27 Payroll Terms You Should Know

On payday, the payroll service calculates the gross amount the employee is owed based on the number of hours or weeks worked during the pay period and the pay rate. The service deducts taxes and other withholdings from earnings and then pays the employees. Deductions are amounts taken from the employee’s paycheck (not to be confused with taxes). Income tax withholding refers to the money an employer keeps, or withholds, from an employee’s paycheck to remit for paying federal or state income taxes. Employees fill out Form W-4 and a state withholding certificate to direct their employers how much to withhold for income tax payments.

Gross pay is the total pay received by the employee before taxes and deductions are removed. Fringe benefits, also called imputed income, are the perks that businesses offer aside from regular wages. For example, the New Jersey minimum wage is $12 per hour in 2021.

1. However, companies must also perform accounting functions to record payroll, taxes withheld, bonuses, overtime pay, sick time, and vacation pay.
2. The first step is to calculate your employees’ gross pay.
3. Common pay periods include weekly, bi-weekly and monthly.

You, as the employer, must match each employee’s contribution. The business submits both the employee’s and the company’s contributions to Social Security and Medicare. 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.

What Is a Payroll Tax Holiday?

As a business grows, its accounting needs become more complex, and a custom enterprise resource planning (ERP) system is often needed. Another disadvantage is that payroll services are more expensive than running payroll in-house. The services may charge a set monthly fee or offer different payment structures for varying tiers of service.

Understanding the basics of payroll

However, companies must also perform accounting functions to record payroll, taxes withheld, bonuses, overtime pay, sick time, and vacation pay. Companies must put aside and record the amount to be paid to the government for Medicare, Social Security, and unemployment taxes. Imputed income is added to the employee’s gross income and is subject to Social Security and Medicare taxes but typically not federal income tax. Employers must include imputed income in the employee’s W-2 form for tax purposes. Additionally, imputed income may be used to determine an amount for child support payments in some states.

Exempt Employee

Overtime is the additional amounts paid to hourly employees who work over 40 hours in a week, who work on weekends, or other additional amounts. Overtime must be paid at one-and-a-half times the person’s hourly pay rate for employees who work more than 40 hours in a workweek. Gross pay is stated as an annual amount for salaried employees. The annual salary is divided by the number of pay periods in the year to determine gross pay for a pay period. Gross pay is the total paid to an employee each pay period before any deductions for taxes or other purposes are made.

This is a form used to verify if an employee is legally eligible to work in the United States. The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters. Paid time off encompasses all the time an employee is not working while being compensated.

The SEP is the most popular IRA plan among self-employed workers. Hopefully these definitions help to round out your payroll vocabulary and gain a better understanding of what goes into the payroll process. Share this useful glossary with your peers and coworkers, and let us know what other concepts you want to see defined. Whether you are a Business Owner, Finance Director, HR Specialist or Office Manager, there are certain terms relating to payroll that you should absolutely become familiar with. If you are a new business owner, you may come across specific https://quickbooks-payroll.org/ that you should understand. Knowing the language always helps better negotiate new territory.

Unlike payroll taxes, employers never contribute to paying their employees’ federal or state income taxes. Form W-4 is completed by employees to inform their employer of how much federal income tax to withhold from their paychecks. The form asks for details such as the employee’s marital status, number of dependents, and additional income.

These articles and related content is the property of The Sage Group plc or its contractors or its licensors (“Sage”). Accordingly, Sage does not provide advice per the information included. These articles and related content is not a substitute for the guidance of a lawyer (and especially for questions related to GDPR), tax, or compliance professional. When in doubt, please consult your lawyer tax, or compliance professional for counsel. This article and related content is provided on an” as is” basis.

It’s determined in different ways for salaried and hourly employees. 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. The deductions made on the employees’ wages are called payroll deductions, and it can be calculated as the difference between gross pay and net pay. Deduct the 7.65% FICA tax from the employee’s gross pay.

The IRS requires that all tax records, including those for payroll taxes, be kept for at least three years, and longer in some cases. But not all “white collar” professionals are exempt from overtime. They must be over a standard salary level of $684 a week ($35,568 a year for a full-year worker) to be exempt.

The employer then uses Form W-4 to calculate how much of an employee’s salary is withheld for tax purposes. Disposable earnings are an employee’s wages after all legally required trucking bookkeeping deductions — including payroll taxes — have been subtracted from his or her gross wages. Taxable wages are the earnings from which an employer must withhold taxes.