What Is Payroll, With Step-by-Step Calculation of Payroll Taxes

payroll terms

Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team. Throw some https://www.quick-bookkeeping.net/ of these terms around the next time you talk to your accountant about payroll. You can’t talk about payroll without talking about taxes.

For example, FLSA rules specify when workers are considered on the clock and when they should be paid overtime. Independent contractors and employees are two categories of workers. Independent contractors are self-employed people or businesses hired to complete specific tasks and most often receive project-based compensation. Companies hire employees to perform services and are salaried or paid hourly. Wage garnishment is a legal process that requires employers to withhold a specified amount of money from an employee’s paycheck and remit it to a third party. Garnishment is a tool that courts use to get people to repay debts, whether they’re unpaid child support or credit card bills.

  1. Here are the top-line payroll terms you’ll hear as a small business owner.
  2. If you are a customer with a question about a product please visit our Help Centre where we answer customer queries about our products.
  3. The IRS provides income tax withholding tables you can use to calculate federal income tax withholding.
  4. But all deductions from an employee’s paycheck except for deductions ordered by a court must be approved by the employee in writing.

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. For the past few years, the Virgin Islands has been the only state or territory designated as a credit reduction state. The FICA tax rate is 15.3%, split evenly between employees and employers, with 12.4% going toward Social Security tax and the remaining 2.9% for Medicare. The Social Security tax applies to the first $142,800 of eligible compensation in 2021. The Medicare tax doesn’t have a limit, though higher-earning employees must contribute an additional 0.9%.

Payroll tax forms are documents created to collect and report information related to employee compensation. These articles and related content is the property of The Sage Group plc or its contractors or its licensors (“Sage”). Accordingly, Sage does not provide advice per the information included. These articles and related content is not a substitute for the guidance of a lawyer (and especially for questions related to GDPR), tax, or compliance professional.

Exempt vs. Non-Exempt Employees

Net pay is the final amount you pay your employees for their work, after all deductions have been made. Whether you are a Business Owner, Finance Director, HR Specialist or Office Manager, there are certain terms relating to payroll that you should absolutely become familiar with. Hopefully these definitions help to round out your payroll vocabulary and gain a better understanding of what goes into the payroll process. Share this useful glossary with your peers and coworkers, and let us know what other concepts you want to see defined. This option is the most time-consuming (but least expensive) payroll option. Deposit state and local taxes depending on the tax agencies’ rules.

payroll terms

Common pay periods include weekly, bi-weekly and monthly. The chosen pay period is defined by its beginning and ending dates. When an employee’s wages are garnished, he or she is forced to forfeit a given portion of the paycheck to a debtor. Garnishments are most common for employees who have failed to pay their debts (such as student loans) and for child support payments.

Non-exempt Employee

Because of their cost, payroll services may not be the best option for small companies with tight operating budgets. The FLSA also sets out how to treat jobs that are primarily compensated by tipping. In the case of tipped service workers, the employer must pay the minimum wage to the employee unless they regularly receive more than $30 per month from gratuities. Think paying employees is the end of the payroll process?

Set payroll to a schedule, so your team gets paid on time, every time. Payroll Dictionary is a free resource and reference for payroll terminology and definitions. No matter how long we work at a job, there come times when we struggle to remember certain work related words or definitions. Whether you are learning payroll or have been working in payroll for many years, we hope that this Payroll Dictionary will be of service to you.

Fringe benefits, also called imputed income, are the perks that businesses offer aside from regular wages. Not all wages are taxable; for example, an employer’s contribution to an employee’s health insurance premiums is not taxable. Paychecks, also called payroll checks, are checks issued to employees for working. The amount of a paycheck is the employee’s net pay, or gross pay minus payroll deductions.

Unemployment programs offer temporary compensation to people who have lost their jobs through no fault of their own. The program helps tide them over until they find new work. Learn about the key terms and concepts that will help you to manage the complexities of payroll systems effectively, and to confidently meet compliance requirements. Whether you are new to payroll, or someone on your team is, The A to Z of payroll will take you through the fundamentals to build a solid knowledge base. Payroll terminology can be intense to digest if you’re new to the role, and challenging to remember even with payroll experience.

payroll terms

In addition to financial savings, internal payroll systems help companies keep confidential financial information private. However, software programs can be time-consuming, which can pose a problem for small companies with few staff. Get the basics on payroll processing and how outsourcing can benefit your company. When you pay employees, you might also provide paper or digital pay stubs. Keep in mind that employees could have additional sources of pay you must include in payrolls, such as tips, commissions, or bonuses. Businesses with hourly employees often pay in arrears to give time for employees to submit timesheets.

Any Voluntary Deductions Must Be Taken From the Remaining Wages

Processing payroll is a complex and time-consuming endeavor that requires adherence to strict federal and state rules and regulations. It requires extensive record-keeping and attention to detail. Small businesses https://www.online-accounting.net/ often handle their own payroll using cloud-based software. Other companies choose to outsource their payroll functions or to invest in an integrated ERP system that manages the overall accounting and payroll.

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. Employees submit timesheets on a weekly or biweekly basis. Supervisors approve employee timesheets to ensure their accuracy. To encourage your workers to take the overnight shift, you might offer any takers an additional $5 per hour. Most pay stubs also give employees an update on how many vacation and sick days they’ve accrued and used during the year.

A non-exempt employee is entitled to overtime pay when they work more than 40 hours in a week. Overtime pay is equal to 1 ½ times the employee’s regular rate of pay. States use this information to enforce laws and benefits such as welfare assistance and fraudulent use of collecting https://www.bookkeeping-reviews.com/ unemployment insurance. The Electronic Federal Tax Payment System (EFTPS) was created in hopes of automating the otherwise clumsy process of handling physically mailed tax payments. With EFTPS, employers and taxpayers can pay their taxes by phone or online free of charge.

The Federal Unemployment Tax Act (FUTA) tax is a payroll tax that employers are required to pay to the federal government to help fund unemployment benefits. The tax is 6% of the first $7,000 that an employee earns; however, most businesses do not pay the full 6%. 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. 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.

These types of payments are taxable, so you must separate them out when you’re doing payroll accounting and include them in the employee’s taxable wages for the year. The calculation for net pay begins with gross pay, then amounts for federal and state income taxes are taken out, as well as FICA tax (Social Security and Medicare). Finally, discretionary deductions like health plan contributions and retirement plan amounts are taken out. Gross pay is the worker’s hourly rate times the number of hours worked in that pay period for hourly employees.

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