19 Common Payroll Terms To Know

Are you involved with payroll processing duties or simply want to learn more about this process?

No matter your involvement with payroll at your business or organization, we have broken down some of the most common payroll definitions and terms to know. We have also included some of the most common payroll acronyms.

1. Accrue

Accrue means to build up or accumulate. As part of a compensation package, many employers offer paid vacation, sick, and personal time. There are many ways to provide this time, accruals being one of them. Many employers choose to allow the employee to earn (or accrue) a certain amount of time per pay period they work. Other employers may choose to give a bulk amount at one time.  

2. ACH (Automated Clearing House)

ACH is an electronic network for processing direct deposits and other payroll transactions. It is a safe way to transfer money between banks and credit unions and reduces the needs for paper and checks. Direct deposit for your payroll is an ACH.

3. Base pay rate

Base pay rate is the wage that has been agreed upon to be the starting point for employee earnings. This can be an hourly rate, a daily rate, a piece rate, or salary per pay. 

4. Deductions

Deductions are amounts taken from the employee’s paycheck that are not for taxes. These can be voluntary amounts that the employee chooses, such as health insurance premiums, retirement plan contributions, and miscellaneous deductions. Salary deductions can also be involuntary, such as a child support order or a tax garnishment. These items can be considered pre-tax or post-tax, depending on the actual deduction.

5. EFTPS

EFTPS stands for the Electronic Federal Tax Payment System. It’s used for an employer to pay federal taxes online.

6. Employee’s Withholding Allowance Certificate (W-4)

Federal Form W-4 or state equivalent is where the employee states the number of withholding allowances claimed to determine income taxes to withhold from the employee’s compensation. Every employee will need to fill out a W-4 upon starting a job.

7. Exempt

Amounts that are not considered part of the taxable compensation. These amounts would be subtracted from the gross pay (total compensation) before the calculations of each applicable tax are completed.

Example:  Employee contributions to a 401(k) plan are considered exempt from federal income tax. The contribution amount for that paycheck is subtracted out before the calculation of the Federal Income Tax (FIT) is done.

8. FICA

The acronym FICA stands for Federal Insurance Contributions Act. It is the formal name for the combination of Social Security and Medicare Taxes. Employers are responsible for remitting FICA and FIT together in a payment known as the federal tax liability. This is reported on the quarterly form 941. 

9. Garnishment

Garnishment is a legal proceeding authorizing an involuntary transfer of an employee’s wages to a creditor to satisfy a debt. Child support is a garnishment that is often placed when couples divorce and one does not pay as agreed in a divorce decree.

10. General Ledger

A general ledger is a tool used to record a business’s financial transactions. It includes amounts for assets, liabilities, revenue, and expenses.

11. Gross pay

Gross pay is the total pay received by the employee before taxes and deductions are removed. This includes the base pay plus any additional earnings like bonuses, vacation pay, and commissions.

12. I-9

The I-9 is a form used to verify if an employee is legally eligible to work in the United States.

13. Income Tax

Income tax is a tax that only employees pay. There are several taxes that fall into this category:  Federal Income tax, state income tax, and local income tax. Federal income tax is paid with FICA as part of federal tax liability. This is calculated by considering taxable compensation on a wage-bracket method but can also be taken as a flat dollar amount or percentage. 

State and local income tax withholding methods vary, as do whether or not that tax is taken in that state.

14. Net pay

Net pay is the employee’s take-home pay. This is the amount the employee receives after taxes and deductions are calculated and subtracted from gross wages.

15. Social Security (OASDI)

Social Security is both an employee withholding tax and an employer payroll tax. The employer is responsible for remitting a total of 12.4% of an employee’s taxable earnings to the IRS. They are permitted to take 6.2% from the employee as a withholding tax and “match” the other 6.2% as a payroll tax. There is a wage base limit, which means that the tax stops at a certain amount of wages for the year. This wage amount varies per year.

16. Take-home pay

Take-home pay is the employee’s wages that remain after all normal deductions and taxes are taken out. This is also known as net pay.

17. Taxable wage base

Taxable wage base is the maximum amount of employee compensation subject to Social Security, FUTA, and state unemployment insurance taxes.

18. Third-party sick pay

Third-party sick pay is compensation paid by a third party (often an insurance company or state insurance program) to an employee because of non-job-related illness, injury, or condition (maternity leave). The payment is considered fully taxable for the first six months, then becomes exempt from FICA and FUTA if the payments continue into the seventh month and beyond. These payments need to be shared with the employer and recorded on the employer’s tax returns, including employee W-2s.

19. Withholding

Subtract amounts from an employee’s wages for taxes, garnishments or levies, and other deductions (like medical insurance or union dues). These amounts are paid over to the government agency or other party to whom they are owed.

Once you familiarize yourself with these key payroll phrases, you will feel like an expert next time you run your payroll.