Unsure about payroll terminology? Search our glossary to get simple definitions of common payroll-related words, phrases, and acronyms.
Small Business Payroll Glossary
Showing all the terms
What is a 401(k) plan?
A 401(k) plan is a defined contribution plan that
allows employees to make pretax contributions from
their paychecks to a retirement plan. Employee
contributions to 401(k) plans are not exempt from
FICA withholding. They are exempt from federal
income tax withholding and may be exempt from state
income tax withholding, depending on the state. See FICA.
What is a 401(k) company match?
Employers that offer 401(k) plans can choose to
match employees’ contributions up to a certain
percentage. Employer contributions are exempt from
federal income tax withholding.
What are 401(k) limits?
The IRS limits how much an individual can
contribute to a 401(k) plan in a year. People age 50
and up can make additional “catch-up” contributions
up to a certain limit.
What is a 1099 form?
Form 1099-MISC is a government tax form that
businesses use to report payments made to an
unincorporated business or to a person who’s not an
employee. Employers must complete a Form 1099-Misc
for any person the business paid $10 or more in
gross royalties or $600 or more in rents or
compensation. See Form 1099-MISC.
What is accrual?
Employee benefits calculated on an accrual basis
are earned over a period of time. For example,
employees may accrue a certain amount of paid time
off for each hour worked.
What is the advance earned income credit?
The advance earned income credit is a federal
program that allows employers to reimburse
low-income employees for part of their federal
income tax withholdings. Employers claim the
reimbursements as tax credits on their Quarterly
Federal Return (Form 941). See Earned Income Tax Credit.
See Form 941.
What is an after-tax deduction?
A deduction from an employee’s wages that is taken
out after all applicable taxes and pretax deductions
have been withheld is called an after-tax deduction. See pretax deduction.
What is an amended rate notice?
Once an employer has established an unemployment
history, state unemployment insurance tax rates are
calculated annually. An amended rate notice alerts
employers of a rate change and the factors involved
in calculating the new rate. See SUI tax rate notice.
What is average taxable payroll?
The average of an employer’s taxable payrolls
immediately preceding the SUI tax rate computation
date for a specified period is used to compute the
employer’s SUI tax rate. See SUI taxes.
See SUI tax rate notice.
See tax rates.
What is back pay?
Pay owed to an employee from a previous payroll
period. See retroactive pay.
What is a bankruptcy lien?
If an employee declares bankruptcy, their employer
will receive a federal court bankruptcy lien
requiring them to garnish all or part of their wages
to repay the debt. Bankruptcy liens take priority
over most other types of liens. See garnishment.
What are bonus taxes?
Bonus compensation that employees receive above
their usual compensation that is taxed differently
from normal wages. There are two options: Using the
percentage method, withhold a flat 25% of the bonus
amount. Using the aggregate method, combine the
amount of the bonus with the employee’s paycheck,
then treat the whole amount as a larger-than-usual
paycheck and withhold taxes at the normal rate.
What is a cafeteria plan?
An employee benefit plan that offers a “menu” of
benefits such as health insurance and life
insurance, is called a cafeteria plan. Employees
choose the options they want and pay for some or all
of the chosen benefits using pretax deductions from
their wages.
What is a certified payroll report?
Businesses that are fulfilling federal government
contracts must submit the certified payroll report (Form WH-347)
to the contracting agency each week. Agencies use
the form to verify that contractors are paying
workers the prevailing wage. Employers must list all
the employees who worked on the project, their
hours, gross wages, benefits, and tax withholdings. See prevailing wage.
What is a city or local income tax?
Cities or local jurisdictions that have city or
local income tax may require employers to withhold
this tax from employees’ wages.
What is COBRA?
The Consolidated Omnibus Budget Reconciliation Act
of 1985 (COBRA) is a federal law requiring employers
to offer qualifying former employees and dependents
who lose their health insurance or dental insurance
the chance to continue their group health insurance
for a limited time.
What is a COD (court-ordered deduction)?
This legal notice directs an employer to withhold
money from an employee’s wages and remit it to a
court or other agency. See garnishment.
What is commission pay?
Compensation calculated based on a percentage or
dollar amount of each sale an employee makes is
called commission pay.
What is comp time?
Compensatory paid time off
(comp time) can be given to employees in return for
working extra hours. Comp time cannot be used
instead of paying employee overtime.
What is a company car allowance?
An employee who uses their personal vehicle for
work may be given a company car allowance to
compensate for these vehicle expenses. The allowance
is typically added to the employee’s paycheck.
What is a contract worker?
Contract workers are paid a set price for working
for a set amount of time. Unlike independent contractors or freelancers, both of whom are self-employed, contract workers
are employed by a company (such as a staffing agency
or consultancy) that hires them out to other
companies.
What are credit reduction states?
These states have taken loans from the federal
government to fund state unemployment benefits and
have not repaid the loans within the allotted time
period. Wages subject to unemployment insurance tax
are taxed at higher rates in credit reduction
states.
What is the Davis-Bacon Act?
The Davis-Bacon Act
is a federal law that requires contractors and
subcontractors on federally funded public works
contracts worth more than $2,000 to pay all laborers
and mechanics involved the prevailing local wages. See prevailing wages.
What is a deferred compensation plan?
This employee benefit allows employees to
contribute a percentage of their wages to a
tax-deferred savings plan such as a 401(k) instead
of receiving those wages as current
compensation.
What is a de minimis fringe benefit?
A de minimis
fringe benefit is any employee benefit with a dollar
value so small that it’s unreasonable to include it
as part of the employee’s income. See fringe benefits.
What is direct deposit?
Direct deposit is the use of an Electronic Funds
Transfer (EFT) to deposit an employee’s wages
directly into a bank account they designate.
What is disability leave?
Disability leave is a paid or unpaid leave of
absence taken by a disabled employee as a reasonable
accommodation or as part of an employer’s short-term
or long-term disability policy. If the illness or
injury is work-related, workers’ compensation
insurance may pay the employee’s benefits while
they’re on disability leave. Most states have laws
regulating disability leave. Some states provide (or
require employers to provide) short-term disability
insurance (SDI) or temporary disability insurance
(TDI) to replace part of employee wages lost to an
illness or injury unrelated to work.
What is the Earned Income Tax Credit (EITC or EIC)?
This tax credit is available for working people
with low to moderate income. See advance earned income credit.
What is an earnings allowance?
An earnings allowance is the maximum amount of
compensation that people receiving unemployment
benefits can earn per week without losing any of
their weekly unemployment benefits. The state sets
the earnings allowance.
What is the effective tax rate?
The percentage of an individual’s income that they
pay in taxes is their effective tax rate.
What is EFT?
What is EFTPS?
What is an EIN?
What is the Electronic Federal Tax Payment System?
This secure government website allows users to pay
federal taxes electronically online (or by
phone using the EFTPS® Voice Response System).
What is Electronic Funds Transfer (EFT)?
Federal and state agencies may require employers to
pay unemployment taxes using electronic funds
transfer.
What are employee benefits?
Employee benefits are indirect, non-cash or cash
compensation paid over and above an employee’s
regular wages. Health insurance and life insurance
are two examples of employee benefits. Employment taxes are also considered employee
benefits. See fringe benefits.
What is the Employee Retirement Income Security Act (ERISA)?
This federal law sets minimum standards for
retirement plans offered by private employers in
order to protect individuals’ rights to their
benefits.
What is employee time tracking?
Employee time tracking
is the process of keeping count of and recording the
hours employees work, for payroll, job costing, and
more. Employee time can be tracked on paper, on a
spreadsheet, or with a manual punch clock, though
automated, cloud-based systems are available.
What is an Employer Tax Identification Number (EIN)?
A unique nine-digit number assigned by the IRS to
any company with employees. Similar to a Social
Security number for an individual.
What is the Employer’s Annual Federal Unemployment Tax Return?
What is the Employment Eligibility Form?
What are employment taxes?
Taxes that employers must legally withhold from
employees’ wages, then deposit and report, are
considered employment taxes. These include federal
income tax, Social Security and Medicare taxes, and
the Federal Unemployment Tax (FUTA).See Social Security taxes.
See Medicare Taxes.
See Federal Unemployment Tax.
What is an employment tax audit?
What is ERISA?
What is an exempt employee?
Exempt employees are, under some circumstances, not
protected by state or federal wage and hour laws,
including minimum wage protections. Exempt employees
are usually paid a salary rather than hourly wages,
though some are paid by the hour. Exempt employees
are not eligible for overtime. See Fair Labor Standards Act.
See nonexempt employee.
See white collar exemption.
What is the Fair Labor Standards Act (FLSA)?
This federal law establishes the minimum wage,
overtime pay eligibility, recordkeeping, and child
labor standards for full-time and part-time
workers.
What is the Family and Medical Leave Act (FMLA)?
This federal law entitles eligible employees to 12
workweeks of unpaid, job-protected leave for the
birth or adoption of a child, to care for a
seriously ill family member, or to recover from a
serious medical condition. Eligible employees are
also entitled to access their group health insurance
coverage.
What is the Federal Insurance Contribution Act?
This federal law created a payroll tax to fund the
Medicare and Social Security programs. See FICA.
What are Federal Supplemental Benefits (FSB)?
This temporary federal program provides
supplemental unemployment benefits to people who
have used up their regular unemployment benefits,
their state-financed extended benefits, and/or their
jointly financed federal/state extended benefits
during periods of high unemployment.
What is federal tax withholding?
Employers are legally required to withhold the
following federal taxes from employee paychecks:
FUTA, FICA, and federal income taxes. See Federal Unemployment Tax Act.
See FICA.
What is the Federal Unemployment Tax Act (FUTA)?
FUTA is a federal law that guides the
administration of unemployment compensation programs
and requires all eligible employers to pay a federal
unemployment tax. Funds are used for state and
federal unemployment programs and benefits. Some
states have additional guidelines regarding
unemployment taxes and benefits. See SUI tax.
See State Unemployment Tax Act.
What is FICA?
The Federal Insurance Contribution Act (FICA) is a
federal law that establishes payroll tax funds to
Medicare and Social Security. Both employees and
employers pay the FICA tax. Employees have FICA
taxes withheld from their paycheck, while employers
pay their own contribution.
What is a filing status?
Employees select a filing status on their Form W-4
to help determine the amount of tax withheld from
their paychecks. There are three options for filing
status: single, married or “married, but withhold at
higher Single rate.” See withholding allowance.
What is the difference between fired and laid off?
An employee who is fired is permanently terminated
for a cause such as poor performance or misconduct.
A laid-off employee is terminated because their job
is eliminated. Depending on the reason for firing
and the state’s unemployment regulations, fired
employees may not be eligible for unemployment
benefits.
What is a Flexible Spending Account (FSA)?
This employee benefit allows employees to
contribute pretax dollars to a savings account to be
used for medical or child care costs.
What is the FLSA?
What is the FMLA?
What is Form 940 (Employer’s Annual Federal Unemployment Tax Return)?
This government form is used to report the portion
of FUTA tax that employers pay for their employees. See payroll tax forms.
What is Form 941 (Quarterly Federal Tax Return)?
This government form is used to report the payroll
taxes withheld from employee paychecks. See payroll tax forms.
What is Form 944 (Employer’s Annual Federal Tax Return)?
This government form is used by employers whose
annual liability for Social Security, Medicare, and
withheld federal income taxes is $1,000 or less to
file and pay these taxes. See payroll tax forms.
What is Form 1099-Misc?
What is Form I-9 (Employment Eligibility Form)?
This government form is used to verify the identity
and employment authorization of every person hired
for employment in the United States. U.S. employers
must complete a Form I-9 for each person hired,
including citizens and noncitizens.
What is Form W-2 (Wage and Tax Statement)?
A W-2 is a government form
that summarizes an employee’s wages and withholdings
for the year. Employers must file a form with the
Social Security Administration (SSA) for each
employee and issue each employee a copy by January
31 of the following year. Employers are not
responsible for issuing W-2s to 1099 contractors, though these workers can receive a 1099-MISC
report.
What is Form W-3 (Transmittal of Wage and Tax Statements)?
This government form summarizes the total earnings,
Social Security payments, Medicare payments, and
federal and state tax withholding for all employees
of a company. Use an employees’ W-2 forms to arrive
at the totals for the W-3. File it with the Social
Security Administration (SSA) by January 31 of the
following year.
What is Form W-4 (Employee’s Withholding Allowance Certificate)?
Employees use this government form to tell their
employer how many personal exemptions they want to
claim on their taxes. See withholding allowance.
See wage withholding.
What is Form WH-347?
What is a fraudulent claim?
A fraudulent claim is a type of unemployment fraud
where the claimant lies on an application, hides
information, or uses someone else’s Social Security
number to make an unfounded claim for unemployment
benefits.
What is a freelancer?
What is a fringe benefit?
Any non-wage compensation provided to an employee
is a fringe benefit, which may be taxable or
non-taxable. See employee benefits.
What are frozen wage credits?
In some circumstances, state law allows individuals
who were injured on the job to use a base year prior
to the injury, effectively freezing those wage
credits.
What is a FSA?
What is an FSB?
What is FUTA?
What is garnishment?
If an employer receives a lien on an employee for
unpaid debts, they must withhold, or “garnish,”
money from the employee’s wages to repay the debt. See bankruptcy lien.
What are gross earnings?
Gross earnings are an employee’s total compensation
before taxes and deductions.
What is gross pay?
What is group term life insurance?
Group term life insurance coverage is provided and
paid for by employers as an employee benefit.
Coverage of up to $50,000 is not taxable to the
employee; however, if employees purchase additional
insurance coverage exceeding $50,000, that portion
of the premium is taxable.
What is a Health Savings Account (HSA)?
An HSA is a tax-advantaged savings plan offered by
employers along with a high-deductible health
insurance plan. Both employers and employees can
contribute pretax dollars to the HSA, which allows
employees to save money tax-free for deductibles and
qualified medical expenses.
What is HIPAA (Health Insurance Portability and Accountability Act of 1996)?
This federal law requires privacy protections for
an individual’s’ health information.
What is holiday pay?
Holiday pay is paid time off for federal holidays.
The FLSA does not require employers to give
employees federal holidays off or to pay them for
hours not worked; however, many employers do
so.
What is an HSA?
What are HSA limits?
The IRS sets HSA limits on how much individuals and
employers can contribute to an employee’s HSA
annually. See Health Savings Account.
What is imputed income?
Imputed income is a non-cash service or fringe
benefit provided to employees. While some non-cash
benefits are tax-exempt (such as health insurance),
imputed income is subject to employment tax
withholding. See employment tax.
See fringe benefits.
What is an independent contractor?
An independent contractor
is a self-employed person who works for various
companies on a project or contract basis. Employers
do not withhold taxes from an independent
contractor’s wages, pay their Social Security or
Medicare taxes, or pay state unemployment taxes for
them. See contract worker.
See freelancer.
What is an Individual Retirement Account (IRA)?
An IRA is a tax-deferred retirement account that
any employed or self-employed person can establish
for themselves. Employees can authorize their
employer to make payroll deductions and transfer
them to the employee’s IRA.
What is a leave of absence (LOA)?
A leave of absence is a period during which an
employee has permission to be absent from work
without losing their job. Leaves of absence may be
paid or unpaid, and they’re generally used in
special circumstances such as when an employee has
exhausted available paid time off (sick days,
personal days, vacation days, and holidays). See disability leave. See Family and Medical Leave Act.
See maternity leave.
See paternity leave.
What is long-term disability insurance (LTDI)?
Long-term disability insurance protects employees
against loss of income if a non-work-related illness
or injury leaves them unable to work for an extended
time. Employers sometimes provide long-term
disability insurance as an employee benefit.
What is maternity leave?
Maternity leave is an approved absence from work
given to a mother after or shortly before the birth
of her child. Qualified employees of companies
covered under the Family and Medical Leave Act
(FMLA) can take up to 12 workweeks of unpaid leave
for this purpose. Some states also provide paid
disability leave for expecting mothers. Some states
require employers to provide paid family leave. See disability leave.
See Family and Medical Leave Act.
See leave of absence.
See paternity leave.
What is the maximum benefits amount?
This refers to the maximum amount of unemployment
benefits a claimant can receive during a benefit
year or the entire period of unemployment. It is
also referred to as “maximum benefits
payable.”
What is the maximum benefits payable (MBP)?
What is the maximum potential benefit amount?
This refers to the maximum unemployment benefit for
weeks of total unemployment that a claimant can
receive under state or federal unemployment
insurance regulations.
What is the maximum potential duration?
This refers to the maximum number of weeks for
which a claimant can receive unemployment benefits
during a benefit year or the entire duration of
unemployment.
What is the maximum weekly benefit amount?
This is the highest weekly amount of unemployment
benefits a claimant can receive under state or
federal unemployment insurance regulations.
What is the Medicare tax?
Medicare provides medical benefits for individuals
age 65 and up and individuals under 65 with certain
qualifying health conditions or disabilities. The
Medicare tax is funded through FICA taxes paid by
both employers and employees. See FICA.
What is mileage reimbursement?
This is money paid to reimburse employees for
business use of their personal vehicles, Mileage
reimbursement is calculated on a per-mile rate set
each year by the IRS. See company car allowance.
What is the minimum wage?
The minimum wage is the lowest amount per hour that
employers can legally pay employees. In addition to
the federal minimum wage law, some states have their
own minimum wage laws. In this situation, employers must pay the higher
of the two wages.
What is multi-state payroll?
If a business has employees who work in another state, it may be considered to have a “nexus” or
business presence in that state and may be required
to withhold the other state’s income tax from the
employee’s wages.
What is net pay?
Net pay is the remainder of an employee’s wages
after all deductions are subtracted from the gross
wages. Net pay is also called take-home pay.
Calculate net pay with a paycheck calculator. See gross earnings.
What is a nonexempt employee?
Nonexempt employees are entitled to overtime pay,
under the Fair Labor Standards Act
(FLSA). Some states, such as California, have their own overtime regulations. Nonexempt
employees are still entitled to overtime pay, even
if that time was unauthorized by their employer. See exempt employee.
What is OASDI (Old-Age, Survivors, and Disability Insurance Program)?
Old-Age, Survivors, and Disability Insurance
Program is the official name for Social
Security. See FICA.
What is off-cycle payroll?
Off-cycle payroll is a wage payment made outside of a
company’s normal pay schedule.
What is officer’s compensation?
Officer’s compensation is compensation given to
corporate officers in return for services performed
for a business. This type of compensation must be
treated as wages.
What is overtime?
Hours that nonexempt employees work over the
maximum workweek hours set by federal or state laws.
The Fair Labor Standards Act
(FLSA) entitles nonexempt employees to overtime pay
at least 1.5 times their regular rate of pay. Some
states, like California, have their own overtime regulations. See FLSA.
See nonexempt employees.
What is paid time off (PTO)?
Paid time off
is an employee benefit that allows employees to take
a specified number of days off with pay. PTO can
include sick leave, paid holidays, vacation days,
and personal time off. PTO is often earned on an
accrual basis according to the number of hours or
years employees have worked for a company.
What is a part-time worker?
Defined in the Affordable Care Act, part-time workers
as those who work less than 30 hours per workweek, on
average, or less than 130 hours per month. Full-time
workers are those who work more than 30 hours per
workweek, on average, or more than 130 hours per
month. Employers can set their own parameters for
full-time and part-time employment at their companies.
What is paternity leave?
Paternity leave is an approved absence from work
given to a father after or shortly before the birth
of his child. Qualified employees of companies
covered under the Family and Medical Leave Act
(FMLA) can take up to 12 workweeks of unpaid leave
for this purpose. Some states require employers to
provide paid family leave. See FMLA.
See maternity leave.
See leave of absence.
What is a pay period?
A pay period is a recurring period of time over
which employee hours worked are recorded and wages
paid. A business may have monthly, weekly, biweekly,
or monthly pay periods. The pay period determines
the number of paychecks employees receive per
year.
What is a payroll advance?
Some employers offer employees payroll advances, or
the opportunity to get their payroll funds before
payday as a short-term, unsecured loan.
What are payroll deductions?
Payroll deductions are withheld from an employee’s
paycheck. Some payroll deductions are voluntary
(401(k) contributions). Others are involuntary
(federal income taxes). Payroll deductions may be
taken out before taxes are withheld (pretax) or
after taxes are withheld (after-tax). See pretax deductions.
See after-tax deductions.
What are payroll expenses?
Payroll taxes that employers pay on behalf of
employees (the employer’s portion of Social Security
and Medicare taxes) are considered business
expenses. See payroll liabilities.
See payroll taxes.
What are payroll liabilities?
Payroll liabilities are payroll taxes withheld
from employee wages that are not considered business
expenses. They are considered liabilities until
the money is remitted to the government. See payroll expenses.
See payroll taxes.
What is a payroll liability account?
To keep payroll liabilities from messing up cash
flow, payroll liability accounts can be set up in
payroll or accounting solutions to track these
amounts. See payroll expenses.
See payroll liabilities.
See payroll taxes.
What is payroll processing?
Payroll processing is the process by which
employees are paid each pay period. Payroll
processes must comply with all applicable state and
federal labor laws.
What are payroll taxes?
Payroll taxes are those required by the Federal
Insurance Contributions Act (FICA) that says
employers must withhold taxes from all employee
wages and pay on their behalf. Payroll taxes include
the federal income tax, federal unemployment tax,
Social Security tax, and Medicare tax.
What is a payroll tax audit?
State or federal tax agencies may audit a company’s
payroll taxes to make sure they are making payroll
tax deposits on time and filing the correct payroll
tax returns. A payroll tax audit is often conducted
when the tax authority believes a business has misclassified employees
as independent contractors. Payroll tax audits are
also called employment tax audits.
What are payroll tax forms?
Form 941 is used to report the payroll taxes
withheld from employee paychecks. Form 940 is used
to report the portion of Social Security and
Medicare tax employers pay for their employees. Form
944 is used by very small employers to report
payroll taxes. See Form 940.
See Form 941.
See Form 944.
See payroll taxes.
What are payroll tax penalties?
When employers can’t submit payroll taxes in full
and on time, the IRS charges a penalty based on the
number of days the payment is late. Before the
beginning of each calendar year, employers can
determine their deposit schedule by consulting Publication 15 and the IRS.
What are payroll tax returns?
What is a peg balance?
Some business bank accounts offer a sweep option
that helps businesses maintain a certain minimum
balance in their primary account and earn money
market interest rates. Account holders determine a
minimum, or “peg” balance, for their primary
business checking account. At the end of each
business day, any money over the peg balance is
swept into an investment account. If the primary
checking account balance dips below the peg balance,
money is transferred back to that account to
maintain the peg balance.
What is a period of employment?
A period of employment is the first day an employee
works for a business through the last day he or she
works before employment is terminated.
What is a piece rate?
In this system of determining wages, employees are
paid a fixed amount for each unit they produce (that
is, each piece). For example, if a business sells
crafts, artisans might be paid a piece rate for the
products.
What is a pooled account?
A pooled account is an unemployment fund into which
an individual’s state unemployment insurance
contributions are paid. All contributions commingle
in the pooled account fund, and unemployment
benefits are payable from the fund to all
individuals eligible for compensation. See SUI tax.
What are post-tax deductions?
What is power of attorney (POA)?
Employers who have a payroll provider may be
required by the state tax board to give that
provider power of attorney. This allows the provider
to deposit state taxes and file state tax returns on
the business’s behalf but not to make legal
decisions on behalf of the business.
What is pregnancy disability leave?
What are pretax deductions?
Money subtracted from an employee’s wages before
any taxes are withheld are pretax deductions. Some
benefits, such as health insurance or 401(k) plans,
can be paid for with pretax deductions. See after-tax deductions.
What are prevailing wages?
The prevailing wage, required by the Davis-Bacon Act, is the average
or majority hourly rate of pay, benefits, and
overtime paid to the majority workers, laborers, and
mechanics in the largest city of a given county. The
prevailing wage applies to government-contract
projects valued at least $2,000 and is reevaluated
every three years. See Davis-Bacon Act.
See certified payroll report.
What is private support?
Private support is a type of wage garnishment based
on a private agreement between parties rather than a
court order. Employees may ask for the garnished
amount to be paid to a third party such as an
attorney or bank. A private support lien is a lower
priority than most other types of wage garnishment
such as child support or federal tax liens. See COD.
See garnishment.
What is PTO?
What is public assistance?
Public assistance programs give individuals and/or
families cash assistance or in-kind benefits from a
government entity. Assistance includes Supplemental
Security Income (SSI) and Temporary Assistance for
Needy Families (TANF). It is possible for people to
be employed and still have incomes low enough to
receive public assistance.
What is the Quarterly Federal Tax Return?
Employers must file the Quarterly Federal Tax
Return, Form 941, each quarter to report income
taxes, Social Security taxes, or Medicare taxes
withheld from employee paychecks and pay their
portion of Social Security or Medicare taxes. See Form 941.
See payroll tax forms.
What is reimbursement?
Employees who pay for work-related expenses, such
as mileage or transportation, out of their own
pockets may be reimbursed for those expenses. In
accountable reimbursements, the employee must keep
records to justify the amount of reimbursement. In
nonaccountable reimbursements, employees receive a
set allowance every month. Employees do not pay
income taxes on reimbursements. Employers do not
submit payroll taxes on reimbursement.
What are retirement limits?
Retirement limits are the maximum dollar amount
employees can contribute to retirement plans each
year. The IRS sets retirement limits, which
typically increase annually.
What is retroactive pay?
Retroactive pay is money owed to an employee from a
previous pay period. See back pay.
What is severance pay?
Severance pay is compensation given to an employee
upon termination of their employment. Severance pay
is not required by law, but some employers provide
it to help employees get through a period of
unemployment. Severance pay is typically based on an
employee’s length of service and can be given in a
lump sum or installments over time. See supplemental wages.
What is the severance pay tax?
Employers must withhold state and federal income
tax, Social Security tax, and Medicare tax from
severance pay. The IRS treats severance pay as
supplemental wages. If the money is given in a lump
sum, it can either be taxed at a flat rate or added
to the employee’s normal paycheck and taxed like
regular wages. See bonus taxes.
See supplemental wages.
What is sick leave?
Sick leave is an absence from work due to illness,
injury, or disability. Fair Labor Standards Act (FLSA) regulations
do not require employers to offer paid sick leave.
The Family and Medical Leave Act (FMLA) requires
covered employers to provide paid sick leave for
short-term health needs and preventative care. See Fair Labor Standards Act.
See Family and Medical Leave Act.
What is sick pay?
Sick pay may also refer to Short Term Disability
Insurance in which compensation is paid by an
employer or a third party (such as an insurer) due
to an employee’s temporary absence from work as a
result of injury, sickness or disability. Sick pay
is subject to employee Social Security and Medicare
tax withholding. How sick pay is reported for tax
purposes depends on whether the the employer or a
third party makes the payments. See third-party sick pay.
What are Social Security taxes?
All employees and self-employed people must pay
Social Security taxes at the same tax rate, up to a
certain income limit. Income over the limit isn’t
subject to Social Security tax. Employers and
employees pay a portion of Social Security tax
through payroll withholding. See OASDI.
What are state income tax rates?
If a business is in a state that taxes earned
income, employers must withhold state income taxes
from an
employee’s gross pay. If employees work in more than one state with
state income tax, employers must withhold taxes from
each employee’s gross pay at each state’s tax rate. See multi-state payroll.
What is state withholding?
State withholding is a state’s income tax withheld
from an employee’s gross pay and remitted to the
state.
What is state unemployment insurance tax?
State workforce agencies collect the state
unemployment insurance tax to fund benefits for
eligible unemployed workers. If an employer has employees in more than one state, employers must pay SUI taxes for each state. See multi-state payroll.
What is SUI tax?
What are SUI tax rates?
States determine their own SUI tax rates within a
certain range. The SUI tax rate a business pays
depends on employees’ wages and how many employees
have used unemployment insurance. Companies in
seasonal industries that frequently lay off workers
and rehire them again typically pay higher SUI tax
rates.
What is a SUI tax rate notice?
Every year, states send a tax rate notice with a
businesses SUI tax rate. See amended rate notice.
What are supplemental wages?
Supplemental wages are payments to an employee that
aren’t regular wages. Supplemental wages include but
are not limited to bonuses, commissions, overtime
pay, sick pay, severance pay, awards, prizes, back
pay, retroactive pay increases, and taxable fringe
benefits. Rules for withholding on supplemental
wages depends on whether the supplemental payment is
identified as a separate payment from regular wages. See bonus taxes.
See fringe benefits.
See imputed income.
What is SUTA (State Unemployment Tax Act)?
What is take-home pay?
What is a tax bracket?
Tax brackets are categories based on a person’s tax
filing status that states how much tax they’ll pay
on each portion of their income. For example, the
first $9,525 of a person’s income is taxed at a
certain rate. The next portion is taxed at a higher
rate and so on.
What are tax codes?
Tax codes are also called tax laws. The United
States has federal, state, and local tax codes.
What is a tax levy?
If an employee is delinquent on state or federal
taxes, their employer will be served a notice from
the tax authority requiring them to send them to
garnish the taxes owed from the employee’s wages
each month minus a small percentage that is exempt. See garnishment.
What is a tax rate?
A tax rate is the percentage at which something is
taxed.
What are taxable benefits?
Taxable benefits are employee benefits that are
taxable to the employee and reported as income on
the employee’s W-2 form. Taxable benefits are based
on their fair market value. Taxable benefits may
include cars, employer-provided flights and travel
expenses, free or discounted commercial flights,
vacations, discounts on property or services,
memberships for country clubs or other social clubs,
and tickets to entertainment or sporting events. See de minimis benefits.
See employee benefits.
See fringe benefits.
See imputed income.
What is a Taxpayer Identification Number (TIN)?
A Taxpayer Identification Number is one used by the
IRS to identify a taxpaying individual or entity.
For individuals, it’s a Social Security number. For
employers, it’s an Employer Identification Number
(EIN). See Employer Tax Identification Number.
What is third-party sick pay?
This disability insurance benefit pays employees
partial or full wages during medical leave.
Employees receive the benefit payments through an
insurance company, union, or state temporary
disability plan, not through their
employer. Some third parties are considered
“agents” of a business, which makes an employer
responsible for withholding employment taxes on sick
pay. Others third parties are considered nonagents,
so they are responsible for withholding employment
taxes on sick pay. See sick pay.
What is a timesheet?
A timesheet is used to record an employee’s hours
worked for payroll. Timesheets may be digital or electronic, on paper, or in a spreadsheet.
What is a tipped employee?
Employees who regularly make $30 or more per month
in tips are classified as tipped employees, and in some states, employers can pay them a
direct wage of just $2.13 per hour. The direct wage
plus tips must add up to at least the federal or
state minimum wage (whichever is higher). If it
doesn’t, employers must pay the difference.
What are unemployment tax rates?
What is the unemployment wage base?
The unemployment wage base is the maximum amount of
compensation an employer pays in taxes for each
employee. If the unemployment wage base is $10,000
per employee, employers pay the unemployment tax
only on each employee’s first $10,000 in wages.
Unemployment wage bases are set by each state
and must be equal to at least the FUTA wage
base.
What is the Uniform Interstate Family Support Act (UIFSA)?
This national law allows state child support
agencies to send payroll withholding orders to
employers across state lines. This is used in cases
where a noncustodial parent lives in a different
state from the child and the custodial parent.
What are vacation days?
Vacation days are a type of paid time off (PTO)
employees can use to take vacations. See paid time off.
What is vesting?
Vesting is a way to gradually give employees
ownership of a benefit such as company stock options
or a 401(k) plan. Only benefits that involve both an
employer contribution and an employee contribution
are eligible for vesting. When an employee is fully
vested in a benefit, they have full ownership of it.
If their employment is terminated before the vesting
period is over, the employee forfeits their right to
the unvested part of the benefit.
What is visitation?
Some states have laws requiring employers to give
employees unpaid time off for school visitation, or
attending children’s school events such as
parent-teacher conferences.
What is a voluntary contribution?
Some states allow employers to make voluntary
contributions to their SUI accounts over and above
the required payments. The voluntary contribution
affects the account balance used to determine next
year’s SUI tax rate. This can save employers money
on next year’s taxes. See SUI tax rates.
What is a voluntary payroll deduction?
Voluntary payroll deductions are those employees
choose to have withheld from their paychecks to pay
for or contribute to employee benefits such as a
retirement plan, health insurance, or group term
life insurance.
What is Voluntary Plan Disability Insurance (VPDI)?
A Voluntary Plan Disability Insurance is a state
option allowing an employer and/or individual to buy
private disability insurance instead of a State
Disability Insurance (SDI) plan. This insurance is
administered by an employer or (if purchased by an
individual) by an insurance carrier.
What is a W-2?
A W-2 is a government form
that summarizes an employee’s wages and withholdings
for the year. Employers must file a form with the
Social Security Administration (SSA) for each
employee and issue each employee a copy by January
31 of the following year. Employers are not
responsible for issuing W-2s to 1099 contractors, though these workers can receive a 1099-MISC
report. See Form W-2.
See Form 1099-MISC.
What is a W-3?
What is a W-4?
What is a wage and separation report?
If a former employee files a claim for unemployment
benefits, their state unemployment insurance agency
may ask an employer for a report confirming the
wages the employee earned during a certain base
period and the reason for separation from the
company.
What is wage assignment?
In a voluntary wage assignment, an employee asks
their employer to withhold part of their paycheck
and send it directly to a creditor. In an
involuntary wage assignment (also called wage
garnishment), the money is withheld from the
paycheck by court order. See garnishment.
What is wage attachment?
What is a wage base?
A wage base is the amount of an employee’s pay that
is subject to wage garnishment. It is based on an
employee’s “disposable earnings” (earnings left
after legally required deductions like federal,
state, and local income taxes; the employee’s share
of Social Security, Medicare, and SUI taxes; and
withholdings for employee retirement plans required
by law). See garnishment.
What is a wage claim?
A wage claim is a state or federal claim filed
against an employer by an employee or former
employee claiming their wages were not paid
according to applicable labor laws. Examples of wage
claims include unpaid wages, late wages, unpaid
overtime, minimum wage violations, and incorrect pay
information on pay stubs. See wage claim penalty.
What is a wage claim penalty?
If a wage claim against an employer is valid, they
may be assessed a penalty in addition to paying the
employee or former employee money owed. See wage claim.
What are wage credits?
Wage credits are wages earned by employees covered
by state unemployment compensation laws. Employees
must earn a certain number of wage credits to be
eligible for unemployment benefits.
What is a wage detail report?
A wage detail report is a quarterly report an
employer must file with the state that lists the
name, Social Security number, wages, and hours
worked of each worker employed during the quarter.
This is also called a wage report.
What is a wage report?
What is wage withholding?
Wage withholding is prepayment of income taxes.
Employers withhold income taxes from each employee’s
pay and remit the money to the tax authority.
Employees choose their wage withholding amounts by
submitting Form W-4 to their employer. See Form W-4.
See withholding allowance.
What are wages?
Wages are the payments for services an employee
performs for an employer.
What is the waiting period?
A waiting period is a week of unemployment during
which a claimant doesn’t receive any unemployment
benefits but must meet the same eligibility
requirements needed to qualify for unemployment
benefits. In some states, claimants can receive
payment for the waiting period at the end of their
unemployment benefits. This is also called a waiting
week.
What is a waiting week?
What is a week of partial unemployment?
A week of partial unemployment is a week in which
an individual involuntarily works less than regular
full-time hours for their regular employer due to a
lack of work. If the employee earns less than their
regular wages and less than they would receive in
benefits during a week of total unemployment, they
may be eligible for partial unemployment benefits to
help supplement their income.
What is a week of unemployment?
This is any week during which a person is totally
or partially unemployed.
What is a weekly benefit amount?
A weekly benefit amount is the number of
unemployment benefits a claimant receives for a week
of total unemployment. See maximum weekly benefit amount.
What is a weekly earnings allowance?
A weekly earnings allowance is the amount of
compensation unemployment benefits claimants can
earn in a week without having their weekly benefit
amount reduced.
What are weeks claimed?
Weeks claimed are the number of weeks of
unemployment benefits for which payment of benefits
or credit for a waiting period is requested.
What are weeks compensated?
Weeks compensated are the number of weeks of
unemployment for which benefits are paid.
What is a white-collar exemption?
The Fair Labor Standards Act
(FLSA) creates several different categories of
exempt employees. Executive, administrative,
professional, outside sales, and certain computer
employees fall under the “white-collar exemption.”
Job titles alone don’t determine exempt status.
Employees must meet certain guidelines regarding
their job duties and be paid a minimum salary of
$455 per week. See exempt employee.
See Fair Labor Standards Act.
See nonexempt employee.
What is a withholding allowance?
A withholding allowance is an exemption that
reduces the amount of federal income tax employers
withhold from an employee’s paycheck. Withholding
allowances are chosen by the employee using Form
W-4. See filing status. See Form W-4.
What is workers’ compensation?
Workers’ compensation is a state-administered
insurance program that pays medical expenses,
rehabilitation expenses, and lost wages to employees
who are injured or become ill in the course of
performing their jobs. Workers’ comp also pays death
benefits to families of employees killed on the job.
Each state determines what types of employers are
required to purchase workers compensation
insurance.
What is a workweek?
A workweek is any consecutive seven-day period
chosen by an employer to serve as the basis for
determining an employee’s regular rate of pay and
overtime pay according to the Fair Labor Standards Act (FLSA). See Fair Labor Standards Act.
See overtime.
What are year-to-date (YTD) deductions?
YTD deductions are the total amount of money
deducted from an employee’s earnings from the
beginning of the year up until the day the pay
statement is prepared.
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