Payroll Terms and Definitions: A Comprehensive Glossary
Access this glossary that’s filled with the most common payroll terms and easy-to-understand definitions.
Payroll is one of the most crucial aspects of running a business — but it’s far from easy trying to learn and remember payroll terminology and jargon. If you’ve found yourself struggling to remember payroll vocabulary, don’t fret. We’ve got a glossary filled with the most common payroll terms and easy-to-understand definitions.
This guide can help you create your employee handbook, which you can start building with this tool.
Payroll deductions taken out of an employee’s wages after applicable payroll taxes are withheld. After-tax deductions include wage garnishments and Roth 401(k) contributions.
The legally-required amount an employer must withhold from an employee’s wages to satisfy a spousal support order from the court.
Automated Clearing House (ACH)
A network that enables the electronic transfer of funds, from one bank account to another. For example, during payroll processing, the employer transfers funds from the company’s bank account to each respective employee’s bank account.
Wages an employee should have received, but didn’t. Includes missed payments, such as unpaid salary, regular hours, overtime, or commissions.
A document from a bankruptcy court ordering an employer to withhold a certain portion of an employee’s wages to satisfy a nondischargeable debt — that is, a debt that cannot be eliminated through bankruptcy.
An employee’s minimum pay, such as their fixed salary or regular hourly rate. Base pay does not include additional compensation like overtime, benefits, or bonuses.
Refers to when an employer pays its employees once every two weeks, such as every other Friday.
Additional pay an employee receives on top of their regular wages or salary, often as an incentive or reward for good performance. Bonuses include holiday, signing, referral, and retention bonuses. Most bonuses are discretionary, meaning they are given at the sole discretion of the employer and not because employees expect to receive them.
Child Support Withholding
The amount an employer deducts from a noncustodial parent’s wages to satisfy a child support order from the court.
Competency Based Pay
A pay structure that rewards employees based on the knowledge, skills, competencies, abilities, and value they bring to the organization — instead of on the basis of their job title or role.
Money an employee earns upon completing a task — typically for selling a specific amount of employer goods or services. Some employees earn commissions in addition to their base pay, while others receive only commissions.
An employment tax guide developed for employers by the Internal Revenue Service (IRS). Includes guidance on handling both employer and employee federal payroll taxes.
Amounts taken from employees’ wages. Can be mandatory (e.g., paid sick leave and state disability insurance) or voluntary (e.g., health savings account and retirement plan contributions). May be pre-tax or after-tax, depending on the type of deduction.
De Minimis Fringe Benefit
An employer-provided benefit which is so small in value that accounting for it would be administratively impractical or unreasonable. Includes occasional coffee, snacks, doughnuts, flowers, fruit, books, etc.
The basic salary or hourly wages paid to an employee in exchange for their services. It includes all financial compensation made directly, regularly, and consistently to the employee.
A type of ACH payment that allows employers to transfer employees’ wages directly into their bank accounts, thereby avoiding paper checks.
An employee’s pay after legally-required deductions (such as payroll taxes) are taken out.
A form of overtime compensation that is paid at twice the employee’s regular hourly rate.
Earned Income Credit
A tax credit that certain employees receive when their wages are less than a specific amount.
The Electronic Federal Tax Payment System (EFTPS) allows employers to make federal employment tax payments electronically via the Internet or by phone. The service is free and available 24/7.
Employee Payroll Taxes
The federal, state, and local taxes an employer is required to withhold from employees’ wages.
Employer Identification Number (EIN)
Also known as a Federal Tax Identification Number, an Employer Identification Number is a unique 9-digit number assigned to a business by the IRS. The EIN is used to identify the business’ tax accounts.
Employer Payroll Taxes
The federal, state, and local taxes an employee is legally required to pay (though payroll withholding).
Exempt From Withholding
An employee who meets the legal requirements for exclusion from federal, state, or local tax withholding. In this case, the employer does not withhold the tax from the employee’s wages.
Fair Market Value (Fringe Benefits)
“The amount an employee would have to pay a third party in an arm’s-length transaction to buy or lease the [fringe] benefit.” Defined by the IRS.
Federal Income Tax Withholding
The amount of federal income tax an employer is required to withhold from an employee’s wages. Federal income tax withholding is based on the employee’s Form W-4 and the IRS’ withholding tax tables.
Federal Insurance Contribution Act (FICA) Taxes
Represents the Social Security tax and Medicare tax an employer must withhold from employees’ paychecks plus the employer’s share of those 2 taxes. FICA taxes apply to self-employed individuals, as well.
Federal Tax Deposits
An employer’s federal employment tax liabilities that must be paid to the IRS. Includes federal taxes withheld from employees’ wages and the employer’s share of federal employment taxes owed.
Federal Tax Reporting
The federal employment tax reports that an employer must file periodically (e.g., quarterly and annually) with the IRS.
Federal Tax Forms
Include IRS payroll tax forms, such as:
- Form W-4, Employee’s Withholding Certificate
- Form W-2, Wage and Tax Statement
- Form W-3, Transmittal of Wage and Tax Statements
- Form 941, Employer’s Quarterly Federal Tax Return
- Form 944, Employer’s Annual Federal Tax Return
- Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return
Federal Unemployment (FUTA) Tax
An employer-paid federal payroll tax which is used to help fund the unemployment insurance system. Also provides a fund that states can borrow from for unemployment benefits purposes.
FICA Tip Credit
A credit that eligible food and beverage establishments can claim on a portion of their FICA taxes paid on employee tips.
The amount of wages that must be paid to an employee who voluntarily or involuntarily leaves the company.
Compensatory damages awarded to plaintiffs in an employment discrimination lawsuit. Front pay makes up for lost compensation suffered by the victim of discrimination.
The process of legally withholding a portion of an employee’s wages to satisfy an outstanding debt, such as unpaid credit card bill, delinquent taxes, defaulted student loan, or child support.
A recordkeeping system used to organize, summarize, and store the company’s financial transactions, including payroll.
Allows an employer to cover the taxes owed on a bonus or fringe benefit paid to an employee. The “gross-up” increases the gross amount of the payment to account for the taxes that would normally be withheld.
An employee’s total wages — e.g., salary, hourly wages, bonus, commissions, overtime, tips, vacation pay — before mandatory and voluntary deductions come out.
“In general, “hours worked” includes all time an employee must be on duty, or on the employer’s premises or at any other prescribed place of work. Also included is any additional time the employee is allowed (i.e., suffered or permitted) to work.”
Defined by the United States Department of Labor.
Taxable, non-monetary compensation provided to employees as a fringe benefit.
Additional compensation to motivate higher employee productivity and reward top performance. Often comes in the form of bonuses and spot awards.
Non-financial benefits offered to employees, on top of their regular pay — such as healthcare benefits, paid time off, mobile phone, company vehicle, company computer, and meals. An employee’s direct and indirect compensation equals their total compensation.
Also called “mandatory deductions,” involuntary deductions are legally-required payroll deductions, such as payroll taxes and wage garnishments.
Local Income Tax Withholding
The local taxes an employer is required to withhold from employees’ wages, such as city or county income taxes.
Local Tax Reporting
The employment tax reports an employer must file with the local taxation agency. Applies to employers who must withhold local taxes from employees’ wages and/or pay their own share of local employment taxes.
The length of time an employer uses to determine their IRS deposit schedule for withheld federal income tax and FICA taxes plus their own share of FICA taxes.
Magnetic Media Reporting
An alternative, non-paper method of reporting data to government agencies — e.g., diskette, magnetic tape, or cartridge.
A paycheck issued to an employee outside of the normal payroll run.
The portion of an employee’s wages that is subject to Medicare tax withholding.
Refers to an employee using their personal vehicle for their employer’s purpose and the employer refunding the employee for associated mileage costs. The IRS sets the federal standard mileage reimbursement rates for each year.
The minimum hourly rate an employer is allowed to pay nonexempt employees under federal, state, or local law.
An employee’s take-home pay, after mandatory and voluntary deductions.
Next-Day Deposit Rule (IRS)
Regardless of whether an employer makes monthly or semiweekly tax deposits to the IRS, they must deposit their taxes by the next business day if they accumulate $100,000 or more in taxes on any day throughout the deposit period.
In terms of state income tax, an employee is a non-resident if they work temporarily in a state that is not their residency and they have intention of making that state their home.
Enables employees to receive early access to earned wages, instead of having to wait until the regular payday.
Refers to when an employee receives a bigger paycheck than they should. Overpayments can be corrected in various ways, including reducing the overpaid employee’s future wages.
Payments made to an employee at 1.5 times their regular hourly rate, for work hours exceeding 40 in a workweek.
The length of time for which employees are paid, based on their pay frequency. For example, a weekly pay period may start on Sunday and end on Saturday.
The recording, tracking, and balancing payroll transactions, including employee compensation, paycheck deductions, and employer payroll liabilities.
Payroll Action Request (PAR)
An internal form managers and employees can use to submit payroll requests, such as for manual checks, salary advance, or retroactive pay.
A documented contingency plan for managing payroll when disaster or unforeseen emergencies strike.
The period of time between each payday. For example, a biweekly payroll has a 2-week payroll cycle.
The process of verifying payroll transactions and ensuring they are accurate. Payroll reconciliation and payroll accounting go hand-in-hand.
An application that employers use to automate, manage, and streamline payroll processes, including wage payment and tax reporting.
A statement given to employees showing details of their wages received for the pay period, such as hours worked, total wages or salary, overtime, and bonus. Many states have laws dictating the minimum information that must go on a pay stub.
An allowance given to employees for travel-related business expenses, such as meals and lodging.
Work paid for based on the number of products completed or units produced. Employers must follow applicable federal and state laws when paying on a piece-rate basis.
Additional wages paid to employees for working undesirable hours, such as weekends, nights, or holidays.
A zero-dollar ACH transaction to verify whether an employee’s bank account information is correct, prior to paying them by direct deposit.
Paycheck deductions that are subtracted from an employee’s wages before withholding applicable taxes. Pre-tax deductions include health benefits offered under a cafeteria/Section 125 plan.
Quarterly Tax Returns
Federal, state, or local employment tax filings that an employer must file on a quarterly basis — for periods ending March 31, June 30, September 30, and December 31.
Allows employees who live in one state and work in another to pay state income tax to their home state, instead of the state they work in.
The total financial and nonfinancial compensation an employer pays an employee for work performed. What constitutes “remuneration” may vary by state.
In terms of state payroll taxes, an employee is a resident if the state is officially their home and they have no intention of living there temporarily.
Money paid to an employee for work done in a previous pay period, such as a salary increase that was due in the prior pay period.
The Social Security and Medicare taxes a self-employed person is legally required to pay.
Refers to when an employee gets a predetermined amount of compensation each payday on a weekly basis, or less frequently (e.g., biweekly or semimonthly). Under the Fair Labor Standard Act’s salary basis rule, exempt employees generally must receive no less than $684 weekly.
Refers to when an employer pays employees twice per month, such as on the 15th and last day of the month.
Compensation that an employer provides to terminated employees, typically those who are discharged through no fault of their own (e.g., layoff). Severance is often based on length of employment.
Additional pay an employee receives for hours worked outside of normal business hours, such as evening or night shifts.
Payment made to an employee to cover time away from work due to falling ill. Some states and local governments require paid sick leave.
Social Security Wages
The portion of an employee’s wages that is subject to Social Security tax.
State Disability Insurance (SDI) Tax
A state-administered program that provides partial wage replacement to employees who are unable to work because of an illness or injury. Depending on the state, SDI coverage may be funded by the employee, the employer, or both.
State Tax Reporting
The employment tax reports an employer must file with the state taxation agency. Applies to employers who must withhold state taxes from employees’ wages and/or pay their own share of state employment taxes.
State Tax Withholding
Refers to the state taxes an employer is required to withhold from employees’ wages, such as state income tax and SDI tax.
State Unemployment (SUTA) Tax
A state payroll tax which is used to help fund the unemployment insurance system. In most states, only the employer pays SUTA tax. A few states, including New Jersey and Pennsylvania, require employees to pay SUTA via payroll deduction.
Wages paid to an employee at their regular rate of pay. Straight-time calculation is typically used to determine payment for weekly work hours of 40 hours or less. It also applies to other types of regular wages, such as holiday and vacation pay.
Wages paid to an employee in addition to their regular wages. Includes overtime pay, bonuses, commissions, retroactive pay, accumulated sick leave pay, and severance pay. Supplemental wages may be subject to special federal and state tax withholding rules.
The portion of an employee’s wages that is subject to taxation, such as federal income tax, Social Security tax, Medicare tax, and state income tax.
Taxable Wage Base
The maximum amount of an employee’s wages on which the employee or the employer must pay taxes. For example, Social Security tax, FUTA tax, and SUTA tax each have their own annual taxable wage base.
Third-Party Sick Pay
Payments made to an employee who goes on extended medical leave. The payments are made through a third party, such as an insurance company, instead of directly through the employer.
In large food and beverage establishments, if all reported tips are less than 8% of the total gross sales, the employer must allocate the difference. The employer assigns/allocates an additional amount in tips on the W-2 of employees whose reported tips are less than 8% of the total gross sales.
A “tip credit” lets employers pay tipped employees less than the minimum wage if they make enough tips to account for the difference. Under federal law, the maximum tip credit is $5.12/per hour. Many states have their own tip credit requirements.
Under federal law, a tipped employee is an employee who frequently and customarily receives over $30 monthly in tips. The state may have a different definition.
When an employee does not collect their paychecks after a period of time, the employer must follow the state’s escheat laws, which governs unclaimed property.
Payment given to employees who take vacation leave. In some states, employers must pay out unused vacation time to terminated employees.
Paycheck deductions that require the employee’s consent, such as for health insurance, 401(k) contributions, life insurance, and flexible spending accounts.
Employers must usually file quarterly wage reports with the state for SUTA tax purposes.
Wage (Tax) Levy
The legal seizure of an employee’s wages to satisfy delinquent taxes that the employee owes. The taxation agency sends the levy to the taxpayer’s employer, who must withhold the required amount from the taxpayer’s wages.
Withholding Tax Rate
The amount an employer is required by law to take out of an employee’s wages for a specific payroll tax.
An employee’s wages from the start of the year to their most recent payday. Year-to-earnings are typically reflected on the employee’s pay stubs.