Payroll can be one of the most challenging and crucial administrative chores for a small business owner. Doing it yourself can be a hassle and ridden with liability. It’s why many small businesses often hire a PEO or a payroll services provider to help with payroll processing and management. Whether you do it in-house or outsource your payroll work, it’s best to know the basic terms. We’re here to help. Below is a simple list of the most common payroll terms and their definitions.
Payroll Terms
A-I
Accrue: To accrue is to accumulate, and depending on the employer, employees may need to work a certain amount of days to accrue paid time off, such as vacation days.
ACH (Automatic Clearing House): This is a U.S. financial network for electronic payments and money transfers, such as direct deposit. This is how money moves from one bank account to another without a physical check or credit/debit card.
Base Pay: This is the agreed-upon pay rate for an employee before any bonuses or other incentive pay.
Compensation: This is everything an employee receives as payment for work: salary, wages, fringe benefits, bonuses, commissions, fringe benefits, and company stocks.
Deductions: These are the deductions the employer is responsible for taking out of each paycheck, not including payroll taxes. These deductions include employee contributions to their 401k plans, pay their health plan premium, pre-tax or post-tax, depending on the contribution. These deductions include non-voluntary deductions such as court-ordered child support or other mandatory garnishments as well.
Direct Deposit: This is an electronic transfer through an ACH from the employer’s bank account directly into the employee’s bank account, eliminating the need for a physical paycheck (although some employers may also create a paper version of the payment for the employee’s records.
EIN (Employer Identification Number): This is the nine-digit number assigned by the IRS to identify the tax accounts of employers. The EIN works for businesses like the social security number works for individuals.
Exempt and Non-Exempt Employees: An exempt employee is a salaried employee, and the company is exempt from having to pay them overtime (more than 40 hours/week) wages or meet minimum wage requirements in many cases, as set by the Fair Labor Standards Act (FLSA). In Texas, to meet the requirements for exemption, employees must be making more than $684 per week in salary or be working in specific fields, such as railroad workers or truck drivers.
Non-exempt employees must be paid at least the minimum wage and must be paid overtime pay when they work hours in excess of the standard 40-hour workweek. However, there are cases in which salaried employees working excessive overtime hours will need to be paid. Here is some more information on the laws surrounding exempt and non-exempt employees from Atkerson Law.
FICA Tax: FICA stands for the Federal Insurance Contributions Act and is a tax withheld from employee wages and used to fund the Social Security and Medicare programs. (See payroll tax.)
FUTA: Federal Unemployment Tax Act (FUTA) is a payroll tax paid by employers on employee wages. Businesses with at least one employee who works at least 20 weeks out of the year or have paid employees at least $1,500 in any quarter are responsible for paying FUTA taxes.
Garnishment: Wage garnishment is a legal proceeding where the employer withholds a set amount from the employee’s pay and remits it to a third party as required by law.
According to the Texas State Law Library: “In Texas, wage garnishment is prohibited by the Texas Constitution except for a few kinds of debt: child support, spousal support, student loans, or unpaid taxes. A debt collector cannot garnish your wages for ordinary debts.”
General Ledger: The ledger is the main accounting record for a company or organization, where the company keeps track of revenue, expenses, assets, and liabilities.
Gross Pay: Gross pay, AKA gross wages, is the total amount of pay an employee receives before taxes and other deductions are made. This also includes any additional pay, such as vacation pay or incentives.
Incentive pay (AKA Variable pay): Incentive pay includes additional money paid to the employee, such as bonuses or commissions based on company success or employee performance. Profit-sharing is another form of incentive pay, as are shift differentials (paying more for employees working more in-demand hours, such as the night shift).
Independent contractor: Independent contractors are self-employed workers or businesses contracted to work for a company for the length of a specific project or assignment. Independent contractors can be paid hourly, per assignment/task, or with a salary (for longer-term contracts).
Interlude
It’s a lot, isn’t it? If you are reading straight through, I’d suggest getting up and stretching your legs, grabbing a cup of tea or water, and taking a little break, like I am while writing it. *Cue OK, now are you ready to forge onward? Here we go!
J-Z
Labor burden: This is the company’s actual cost of having employees outside of their pay. This includes what the company pays for benefits, the company’s FICA contribution and other payroll taxes, and retirement benefits.
Net Pay: Also known as take-home pay, net pay is the amount the employee actually takes home after taxes and other deductions.
Non-Exempt: See definition under Exempt and Non-Exempt Employees above.
Overtime: This is what companies in Texas must pay non-exempt employees for hours worked above 40 hours/week, paid at 1.5 times their hourly rate.
Paid Time Off (PTO): This is the time off employees take off from work yet still get paid for, including vacation time, sick days, holidays, bereavement, and parental leave. There are various types of PTO. To learn more about PTO vs. unpaid leave, read our blog post about it.
Payroll: This is the entire process of paying employees and withholding necessary tax and other payments or deductions. This is one of the more time-consuming (and legally regulated) tasks for a small business. To find out more about Decent’s payroll services for small businesses, check it out here.
Paycheck: This is a physical check with an employee’s take-home pay, adjusted from gross pay after all necessary deductions and taxes have been withheld.
Pay period: This refers to how often a company pays its employees and contractors. According to the FLSA, employers must pay weekly, biweekly, semimonthly, or monthly.
Pay stub: A pay stub goes along with and usually includes information on gross pay, number of hours worked in case of hourly employees, taxes, and additional deductions.
Payroll taxes: These are the IRS-required taxes, including federal, state, and possibly even more local taxes used to finance social insurance programs, such as Social Security and Medicare tax. Depending on the type of payroll taxes and where the business is located, the employer pays some of the taxes, and the employee pays other taxes (taken out of the employee’s paycheck). For more detail, read our explanation of payroll taxes and employer responsibilities including federal income taxes.
Take Home Pay: Also known as net pay, take-home pay is the amount the employee actually takes home after taxes and other deductions.
Timesheet: This is a record of the hours each employee has worked. While some businesses that pay their employees hourly may use a physical timesheet, where employees actually punch in and out, many timesheets for exempt and salaried employees nowadays are electronically recorded and submitted.
While these standard expressions about payroll can give business owners more than an inkling of what managing and running payroll are and many of its components, a large piece of it involves payroll taxes, which is a whole (complicated) topic unto itself. Check out this article explaining what payroll deductions a small business owner may need to take out of their employees’ paychecks, what varies by state, and which tax payments the employer and employee are responsible for.
Does all of this make your head roll? Tax forms, payroll systems, payroll software, and all the record-keeping and processing that goes along with it is enough to make you pull your hair out. Many small business owners are turning to PEOs to outsource their back office work. To see pricing and get a custom quote on Decent’s payroll and PEO services, including our exclusive health insurance plans (small businesses need benefits, too!), check out our pricing page or contact Decent at support@decent.com.
