Payroll is a vital component of any business, whether large or small. Many small business owners find payroll challenging to navigate. There are a lot of moving parts that require a clear understanding of payroll jargon. Understanding key terms and how, or if, they apply to your business can help simplify the process and keep you in the black.
Here are 25 common payroll terms every business owner should know to avoid making potentially costly mistakes.
1. 401(k)
A 401(k) is a type of retirement plan that an employer sponsors. To pay for the 401(k), employers can deduct money from employees’ paychecks on a pre-tax or post-tax basis when the employee opts in. In some cases, employers may opt to match the amount an employee pays toward the plan up to a certain limit.
2. Automated Clearing House (ACH)
Automatic Clearing House, or ACH, is an electronic network that facilitates debit and credit transfers, typically via direct deposit to employees’ bank accounts.
3. Commission
Commission is a type of compensation paid to employees for services they performed. Employers can pay commissions based on either a fixed amount per sale or a percentage of sales made.
4. Compensation
Compensation is the amount of money that employees receive for performing their job-related tasks and duties. Compensation can include hourly pay, salaries, commissions, or supplemental wages. Compensation may also include benefits such as health insurance and vacation time.
5. Contractor
It’s important to know whether a worker is an employee or an independent contractor in order to classify them correctly and minimize risk. Employee status determines whether you are obligated to comply with various state and federal employment laws. The responsibility of classifying a worker correctly falls on the employer, and it’s not as simple as being ‘self-employed.’ It’s best to work with your HR partner to make sure your workers are properly classified.
6. Deduction
Deductions are any amount of money removed from an employee’s check at the end of a pay period. Typically, deductions are predetermined and help cover employee benefits such as health insurance policies and union dues.
7. Employee
Employees, unlike independent contractors, are in-house or remote workers employed by a company and included on its payroll. Employees may be exempt or non-exempt and paid either hourly or a salary to perform various job duties.
8. Employer Identification Number (EIN)
Employer identification numbers (EINs) are unique business identifiers for tax purposes. They essentially serve the same function as Social Security numbers for individuals. Both state and IRS tax systems use EIN to identify specific companies.
9. Exempt employee
Exempt employees receive a salary as opposed to an hourly rate. They are typically required to perform various administrative, professional, or executive duties. Unlike non-exempt employees, they don’t receive overtime pay after exceeding 40 hours of work in a week.
10. FICA
The Federal Insurance Contributions Act (FICA) requires employees and employers to pay a certain amount of payroll tax. Taxes help fund certain programs such as Medicare and Social Security.
11. Fringe benefits
Fringe benefits account for any compensation other than wages provided to employees such as insurance, employer-provided vehicles, paid time off, public transportation subsidies, and more, any of which may be taxable or non-taxable.
12. Garnishment
A garnishment occurs when an employee is required to forfeit a certain amount of his or her paycheck to a debtor. Usually, garnishments are reserved for employees who need to make certain payments, such as child support or student loans.
13. Gross wages
Gross wages are the amount of pay that employees receive in total before taxes and deductions.
14. Health Savings Account (HSA)
Funds for a Health Savings Account (HSA) are often used for covering qualified medical expenses and belong solely to the employee. HSA funds aren’t subject to any taxes upon depositing. When combined with a high-deductible health plan (HDHP), HSAs can help give employees more control over how they cover medical costs.
15. Minimum wage
Minimum wage is the lowest hourly amount of pay that employees may receive under state or federal law, or local or regional guidelines.
16. Net wages
Net wages are the amount of pay employees take home after taxes, and deductions are subtracted from the gross amount.
17. Non-exempt employee
Non-exempt employees, as the name suggests, are individuals who are not exempt from the overtime provisions set by the Fair Labor Standards Act. This classification entitles them to overtime pay after working more than 40 hours in a week, or in some states, more than 8 hours in a day, thus requiring the employer to track their hours. FLSA status is driven largely by what employees do in terms of job function and non-exempt employees may be paid on a salary or hourly basis.
18. Overtime
Overtime pay entails compensating employees for work exceeding 40 hours in a week. If a non-exempt employee works over that amount, employers must pay 1.5 times that employee’s pay rate for any additional time worked. Overtime laws vary from state to state, and it’s best to consult your HR partner for specifics.
19. Pay period
A pay period refers to the frequency of payment from employers to employees. Employees typically receive payments weekly, bi-weekly, or monthly based on specific dates when employees can expect their paychecks.
20. Payroll
Payroll can refer to the amount of money paid to all employees within a pay period, a company’s financial records of the total payment made to cover employee wages and salaries, or the record of total earnings for employees over the course of a year.
21. Paystub
Paystubs are documents that show employees the specific amount of money they earned during a given pay period, along with the total amount deducted. Pay stubs may feature gross earnings, pre-tax deductions, post-tax deductions, and other details about their pay.
22. Per diem
Per diem is the daily stipend that an employee may receive for covering travel costs along with wages and salary. Per diem pay can cover lodging, meals, and other expenses such as tips or laundry services.
23. Supplemental pay
If employees perform work that falls outside of their typical pay rate, employers will be required to compensate them with supplemental wages. These wages could include commissions, bonuses, or tips. Taxes also apply differently to supplemental wages.
24. Withholding
Withholding entails the deduction of money from employee salaries for the purpose of meeting government requirements. Withholding could also involve the deduction of funds from a person’s paycheck to cover any applicable employee paid portions of benefits, or other expenses, such as union dues or child support payments.
25. Workweek
One hundred sixty-eight consecutive hours of work within a seven-day week constitute a workweek. When calculating overtime for non-exempt employees, the term “workweek” often comes into play.
Gaining a better understanding of these terms can make it easier for you to handle payroll. However, the process can be complicated for many unfamiliar with it, requiring some outside help in many cases.
The above definitions are high-level overviews of payroll terms that can be very tricky and involved. If you want to work with professionals who can help you successfully manage payroll for employees, consider working with a reliable Bay Area PEO with the experience and resources needed to cover every aspect.
