This glossary is designed to help employers, HR professionals, payroll administrators, and employees understand the complex terminology associated with payroll processing, tax withholding, employee benefits, and compliance requirements.
Whether you're new to managing payroll or looking to refresh your knowledge, this glossary covers the essential payroll terms you need to know to navigate the complexities of paying employees accurately and on time while remaining compliant with federal and state regulations.
A
ACA (Affordable Care Act)
Legislation passed in 2010 that requires employers with 50 or more full-time employees to provide health insurance coverage that meets certain standards or potentially face penalties. The ACA impacts payroll through reporting requirements and the employer mandate.
ACH (Automated Clearing House)
An electronic network used for financial transactions in the United States, including direct deposits of employees’ pay. ACH transfers are a common method for processing payroll payments efficiently and securely to an employee's bank account.
Accrual
The accumulation of benefits or time off that an employee earns over time, such as vacation days, sick leave, or paid time off. Accruals are typically calculated based on hours worked or time employed and may be subject to caps or expiration policies.
B
Bank Account
A financial account maintained by a financial institution where an employee's wages are deposited via direct deposit. Employers typically require employees to provide their bank account information for payroll purposes.
Benefits Plan
A formal program established by an employer to provide additional compensation to employees beyond their regular wages. Common benefits include health insurance, retirement plans, and paid time off, which may be offered on a pre-tax basis.
Biweekly
A pay period schedule where employees receive their paycheck every two weeks, resulting in 26 pay periods per calendar year. Biweekly pay is one of the most common pay schedules used by employers in the United States.
C
Calendar Year
The 12-month period from January 1 to December 31, used for tax reporting and many payroll calculations. Employers must report employee wages and tax withholding to the IRS based on the calendar year.
Child Support
Court-ordered payments that an employee is required to make to support their child. Employers may be required to withhold these payments from an employee's paycheck through wage garnishment and remit them to the appropriate agency.
Disability Insurance
Insurance that provides income to employees who are unable to work due to a non-work-related illness or injury. Some states require employers to provide disability insurance, and premiums may be paid by the employer, employee, or both.
E
Earnings
The total amount of wages, salaries, bonuses, commissions, and other compensation earned by an employee during a specific period. This is the basis for calculating various taxes and deductions.
Employee Wages
Compensation paid to employees for services performed, typically calculated on an hourly, salary, or piece-rate basis. Employee wages are subject to federal income tax withholding and other payroll taxes.
Employer Identification Number (EIN)
A unique nine-digit number assigned by the IRS to identify a business entity for tax purposes. An EIN is required for employers to report taxes and other information to the IRS.
Employment Taxes
Taxes that employers are required to withhold from employees’ wages and pay to federal, state, and local tax authorities. These include federal income tax, Social Security tax, Medicare taxes, and federal and state unemployment taxes.
Enrollment
The process by which employees sign up for employer-sponsored benefits such as health insurance, retirement plans, and other voluntary deductions. Enrollment periods typically occur when an employee is first hired and during annual open enrollment periods.
F
Fair Labor Standards Act (FLSA)
Federal legislation that establishes minimum wage, overtime pay, recordkeeping, and youth employment standards for employees in the private sector and in federal, state, and local governments. The FLSA sets the framework for many payroll requirements.
Federal Income Tax
A tax levied by the federal government on an individual's taxable income. Employers are required to withhold federal income tax from employees’ wages based on the information provided on Form W-4 and the IRS tax tables.
Federal Income Tax Withholding
The amount of federal income tax that an employer withholds from an employee's wages and remits to the IRS. The amount withheld is based on employee earnings, filing status, and allowances claimed on Form W-4.
Federal Insurance Contributions Act (FICA)
Legislation that requires employers to withhold Social Security and Medicare taxes from employee's wages and match these contributions. FICA taxes fund Social Security and Medicare programs.
Federal Law
The body of law created by the federal government that regulates various aspects of payroll, including minimum wage, overtime pay, tax withholding, and reporting requirements. Employers must comply with all applicable federal laws related to payroll.
FICA (Federal Insurance Contributions Act)
A federal law that requires employers to withhold Social Security and Medicare taxes from employee's wages. Both employees and employers contribute to FICA, with each paying 7.65% of the employee's wages (6.2% for Social Security and 1.45% for Medicare).
FMLA (Family and Medical Leave Act)
Federal legislation that provides eligible employees with up to 12 weeks of unpaid, job-protected leave per year for specified family and medical reasons. Employers must maintain employees' health benefits during FMLA leave.
Form 941
The Employer's Quarterly Federal Tax Return, used to report federal income tax withheld from employee' wages and both the employer's and employee's share of Social Security and Medicare taxes. Form 941 must be filed quarterly with the IRS.
Form W-2
The Wage and Tax Statement form that employers must provide to each employee and the IRS annually. Form W-2 shows total earnings and the amount of taxes withheld during the calendar year.
Form W-4
The Employee's Withholding Certificate that employees complete to indicate their tax situation and determine the amount of federal income tax to be withheld from their pay. Employers use this form to calculate appropriate tax withholding.
Fringe Benefits
Additional compensation provided to employees beyond their regular wages. Examples include health insurance, retirement plans, and educational assistance. Some fringe benefits are taxable, while others are tax-exempt.
FUTA (Federal Unemployment Tax Act)
A federal law that imposes a payroll tax on employers to fund unemployment benefits for workers who lose their jobs. FUTA tax is paid by employers only and is not withheld from employees’ wages.
G
Garnishment
A legal procedure in which a portion of an employee's wages is withheld and sent to a creditor to satisfy a debt. Common types of garnishments include those for child support, student loans, and tax levies.
Gross Pay
The total amount of wages or salary earned by an employee before any deductions are taken out. Gross pay includes regular wages, overtime pay, bonuses, commissions, and other forms of compensation.
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H
Health Care
Medical services and products provided to employees as part of their benefits package. Health care benefits are a significant component of many employee compensation packages and may include medical, dental, and vision coverage.
Health Insurance
Insurance coverage that pays for medical and surgical expenses incurred by employees and their dependents. Many employers offer health insurance as part of their benefits package, with premiums often shared between the employer and employee.
Hourly Rate
The amount of money an employee earns per hour of work. Hourly rates are used to calculate wages for nonexempt employees and must comply with minimum wage laws.
I
Independent Contractor
An individual who provides services to a business but is not considered an employee. Independent contractors are responsible for paying their own taxes, including self-employment tax, and are not subject to employment taxes or eligible for employee benefits.
IRS Liabilities
Tax obligations that employers must fulfill to the Internal Revenue Service, including federal income tax withholding, Social Security and Medicare taxes, and unemployment taxes. Failure to meet these obligations can result in penalties and interest.
M
Medicare
A federal health insurance program primarily for people aged 65 and older. Medicare taxes are withheld from employee wages under FICA, with both employees and employers each contributing 1.45% of the employee wages.
Medicare Taxes
Taxes collected under the Federal Insurance Contributions Act (FICA) to fund Medicare, a federal health insurance program. Medicare taxes are withheld at a rate of 1.45% from employee wages, with an additional 0.9% for high-income earners.
Minimum Wage
The lowest hourly wage that employers are legally required to pay employees. The federal minimum wage is set by the Fair Labor Standards Act, but states and localities may establish higher minimum wage rates.
N
Net Pay
The amount of money an employee receives after all deductions have been taken from their gross pay. Also known as take-home pay, net pay reflects the employees’ actual earnings after taxes, benefits, and other withholdings.
Nonexempt Employees
Employees who are entitled to overtime pay under the Fair Labor Standards Act. Nonexempt employees must be paid at least the minimum wage and receive overtime pay for hours worked beyond 40 in a workweek.
O
Overtime Pay
Additional compensation paid to nonexempt employees for hours worked beyond 40 in a workweek. Under the Fair Labor Standards Act, overtime must be paid at a rate of at least one and one-half times the regular rate of pay.
P
Paid Time Off (PTO)
A policy that provides employees with a pool of time they can use for vacation, personal days, or sick leave. PTO is considered a form of compensation and may be accrued based on hours worked or time employed.
Pay
The compensation received by an employee for services rendered, including regular wages, overtime pay, bonuses, and commissions. Employee's pay is subject to various taxes and may include both monetary and non-monetary compensation.
Paycheck
The physical check or electronic payment an employee receives that details their gross pay, deductions, and net pay for a specific pay period. An employee's paycheck typically includes a pay stub with itemized information.
Pay Period
The recurring schedule that determines when employees are paid. Common pay periods include weekly, biweekly, semimonthly, and monthly. The pay period establishes the timeframe for calculating employee's wages and withholdings.
Payment System
The method or platform used by employers to process and distribute employee compensation. Modern payment systems often include electronic timekeeping, payroll calculation, tax withholding, and direct deposit capabilities.
Payroll Processing
The series of tasks involved in calculating employee's wages, withholding taxes, making deductions, and distributing payments. Payroll processing includes time tracking, tax calculations, benefit deductions, and payment distribution.
Payroll Tax
Taxes that employers must withhold from employee's wages or pay based on employee compensation. Payroll taxes include federal income tax, Social Security tax, Medicare tax, and federal and state unemployment taxes.
Pre-Tax Deductions
Amounts withheld from an employee's gross pay before taxes are calculated, reducing the employee's taxable income. Common pre-tax deductions include contributions to retirement plans, health insurance premiums, and flexible spending accounts.
R
Rate of Pay
The amount of money an employee earns per unit of time or output, such as an hourly rate, salary, or piece rate. Rate of pay is the foundation for calculating an employee's gross pay.
Recordkeeping
The practice of maintaining accurate, complete, and up-to-date employment and payroll records as required by various federal and state laws. Proper HR recordkeeping is essential for demonstrating compliance with payroll and tax regulations.
Reimbursement
The act of repaying employees for business-related expenses they incurred using their own funds. Common reimbursements include travel expenses, mileage, and work-related supplies.
Retirement Plan
An employer-sponsored benefit that allows employees to save for retirement on a tax-advantaged basis. Common retirement plans include 401(k)s, 403(b)s, and pension plans.
Retroactive
Referring to payments or adjustments that apply to a past period. Retroactive pay might be issued to correct payroll errors or to implement delayed wage increases.
S
Savings Account
A bank account that earns interest and can be used to set aside money for future needs. Employees may set up direct deposits to their savings accounts as part of their payroll arrangements.
Self-Employed
Individuals who work for themselves rather than for an employer. Self-employed individuals are responsible for paying self-employment tax, which covers both the employer and employee portions of Social Security and Medicare taxes.
Severance Pay
Compensation paid to employees upon termination of employment, typically in cases of layoffs or certain types of dismissals. Severance pay may be based on length of service and is subject to applicable taxes.
State Income Tax
A tax levied by state governments on the income of residents and, in some cases, nonresidents who earn income within the state. Employers are required to withhold state income tax from employee's wages in states that impose an income tax.
Supplemental Wages
Compensation paid to an employee in addition to their regular wages, such as bonuses, commissions, overtime pay, and severance pay. Supplemental wages may be subject to different withholding rules than regular wages.
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T
Take-Home Pay
The amount of money an employee receives after all deductions have been taken from their gross pay. Also known as net pay, take-home pay represents the employee's actual earnings after taxes and other withholdings.
Tax
A mandatory financial charge imposed by government authorities on individuals and businesses to fund public expenditures. In the context of payroll, taxes include income tax, Social Security tax, Medicare tax, and unemployment tax.
Tax Credit
A dollar-for-dollar reduction in the amount of tax owed. Tax credits may be available to employers for certain activities, such as hiring specific categories of workers or providing certain benefits to employees.
Tax Liability
The total amount of tax owed by an individual or business to tax authorities. For employers, tax liabilities include federal income tax withholding, Social Security and Medicare taxes, and unemployment taxes.
Tax Payment
The remittance of taxes owed to tax authorities. Employers are required to make regular tax payments to the IRS and state tax agencies for federal income tax withholding, Social Security and Medicare taxes, and unemployment taxes.
Tax Return
A form or set of forms filed with tax authorities to report income, calculate tax liability, and request refunds if applicable. Employers must file various tax returns, including Form 941 and Form 940, to report and pay employment taxes.
Taxable Income
The portion of an individual's income that is subject to taxation after accounting for deductions and exemptions. For payroll purposes, taxable income is calculated by subtracting pre-tax deductions from gross pay.
Taxable Wage Base
The maximum amount of earnings subject to a particular tax. For example, the Social Security tax applies only to earnings up to a certain limit, which is adjusted annually for inflation.
Taxpayer
An individual or entity that is required to pay taxes to government authorities. In the context of payroll, both employers and employees are taxpayers, with different tax obligations and responsibilities.
U
Unemployment Insurance
A joint federal-state program that provides temporary financial assistance to eligible workers who lose their jobs through no fault of their own. Unemployment insurance is funded through employer-paid taxes.
Unemployment Tax Act
Federal legislation that imposes a tax on employers to fund unemployment benefits for workers who lose their jobs. The Federal Unemployment Tax Act (FUTA) works in conjunction with state unemployment tax laws.
W
Withholding
The amount of money that an employer deducts from an employee's paycheck for taxes, benefits, and other obligations. Withholding includes federal and state income taxes, Social Security and Medicare taxes, and voluntary deductions.
Workweek
A fixed period of seven consecutive days is used for calculating overtime pay for nonexempt employees. Under the Fair Labor Standards Act, overtime must be paid to nonexempt workers for hours worked beyond 40 in a single workweek.
🚩 Disclaimer: This resource is for informational purposes only and does not constitute legal, tax, or compliance advice. Businesses should consult a qualified tax professional or legal advisor to ensure compliance with applicable laws and regulations.
This content was developed with the help of artificial intelligence, though reviewed, edited, and approved by (real) humans.
Social Security
A federal program that provides retirement, disability, and survivor benefits to eligible workers and their families. Social Security is funded through payroll taxes collected under the Federal Insurance Contributions Act (FICA).