Payroll Terms & Definitions Every Business Owner Needs To Know



The Affordable Care Act (ACA) was signed into law in March 2010 and includes health coverage requireds for company owner. Research whether your small company requires to supply health protection and what your state requirements appear like.


The Automated Clearing House (ACH) is an electronic funds transfer system.


Compensation is the pay (money) made to workers as salary or wages.


Payroll reductions are payments kept from an employee’s income each pay period. These can be voluntary amounts that the employee chooses (like retirement contributions) or uncontrolled reductions (like kid support/garnishments; medical insurance premiums). Some reductions can be made post-tax or pre-tax.

Direct Deposit

This is when funds/money is transferred electronically into a monitoring or cost savings account.


A worker is a person who gets a salary or wage for a task. Nevertheless, for the functions of payroll, taxes, and the government, a worker is a person you employ, over whose time and work you have control. It sounds reminiscent of antiquated work-systems, but control is defined as:

  • Work/Behavior Control: Do you assign this individual a schedule? Do you manage their workload?
  • Financial Control: Do you pay a consistent salary? Do you add to a retirement fund? Is this person granted compensation for tools and supplies?

If workers are not employees, they might be independent contractors.

See: Independent Contractors


Exempt methods “exempt from overtime” and is a reference to the type of work someone performs for your organisation. Exempt workers normally consist of supervisory, expert, and executive positions.

See: Nonexempt FICA The acronym FICA means: Federal Insurance Contributions Act. This is an obligatory federal payroll deduction in the type of taxes that you, as a company, send to the IRS. The FICA tax rates are 6.2% for Social Security tax and a 1.45% Medicare tax.


The Federal Unemployment Tax Act (FUTA) covers the expenses of unemployment insurance and state-run task programs. These taxes are based on workers’ gross profits– that suggests they are not kept from their earnings. Rather, these are a financial obligation that companies cover.


This describes a court order from a judge which allows an employee’s wages to be seized and paid to a financial institution to settle a financial obligation.

Gross Pay

This is the overall quantity of money paid to a staff member. Gross pay is reported to the IRS and the employee pays income taxes on that amount. For employed employees, gross pay is a stated yearly amount. For hourly workers, gross pay is their hourly rate increased by hours worked.

See: Net pay

Hourly Hourly employees are paid by the hour; their hourly rate is how much they are paid per hour.

See: Salary Income Tax Income tax is a tax that varies based on earnings or profits (taxable income) and is usually decided upon by a pre-determined tax rate. Taxation may vary by type of taxpayer. This kind of tax is kept from workers’ paychecks.

See: FICA Independent Contractors An independent contractor is an individual who is worked with by means of contract to do work for your service. Contractors are not workers.

See: Employees, 1099 Imputed Income This is any non-monetary settlement offered to

staff members in the

type of additional benefit. Companies need to recognize imputed income in employees ‘incomes as it is gross income. Imputed pay goes through Medicare and Social Security taxes however not to federal earnings tax. Net Pay This is the amount of take-home income a worker receives after withholdings and reductions. See

: Gross pay Nonexempt A nonexempt employee is not exempt from overtime arrangements and is entitled to overtime pay. See: Exempt Off-cycle Payroll An off-cycle payroll is run during a time when payroll isn’t usually

provided. Off-cycle payroll may be utilized to deal with vacation or reward pay, termination pay, repairing an error, or any other uncommon circumstance. Overtime is the number of extra hours an

staff member works. Unless a staff member is exempt, employees need to receive overtime pay if they work more than 4o hours in the workweek. Payroll A payroll is a list of a business’s workers and the amount of money paid as salaries

and salaries. Paystub A

paystub, in some cases described as a payslip, is a document that comes with or is connected to an income. It is a record of gross revenues, net earnings, reductions, and withholdings.

Some states have

laws needing an employer to offer a paystub; examine your state’s local guidelines.

You can also have a look at our post Payroll 101: What Is A Paystub for a more in-depth appearance at what a paystub consists of. Pay Period A pay period is a repeating schedule that determines when you pay your staff members for their time worked. The most common pay period frequencies are weekly, bi-weekly, semi-monthly, and regular monthly. Read our post Choosing The Right Pay Schedule For Your Business for a more comprehensive breakdown of pay

durations. Payroll Processing Payroll processing refers to the process of handling a company’s payroll. Actions include gathering worker timecard information; managing advantages, deductions, and taxes; distributing and recording pay. Quarterly FederalTax Returns Form 941 is a company’s

quarterly federal tax returns and the kind is utilized to report income taxes, social security tax, or Medicare tax withheld from a worker’s paycheck. The type is also utilized quarterly to pay the company’s portion of social security or Medicare. These are approximated payments made to

the IRS for the business year and

you are needed to make these payments if: You expect to owe at least$1000 in federal taxes You expect federal withholding/refundable credits to be less than:90 -100%of the tax to be revealed on your 2020 federal tax return Dates for payments throughout a typical tax year fall on April 15, June 15, September 15, January 15. See: Withholdings Repayments Expense repayment occurs when you pay a staff member back for payments/purchases made for the business with their own cash. Small companies ought to employ a reimbursement policy. Reimbursement via payroll must not

be reported as gross income. See: Taxable earnings Income This is your employee’s set earnings expressed as a yearly amount. Social Security Social

Security began in the 1930s as

government assistance for retirees, veterans, disabled persons, workers, or their families. Today’s employees are spending for existing social security receivers and these contributions are mandatory. Paying social security becomes part of a worker’s FICA taxes. See: FICA Gross income The list of types of taxable earnings can be

long! In general, taxable income consists of incomes, salaries, rewards, ideas, and commissions. It can likewise include charges, interest and dividends

, assignment of earnings, or revenue on a sale. The IRS Publication 525 lists complete kinds of nontaxable and taxable income. Workweek A workweek is the number of hours or days a staff member is scheduled to work throughout a seven-day

duration. The Department of Labor and the Federal Government have this technical definition of a workweek for the purposes of overtime and tax functions: A worker

‘s workweek is a repaired and regularly recurring period of 168 hours– seven successive 24-hour durations. It need not correspond with the calendar week, however may begin on any day and at any hour of the day. Different workweeks may be developed for different workers or groups of workers. Averaging of hours over 2 or more weeks is not allowed. Withholdings are the federal, state,and regional

taxes taken from a staff member’s income and delivered to their appropriate agencies by an employer. Withholdings lower a staff member’s pay however also decrease taxes owed at the end of the year. There are a couple of things that determine an employee’s withholdings, including the staff member’s income, marital status, variety of dependents, and variety of tasks. The number and kind of withholdings for a staff member are figured out by the information noted on an employee’s W4. See: W4 W2 A W2 is a basic tax kind called the “Wage and Statement “file that reveals wages and taxes withheld throughout a fiscal year. This file is prepared

by the company for the employee and need to be sent to staff members by Jan. 31 every year. Companies likewise send out copies of W2s to the IRS. W4 The W4, likewise called an Employee’s Withholding Allowance Certificate, is an IRS form that an employee uses to reveal their tax scenario( exemptions and marital status, and so on ). This type tells the company the amount of taxes to withhold from an income. A W-4 is based upon allowances; the more allowances, the less money a company withholds. See: Withholding 1099 A 1099 is an information return for independent professionals. Payers

use this kind, likewise referenced as a Miscellaneous Income type, to report payments to an individual who is not an employee. Find out more About Payroll Paying your workers is not an optional part of running a small organisation, and you require to find a payroll system and a technique of running payroll that includes quality to your business, not mayhem

. You will desire this not only for yourself however also for your staff members. After the first action– understanding the ins and outs of payroll in general– the next action is to have a concrete understanding of what payroll systems work best for you and your company. Research and understand what you require, understand your business, and take the leap into organizing your systems with smooth payroll. The IRS and your workers


thank you. Need to know more? Merchant Maverick has put together a helpful Small Business Payroll Guide to help

small company owners through decisions

related to payroll and payroll systems. No abacuses required.

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