Whether you outsource your payroll to a payroll provider or handle your payroll in-house, there are a number of payroll terms that are frequently used.  Some terms are easier to figure out than others.  We've put together this resource guide for easy-to-understand explanations of some commonly used phrases. 

Employer Identification Number or EIN
This is a business entity's or employer's unique account number that is assigned by the Internal Revenue Service (IRS) for tax paying purposes.  This identification number is for partnerships, corporations, LLCs or other business entities with paid employees.  If you are a sole proprietorship without any paid employees, your EIN is your social security number.  An EIN consists of nine numerical digits and is usually shown in the format... 00-0000000.  A business's EIN is its unique identifier when it comes to payroll tax filing and payments. 

Independent Contractor
An individual or business that is contracted to perform certain tasks, but is not an employee of the company that hired them for the duties they will provide is considered an independent contractor.  In almost every U.S. state, the company that hires an independent contractor is not responsible for withholding taxes from the payments they make to the person working under contract.  The company also does not pay the independent contractor's or self-employed person's unemployment, disability or workers' comp insurance.  Some states such as North Carolina have changed their regulations for 2010 when it comes to state withholdings for 1099 contractors.  It is best to talk with your accountant or bookkeeper to find out if your state requires these withholdings. 

Some examples of an independent contractor are lawyers, consultants, brokers and subcontractors.  These are people that perform an independent trade or profession in which they offer their services to the public.  The IRS has very specific rules and guidelines when it comes to determining if someone fits the definition of an independent contractor.  These include principles like who has control, set work hours, method of compensation and right to fire.  It is best to evaluate this distinction on a case by case basis using the three categories of evidence the IRS has set up.  There is no set number of factors that make someone an employee versus an independent contractor. 

See How the IRS Defines an Independent Contractor

Exempt Employees
An exempt employee is an employee that is not covered by the Fair Labor Standards Act (FLSA) overtime protection provision, is not eligible to receive overtime pay and is exempt from minimum wage regulations.  An exempt or salaried employee is determined using a series of criteria such as their occupation, pay rate and job responsibilities that they perform.  Exempt categories are:  executive, administrative, professional, computer employees and outside sales. Exempt employees are required to be paid on a salary basis instead of being paid at an hourly rate.  Federal law requires exempt employees to earn at least $455 per week, although some states do have higher requirements.

Involuntary Deductions
Deductions which are mandatory and which an employer and employee have no control over are considered involuntary deductions.  Involuntary deductions include among other things Federal and State tax levies, child support withholdings, creditor garnishment orders and bankruptcy orders.