28 Payroll Terms You Should Know If You Run a Small Business

Overtime pay is a term that describes the amount of money an employee will be paid for overtime hours work. Most companies have a monthly pay period, meaning the employees need to work for a set amount of time per month to get paid at the end of each month. Payroll deduction is a general term that is used when an employee receives less money than the original payment. The reduced money is used for some employment service benefits. In summary, it’s like a Social Security number for businesses and is required for any business processing payroll.

Exempt employees are paid overtime for any excess hours they work over 40 in a week. Disposable income refers to the leftover wages after all taxes and deductions have been taken from an employee’s paycheck. This amount is then used to determine the level of pay subject to garnishment or child support withholding. The payment is considered fully taxable for the first six months, then becomes exempt from FICA and FUTA if the payments continue into the seventh month and beyond.

Net Pay

In exchange, these employees must abide by company rules such as when and how to work. They are voluntary amounts that the employee elects to have taken from their pay (health insurance premiums, retirement plan contributions, etc.). These items can be considered pre-tax or post-tax, depending on the nature of the deduction.

  • The relevant period would run from the day before the worker starts their maternity or family related leave or time off sick, going back for 52 weeks.
  • The U.S. Department of Labor reduces the credit reduction for businesses in states that are late on repaying federal advances to fund their state unemployment program.
  • The individual regulations in FLSA may, under certain circumstances, be superseded by state and local laws.
  • They start to accrue holiday entitlement from Day 1 but take no holiday leave during the 2-week period.
  • The Federal Insurance Contributions Act (FICA) mandates a payroll tax to be imposed on both employees and employers.
  • With EFTPS, employers and taxpayers can pay their taxes by phone or online free of charge.

Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team. Someone with a working knowledge of these 28 payroll terms will be able to speak intelligently about payroll. There’s a lot more to learn, though, so keep up with The Ascent’s payroll content.

Fringe benefits

Net pay is the amount of pay an employee receives after all withholding and deductions from gross pay have been made. That’s why many employers outsource payroll by hiring a payroll processing service, a bookkeeper, or an accountant. Once you have taken out pre-tax deductions, the remaining pay shareholder meaning is taxed. The FICA tax rate is 7.65%—1.45% for Medicare and 6.2% for Social Security taxes. Other tax rates will be determined by Federal, state, or local laws and your employee’s W-4. The payroll service may also maintain a record of how much vacation or personal time employees have used.

Payroll Terms

Gross pay refers to the amount of an employee’s paycheck before all the deductions. Federal law protects an employee from being fired because their wages have been garnished for one debt, and it limits how much can be deducted from an employee’s paycheck each week. Exempt means “exempt from overtime.” Exempt and non-exempt employees are categorized typically by the work they do. Most exempt employees work in professional, managerial, or executive positions, sometimes referred to as a “white-collar exemption.” Withholding doesn’t have to be approved by employees because these amounts are required by law.

Understanding Payroll

After the first year of employment, a worker gets holiday entitlement based upon their statutory and contractual entitlement. Their entitlement will be based upon the proportion of a week which they are contracted to work. A definition for irregular hours workers and part-year workers has been set out in regulations.

Employer Identification Number (EIN) is a nine-digit unique number assigned to every employer that submits an IRS EIN application. It is one of the key pieces of identifying information for a business as they apply for business loans, open business bank accounts, or file taxes. It is comparable to a Social Security Number for a business and is mandatory for payroll processing. The payroll acronym ACH stands for the automated clearing house, which is an electronic network employers use to process payroll transactions. The State Unemployment Tax Act (SUTA) tax is a payroll tax that states require employers to pay in order to provide unemployment benefits. Fringe benefits are additions to compensation that can be offered to employees.


This is so that employers know which workers the accrual method for entitlement and the introduction of rolled up holiday pay apply to. The pay period is the time frame for which the company pays an employee. The pay period also dictates the pay schedule and the frequency your employees receive their paychecks.

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