt employees for hours worked over 40 hours in a week not by cash payment but by time earned which can be taken as leave time at a later date. 

The Fair Labor Standards Act places severe restrictions on the use of compensatory time to avoid paying overtime, although special exemptions are allowed for public sector employees.

Certified Payroll Professional (CPP)

A professional designation obtained by successfully completing the certified payroll professional examination.

Deduction

Any amount taken from an employee's paycheck each pay period. Deductions may include health or medical benefits, union dues, and so on.

Deferred Compensation

The postponement of a wage payment, generally used to describe the portion of wages that employees set aside for retirement, usually on a pretax basis.

Direct Deposit

The electronic transfer of payments to any bank in the U.S. which is a member of an automated clearing house.

Disposable Earnings

The part of the employee's check remaining after deductions required by law (taxes). It is used to determine the amount of an employee's pay that is subject to a garnishment, attachment, or child support withholding.

Duties Test

The "duties test" is one way the FLSA distinguishes exempt from non-exempt employees. (See Salary Basis Test.) Some high-level, "white collar" employees are FLSA exempt if their duties are "executive," "administrative," or "professional" (and if they are paid "on a salary basis"). Executives are high-level employees whose primary job duties are to make discretionary, organization-wide policy decisions. Administrators are high-level employees whose primary job duties are to provide organization-wide support services involving discretion and policy-making. Professionals are high-level employees who are doctors, lawyers, or in other highly educated occupations. Job titles are not determinative, but actual job duties are. Most employees who are engaged in the "production" aspects of their businesses or agencies (i.e., who are involved in making or providing goods or services) are not exempt executives, administrators, or professionals. For example, operational ("street level") police officers are often non-exempt.

Earnings

The amount owed to an employee based on salary, hours worked, or other calculation routines, plus other types of compensation and holiday, vacation, and bonus pay.

Electronic Data Interchange (EDI)

Method of electronically transmitting payments, invoices, etc.

EDI 834

The 834 Transaction is the HIPAA-compliant Benefit Enrollment and Maintenance Transaction. Its purpose is to electronically transmit enrollment and dis-enrollment information to health insurance carriers.

Electronic Funds Transfer (EFT)

Generally used in the contact of the electronic remittance of federal/state taxes. Also, select wire transfers of money (benefits, certain vendors, etc.) made by the treasurer.

Employee

A worker performing services in exchange for compensation who meets the common law test. See also "Independent Contractor." Under Common Law, anyone who performs services for an individual or company (employer), where the employer can control what will be done and how it will be done. This applies even when you give the employee freedom of action.

Employee Deductions

Income that is withheld from an employee's paycheck for benefits and other authorized reasons.

Employer Identification Number (EIN)

A nine-digit number issued by the IRS and used to identify the tax accounts of employers. The digits are arranged as follows: 00-0000000, also is known as the federal ID number.

Employee, Statutory

Someone who works for you and is not an employee under the Common Law; for example, commission drivers, full-time insurance salespeople, or traveling salespeople. The company does not withhold federal income tax from the pay of statutory employees, whereas, they are subject to FICA and FUTA.

Employee Type

The employee type designates whether the employee is salaried, hourly, or exception hourly.

Earned Income Credit

A tax credit that is available to low-income employees; it may be taken when the employee files their individual tax return.

Exempt Benefits

Benefits that are not subject to FIT, FITW, FICA, or FUTA.

Exempt Employee

Classification of an employee whose job title and description do not allow for cash paid overtime or comp time. "Exempt" employees are paid an annualized rate for performing the whole job, not for actual hours worked; these employees do not track, earn, or receive overtime compensation.

Exemption

Usually known as a personal withholding allowance, and not to be confused with number of dependents. You can usually claim one of the following: yourself and a spouse (0, 1, or 2), blind or over 65.

Fair Labor Standards Act (FLSA) of 1938

A federal regulation governing several time and labor issues. FLSA Overtime requires that all non-exempt employees be paid at a rate of time-and-one-half for all hours over 40 physically worked during a workweek. This requirement may be superseded by state or local laws when the lesser law is to the greater benefit of the employee, or by union contract. An FSLA Workweek is a permanently-established, regular workweek for a group of employees. The law also contains a number of other provisions such as the minimum wage and child labor.

Family Medical Leave Act (FMLA) of 1993

A federal regulation that protects health benefits and job restoration for employees who must take a leave from work to care for themselves or family members. FMLA regulations contain provisions regarding employer coverage, employee eligibility and entitlement, notice and certification, continuation of health benefits, and job restoration.

Federal ID number

Also called an Employer Identification Number (EIN). This is a nine-digit number issued by the IRS. The digits are arranged as follows: 00-0000000. It is used to identify the tax accounts of the employers.

Federal Tax Deposit

In general, each quarter you must deposit income tax withheld and both the employer and employee Social Security and Medicare taxes (minus any Advanced EIC Payments.) This is normally associated with Form 941 and Form 8109.

Federal Insurance Contributions Act (FICA)

FICA also refers to the combined taxes of Social Security, disability, and Medicare hospital insurance. It is the amount withheld from an employee's paycheck, which goes towards providing social security benefits. The amount withheld from each employee's paycheck is matched by a contribution from the employer. Both employee and employer contributions are deposited at regular intervals with a federal agency or designated bank.

Federal Income Tax (FIT)

FIT is the amount withheld from an employee's paycheck which goes toward their federal income tax liability at the end of the year.

Federal Income Tax Withholding (FITW)

Federal income tax that is withheld from wages at the time of payment. Also, it refers to wages and benefits that are subject to federal income tax withholding.

Flat Tax

Specific flat rate from which the employer may withhold a percentage for federal income tax. Be sure to review the IRS Publication 15 for the current year. See also "Supplemental Wages."

Form 940

Employer's Annual Federal Unemployment Tax Return.

Form 942

Quarterly Tax Return for Household Employees.

Form 941

Employer's Quarterly FICA and Federal Income Tax Return.

Form 1042-S

A 1042-S Form is a year-end tax document given to a Non-Resident Alien who received wages protected by a tax treaty or received a Qualified or Non-Qualified Scholarship.

Form 1099

Refers to a set of forms that are used to show different types of income other than wages paid by companies to employees and contractors. These include: 1099-A, -B, -DIV, -G, -INT, -MISC, -OID, -PATR,-R, and -S.

Form 8109

Federal Tax Deposit Coupon - This is a special form provided by the Federal Government that accompanies your deposit check.

Form 8233

"Exemption from Withholding on Compensation for Independent Personal Services of a Non-Resident Alien Individual" is an IRS-issued form that must be filed by any NRA claiming exemption from Federal income tax withholding based on a tax treaty.

Form W-2

Wages and Tax Statement: employers must file a form W-2 to report the total amount of wages paid and taxes withheld for each employee in a calendar year.

Form W-3

Document showing the number of employees and total amounts for accompanying W-2 forms sent to the government.

Form W-4

Employee's Withholding Allowance Certificate; the W-4 tells the employer how many withholding allowances the employee is claiming along with the employee's marital status. It also tells the employer if the employee claims exemption from withholding.

Form W-5

Earned Income Credit Advance Payment Certificate; must be filed by employees who want to take advantage of advanced EIC payments and attest to their eligibility for the advance payment.

Federal Unemployment Tax Act (FUTA)

An amount which must be paid into a federal government unemployment fund by an employer for each employee. The payment is taken as a certain percentage of an employee's earnings up to a certain ceiling.

Garnishment

An involuntary transfer of wages to a creditor or other agency assigned to collect a debt.

Gross Income

The compensation for services, including fees, commissions, fringe benefits, and similar items. See "Gross Pay."

Gross Pay

The total amount received from the employer prior to anything being taken out for taxes or other deductions.

Gross-Up

An IRS-allowed algebraic formula for determining the total taxable gross pay when the employer pays the employee's share of tax. Gross-up is also used when the net pay amount is known but the gross pay amount is not.

Gross Wages

The total amount of regular wages and the fair market value of benefits provided to an employee by the employer.

Gross-to-Net (GTN)

The gross-to-net process calculates net pay by subtracting reductions and deductions from each employees' gross pay. Gross-to-net elements indicate which reductions and deductions should be taken.

Health Insurance Portability and Accountability Act (HIPAA)

HIPAA establishes national standards to protect individuals’ medical records and other personal health information and applies to health plans, health care clearinghouses, and those health care providers that conduct certain health care transactions electronically. Law passed in 1996.

Hourly Employee

An employee whose wages are based on an hourly rate. Such employees are usually paid an overtime rate of time-and-a-half for hours worked beyond their regular weekly hours.

Hours Worked

FLSA wages are determined by the number of hours an employee actually works. "Hours not worked" are not governed by the FLSA, even if they are considered "work time" or "paid time" by the employer. Thus, holidays, sick days, or other days off do not count as FLSA hours worked.

I-9

Employment eligibility verification form required by the Immigration and Naturalization Service.

Impute

The addition of the value of cash/noncash compensation to an employee’s taxable wages in order to properly withhold income and employment taxes from the wages.

Independent Contractor

A non-employee who provides services for the employer. The employer exercises no substantial control over who will do the work, when the work will be done, and how the work will be done.

Leave of Absence (LOA)

A temporary absence from work for a specific reason. Reasons include maternity, child care, death of a family member, etc.

Leave Accrual Processing

Processing of leave accruals is used to maintain employee leave balances. All leave benefit plans accrue leave by length of service or number of hours worked. Leave accrual processing is used to determine the employee's leave accrual award and resulting leave balance.

Levy

An attachment or garnishment for a tax debt or court judgment.

Magnetic Media Reporting

An alternative method to filing paper returns and forms for employers with computerized payroll systems. The information is filed on magnetic tape or disks in a format specified by government regulations.

Minimum Wage

The lowest wage payable to employees in general or to designated employees as fixed by law or by union agreement.

Net Pay

Also known as "take-home pay" - the portion of wages that remains after taxes and other deductions from pay.

New Hire Report

In the United States, the Personal Responsibility and Work Opportunity Act of 1996 (the so-called Deadbeat Dads law) requires employers to report new hires to specified agencies within a pre-determined number of days from the hire date.

This is to facilitate the collection of child support and/or to uncover abuse in the state’s unemployment compensation, workers’ compensation, or public assistance programs.

Non-Discrimination Testing

IRS-prescribed tests to determine if employer-provided benefit plans disproportionately favor highly compensated or key employees of the employer.

Non-Resident Alien

For federal income tax withholding purposes, a non-U.S. citizen who has not met one of the two residency tests and who is subject to U.S. taxes on income derived from U.S. sources. Any person in this country on a visa which is not issued as a resident alien or immigrant type.

Overtime

Generally, hours actually worked over 40 in a workweek that are payable at a rate higher than the regular rate (usually the statutory overtime rate of 1.5 x regular rate).

Partial Pay

The pay processed whenever a job record has an effective date in the middle of a pay period. Typically, this happens whenever you hire, terminate, transfer, or change the rate of pay for an employee mid-period.

Pay Calculation

Formula which calculates an employee's gross to net.

Pay Group

A set of employees grouped together for payroll processing.

Pay Period

The frequency that the employer elects to pay wages and benefits (e.g., weekly, biweekly, or monthly). The established time segments for which employees in a pay group are paid. Pay periods are defined by their beginning and ending dates.

Payroll Activities

Includes the record keeping, new employee reporting, check processing, state and local tax compilation, and payments.

Post-Tax Deduction

A deduction from pay that does not reduce the taxable wages (also called an "after-tax deduction"). It is taken out only after all applicable taxes and other deductions have been withheld (e.g., union dues, garnishments, charitable contributions).

Pre-Tax Deduction

A deduction taken from gross pay that reduces the taxable wages.

Prior Period Adjustment

A correction to previously reported time or task information, or an insertion of time or task information that may require the original report to be offset (reversed) and the correct information to be recorded.

Quarterly Federal Tax Return

Normally associated with Form 941. All employers who are subject to federal income tax withholding or Social Security and Medicare taxes must file Form 941 each quarter.

Real Time Processing

Immediate processing. The computer response is received immediately and is immediately available to the user.

Regular Time

An employee's normal (scheduled/shift) work hours.

Salaried Employee

An employee who is paid a fixed salary for a certain time period. Salaried employees are usually not subject to overtime pay and a daily time card is not filled out.

Salaried Non-Exempt

An employee who is paid on a salary basis rather than an hourly basis. However, overtime pay must be paid to the employee based upon responsibilities of the position.

Salary Basis Test

The "salary basis test" is one way the FLSA distinguishes exempt from nonexempt employees. (See also "Duties Test.") The salary basis test has been used to obtain overtime compensation for employees who might be considered exempt because of their "white collar" job duties. To be exempt, an employee must be paid "on a salary basis." This means, (a) they must receive a guaranteed minimum amount in every paycheck no matter how many hours were worked, and (b) the employee's pay may not be "subject to" reduction based on quality or quantity of work performed. Employees who are subject to suspensions without pay or layoffs are not paid on a salary basis, and are therefore nonexempt, no matter what their job duties are. For example, police officers who are subject to suspension without pay for disciplinary violations of department rules and regulations are usually non-exempt, regardless of rank.

Shift Differential

The extra pay an employee receives for working on a certain schedule such as evenings.

Sick Leave Pay

Pay given an employee for a time period not worked due to illness or injury.

Social Security

A general term describing taxes paid for a variety of old age and retirement benefits. There are two types of social security taxes: OASDI (Old Age, Survivor, & Disability Insurance) and Medicare (HI - hospitalization insurance). Be sure to review the IRS Publication 15 for the current percentage rates. In 1991, the IRS required employers to report the two taxes separately. Employers must usually match this deduction.

Social Security Administration (SAA)

A federal agency responsible for the administration of the Social Security benefits and annual wage reporting programs.

Social Security Number (SSN)

The unique number assigned by the Social Security Administration as an individual's taxpayer identification number. It consists of nine digits (000-00-0000).

Standard Hours

Standard hours designate the number of hours defined for a normal workweek. Typically, a normal workweek consists of 40 hours.

State Tax Withholding

Most states require employers to make deductions from employee's paychecks for state income taxes. Each state has its own tax rates and procedures, and there is little or no consistency from one state to another. Several states have no state income tax at all.

Straight-Time Pay

The regular rate of pay for all non-overtime hours of work.

State Unemployment Insurance (SUTA)

All states require employers to contribute to unemployment insurance programs. Several states also allow an employee deduction as well. Each state sets its own rate and taxable wage limit.

Supplemental Wages

Compensation received by employees other than their regular pay, such as bonuses, commissions, and severance pay. Income tax may be withheld from such payments at a flat rate under certain circumstances.

Be sure to review the IRS Publication 15 for the current year.

SUTA

State Unemployment Insurance. An amount that must be paid into a state government unemployment fund by an employer for each employee. The payment is taken as a certain percentage of an employee's earnings, up to a certain ceiling. An employer's SUTA contributions can also be credited against their FUTA tax.

Tax Levy

Requires employers to deduct an amount of money that the employee owes, plus any penalties and interest payments, from the employee's wages and remit to the proper government agency.

Taxable Wage Base

The maximum amount of wages subject to withholding taxes.

Taxpayer Identification Number (TIN)

A social security number or employer identification number, which serves as the taxpayer’s account number with the IRS.

Vacation Pay

Paid time off for vacation. Amount paid to an employee for time on vacation. Can also be referred to as PTO or Paid Time Off.

W-2 - Dependent care benefits

Area of W-2 where you show the amount of dependent care benefits paid or incurred by the company for the employee. This includes the fair market value of the employer-provided or employer-sponsored daycare facilities and amounts paid for the services.

W-2

Wage and Tax Statement. The form used to report wages, tips other compensation, withheld income and social security taxes, and advance earned income credit payments to the IRS, the Social Security Administration, and the employee.

W-2 - Medicare Wages and Tips

Wages that are subject only to Medicare taxes. For example, a 401(k) plan is not subject to federal and state withholdings but is subject to Medicare and Social Security taxes. 

W-2 - Non-Qualified Plans

Unlike tax-deferred plans, these plans do not qualify for tax-favored status. Any amount deferred under a non-qualified plan should be included as social security and Medicare wages.

W-2 - Social Security Tips

The amount of tips that are subject to Social Security tax. If you make less than a certain amount of tips, they are not subject to Social Security tax.

W-2 - Social Security Wages

Wages that are subject only to Social Security taxes. For example, a 401(k) plan is not subject to federal and state withholdings but is subject to Social Security and Medicare taxes. Social Security also has an annual limit which changes each year, so if someone makes more than the limit within a calendar year, the rest of the wage will not be subject to Social Security tax. This will then show total wages as one figure and the Social Security wage as a different figure, reflecting the total wage at the time the Social Security Maximum was reached.

W-4

Employee's Withholding Allowance Certificate. Required by Federal law to be on file with the Payroll Office before any salary or wage payments are made. 

Wage Attachment

An involuntary transfer of wages to satisfy a debt.

Wage-Bracket Withholding Method

A procedure for determining the amount of income tax to be withheld using wage-bracket tables. These tables are usually classified by payroll periods, the employee's marital status, withholding allowances, etc. To find out how much to withhold, the employer determines the employee's wages and uses the appropriate wage bracket table for the period.

Wages

Amount earned by an employee, before tax withholding and deductions, for a certain period of service.

Withholding

Amounts deducted from an employee's wages for federal, state, and local taxes.

Worker

Workers can be defined as anyone who performs functions for the organization and receives compensation from the organization's operating expense funds in return. Workers can be direct employees or independent contractors (includes individuals contracting business directly from the company or through an agency).

Work-Week

Any 7 consecutive days or 168 consecutive hours. The workweek is the basis for determining the total overtime pay that is due employees under the FLSA.

Year to Date (YTD)

Selected dollar and hour balances computed since the start of the calendar year or since the start-up of the balance, whichever is most recent. These balances are zeroed before the start of the next calendar year.

1099

Refers to a set of forms that are used to show different types of income other than wages paid by companies to contractors.

401(a)

This is a qualified pension plan if certain federal requirements are met. These include minimum participation requirement, minimum vesting standards, contribution limits, and nondiscrimination rules.

401(k)

An optional means of saving money for retirement. Money is deducted from each paycheck, pre-tax, and deposited in an account that is set aside until the employee retires. PERA, 401(k) Voluntary Investment Program (VIP) (PERA members only) is a 401(k). Please refer to the IRS website for current rates. 

Example: John has designated that 12% of his gross earnings will be deducted from his paycheck and deposited in his 401(k) account. He does not pay any taxes on the money until he withdraws it. Money from the account is then invested in a number of interest accruing funds.

403(b)

Tax Sheltered Annuities. An annuity or mutual fund that provides retirement income for employees of public schools and certain tax exempt organizations.

457

A deferred compensation plan that provides retirement income for employees of public sector employers (e.g., state and local governments) and certain tax exempt organizations.


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