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Glossary: Payroll


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Legal, government, and general terms regarding business payroll.


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Advanced Earned Income Credit (EIC)

Payments of earned income credit, during the year, to employees who expect to be eligible for this credit. Employers make the payments out of Federal Income, Social Security, and Medicare taxes withheld from the employee’s wages.

After-Tax Deduction

A deduction from an employee’s pay that does not reduce the employee’s taxable wages. It is taken from net pay, not gross pay.

Automated Clearing House (ACH)

A federal reserve bank or private institution acting on behalf of an association operating a facility that serves as a clearing house for direct deposit transactions. Entries are received and transmitted by the ACH under the rules of association.

Cafeteria Plan

A plan that offers flexible benefits under IRC (Internal Revenue Code) Section 125. Employees choose their benefits from a “menu” of cash benefits, some of which can be paid for with pretax deductions from wages.

Check Date

This is the actual date of payment from an employer to an employee for time worked.

Child-Support Order

A document from a court or a state child-welfare administrative agency that requires an employer to withhold a portion of an employee’s compensation to satisfy a child-support obligation. The employer is responsible for withholding the amount and paying it over to the party named in the child-support order.

Circular E

IRS Publication 15, Employers Tax Guide. This publication contains the basic rules, guidelines and instructions for withholding, depositing, reporting and paying federal employment taxes.

COBRA – Consolidated Omnibus Budget Reconciliation Act of 1985

Federal law that requires employers with group health care coverage to offer continued coverage to separated employees and other qualifying beneficiaries.

Compensation

All cash and noncash remuneration given to an employee for services performed for an employer.

Constructive Payment

An IRS rule that considers wages to have been paid to an employee when the employee has access to the wages without substantial limitations or restrictions.

Deductions

An amount subtracted from an employee’s gross pay to reach net pay or an amount allowed to taxpayers as an offset against income.

Deferred Compensation

In general, the postponement of a wage payment to future dates.  The term usually describes a portion of wages set aside by an employer for an employee and put into a retirement plan on a pretax basis.

Defined Benefit Plan

A retirement plan that uses a formula (generally based on an employee’s salary and length of service) to calculate an employee’s retirement benefits. It is not funded by employee contributions to the plan.

Defined Contribution Plan

A retirement plan with benefits determined by the amount in an employee’s account at the time of retirement. The account may be funded by contributions from both the employer and the employee.

Dependent Care Assistance Program (Dep Care)

An employer plan providing dependent care services or reimbursement for such services.

Dependent Group-Term Life Insurance

Term life insurance that gives an employee death benefits should the employee’s spouse or other dependents die.

Disposable Earnings

That part of an employee’s earnings remaining after deductions required by law (e.g. taxes). It is used to determine the amount of an employee’s pay that is subject to a garnishment.

Earned Income Credit (EIC)

Payments of earned income credit during the year to employees who expect to be eligible for the credit. Employers make the payments out of Federal Income, Social Security and Medicare taxes withheld from the employee’s wages.

Electronic Funds Transfer (EFT)

The transfer of money electronically from an account in one financial institution to an account in another financial institution (e.g. direct deposit).

Employer Identification Number (EIN)

Usually refers to state ID number (FEIN refers to Federal ID Number).

Elective Deferral

The amount of pretax dollars an employee chooses to have the employer contribute to a qualified deferred compensation plan ( 401K) on the employee’s behalf, also known as pretax contributions or employer contributions.

Electronic Federal Tax Payment System (EFTPS)

System that allows employers to make federal tax deposits electronically through the ACH network.

Electronic Funds Transfer (EFT)

The transfer of money electronically from an account in one financial institution to an account in another financial institution (direct deposit).

Employer

An individual or organization that hires individuals to perform services in return for compensation, and that has the authority to control and direct the work of those individuals as part of the employer/employee relationship.

Excess Deferral

The amount of an employee’s deferred compensation that exceeds the IRS annual contribution limit.

Exempt Employees

Although this term can refer to anyone not covered as an employee under a certain law, it generally means those employees who are exempt from the minimum wage, overtime pay, and certain record-keeping requirements of the federal wage-and-hour law.

Expatriate

For U.S. payroll purposes—a U.S. citizen or resident alien who lives and works outside the U.S.

Experience Rating

In the context of unemployment compensation, it is the employer’s past record of unemployment claims activity. This past record can then be used to determine the employer’s unemployment tax rate (e.g., the higher the turnover rate, the higher the tax rate).

Federal Insurance Contribution Act (FICA)

It also describes the combined taxes levied for Social Security and Medicare.

Flexible Spending Arrangement (FSA)

An arrangement that allows an employee to have pretax dollars deducted from wages and put into an account to pay for health insurance deductibles, copayments and dependent care assistance.

FEIN

Federal Employer Identification Number.

Fringe Benefits

Compensation other than wages provided to an employee, such as health and life insurance, vacations, employer-provided vehicles, public transportation subsidies, etc., that may be taxable or non taxable.

Federal Unemployment Tax Act (FUTA)

Requires employers to pay a certain percentage of their employees’ wages (up to a maximum wage limit—currently $7,000) as a payroll tax to help fund unemployment compensation benefits for separated employees.

Garnishment

A legal proceeding authorizing an involuntary transfer of an employee’s wages to a creditor to satisfy a debt.

Gross Income

Total wages paid to an employee before any deductions are taken.

Gross-up

An IRS approved formula that employers can use to determine the taxable gross payment when the employer wishes to pay the employee’s share of taxes.

Group Term Life (GTL)

Term life insurance that is provided to employees, with the cost being borne by the employer, the employee or both.

Imputed Wages

The addition of the value of cash/non-cash compensation to an employee’s taxable wages in order to properly withhold income and employment taxes from wages.

Independent Contractor

A non-employee contracted by a business to perform services. Although the business specifies the result of the work to be performed, it has no right to control the details of when, how, or who will ultimately perform the work.

Individual Retirement Arrangement (IRA)

A trust created or organized for the exclusive benefit of an individual on his or her beneficiaries.

Individual Taxpayer Identification Number

A tax reporting identification number issued to aliens of the US who cannot get a social security number but are required to file a tax or information return with the IRS.

Internal Revenue Code (IRC)

Federal tax laws.

Levy

An attachment to satisfy a tax debt or a court judgment.

Liabilities

Debts of a business that have yet to be paid.

Magnetic Media Reporting

Use of a computerized method of filing information with government agencies, such as magnetic tape, diskette, cartridge, or electronic filing from one computer to another.

Medicare

A federal hospital insurance program for individuals age 65 or older and some disabled persons. It is funded through the hospital insurance (HI) component of FICA tax.

Minimum Wage

The lowest amount that an employer can pay it’s employee’s per hour under federal or state law.

Net Pay

That part of an employee’s wages that remains after all deductions have been subtracted (taxes, health insurance premiums, union dues, etc…).

New Hire Reporting

The reporting of newly hired and rehired employees to state agencies to facilitate the collection of child support and/or to uncover abuse in the state’s unemployment compensation, workers’ compensation, or public assistance programs.

Noncash Fringe Benefits

Benefits provided to employees in some form other than cash (company car, health and life insurance, parking…) which may be taxable or nontaxable.

Nonexempt Employees

Employees who are covered by the minimum wage and overtime provisions of the Fair Labor Standards Act (FLSA).

Nonqualified Plan

In the context of employee benefits, an employer plan that does not meet IRS qualification requirements.

OASDI

Old Age Survivors and Disability Insurance (aka Social Security).

Overtime

Hours worked in excess of maximums set by federal or state law that must be compensated at a premium rate of pay (under the FLSA, all hours worked over 40 in a workweek must be paid at no less than 1.5 times the employee’s regular rate of pay).

Participating Depository Financial Institution (PDFI)

A financial institution that can accept direct deposits and transmit or receive entries.

Payroll Period

The period of service for which an employer pays wages to its employees (this is not the check date).

Percentage Method of Withholding

One allowable method for calculating federal income tax withholding from an employee’s wages, most often used when the calculation is automated.

Premium Pay

In a payroll context, it can have two meanings. It can be the extra pay above an employee’s regular rate of pay that is paid for working overtime hours. Or, it can be a special pay rate for work done on weekends, holidays, during undesirable shifts or for doing dangerous work.

Pre-Tax Deduction

A deduction taken from gross pay that reduces taxable wages.

Qualified Plan

A benefit plan that meets IRS qualification requirements for tax-favored treatment.

Receiving Depository Financial Institution (RDFI)

A financial institution that qualifies to receive direct deposit entries from an Automated Clearing House (ACH).

Reciprocity

In payroll, a relationship between states under which privileges granted by one are returned by the other (reciprocal enforcement of child support orders, reciprocal agreements not to tax nonresidents working in a state).

Reconciliation

The process of ensuring that amounts withheld, deposited, paid and reported by employers agree with each other and that if they do not, determining the reasons and making the necessary corrections.

Regular Rate of Pay

An hourly pay rate determined by dividing the total regular pay actually earned for the workweek by the total number of hours worked.

Roth IRA

An individual retirement arrangement to which post-tax contributions may be made up to $5,000 annually (could be more for employees over 50), and the distribution of which are nontaxable.

Severance Pay

A payment offered by some employers to terminated employees (usually those who are terminated through no fault of their own) that is designed to tide them over until new employment is secured.

Shift Differential

Extra pay received by employees for working a less-than-desirable shift (evenings or late night).

Simplified Employee Pension (SEP)

An Individual Retirement Arrangement (IRA) with special participation requirements that is available to certain small employers.

Social Security Number

An individual’s taxpayer Identification Number, it consists of nine digits (000-00-0000).

Statutory Employees

Special groups of employees identified by law (full-time life insurance sales people, certain home workers) whose wages are not subject to Federal Withholding, but are subject to FICA/FUTA.

Supplemental Wages

Compensation received by employees other than their regular pay, such as bonuses, commissions and severance pay. Income tax may be withheld from such payments at a flat rate under certain circumstances.

Take Home Pay

The amount of pay that remains after all deductions have been taken.

Taxable Wage Base

The maximum amount of employee compensation subject to social security, FUTA, and state unemployment insurance taxes.

Taxpayer Identification Number (TIN)

A social security number or employer identification number which serves as the taxpayer’s account number with the IRS.

Third Party Sick Pay

Payments made by a third party, such as a state or private insurer to employees because of non-job related illness or injury.

Time-and-a-half

Payment of 1.5 times an employee’s regular rate of pay for hours worked over 40 in a workweek, as required by the Federal Wage-Hour law (for non-exempt employees only).

Voluntary Contribution

Advance payments of unemployment tax that can reduce an employer’s state unemployment tax rate.

Wage Assignment

A voluntary agreement by an employee to transfer portions of future wage payments.

Wage Attachment

An involuntary transfer of an employee’s wage payment to satisfy a debt.

Wage-Bracket Withholding

Subtracting amounts from an employee’s wages for taxes, garnishments, or levies and other deductions. These amounts are then paid to the government agencies or other parties to whom they are owed.

Workweek

The basis for determining an employee’s regular rate of pay and overtime pay due under the Fair Labor Standards Act. It can be any consecutive seven-day (168-hour) period chosen by the employer.

401K

A cash or deferred arrangement that allows employees to authorize their employer to place pretax dollars in a retirement plan that invests the money. The contributions (including those matched by the employer) and any earnings on them are not subject to Federal Income Tax and MOST (not all) State Income Tax until they are withdrawn.




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