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Payroll Terms

accounting period the period covered by an income statement (e.g., month, year); also known as the business cycle
accrual the recognition of assets, expenses, liabilities, or revenues after the cash value has been determined but before it has been transferred
ACH credit a transaction in which a tax-payer instructs its financial institution to originate a federal tax deposit through the ACH system to the appropriate Treasury account; also known as EFTPS through a financial institution. An ACH transaction initiated by the taxpayer resulting in a payment of taxes; funds are “given” from the account
ACH debit a transaction in which an employer’s Financial Agent, after receivign instructions from the employer, instructs the employer’s financial institution to withdraw funds from the employer’s account for a federal tax deposit and to route the deposit to the appropriate Treasury account through the ACH system; also known as EFTPS-Direct. An ACH transaction initiated by the Tax Agent (e.g., IRS) resulting in a payment of taxes; funds are “taken” from the account
adoption assistance Financial benefit provided by an employer to an employee to help with the child adoption process. Within certain limitations, it is excluded from federal income tax withholding, though not from social security and Medicare.
Advance Earned Income Credit Earned income credit that is partially paid in advance by the employer during the year. This is done through a reduction in income tax withholding during each pay period
aggregate method method of withholding federal income tax from supplemental wages in which the supplemental wage payment is combined with the regular wages paid during the most recent payroll period; after calculating withholding on the total amount using the wage-bracket or percentage method, the amount already withheld from the last wage payment is subtracted to reach the amount that must be withheld from the supplemental wage payment
Archer medial savings account An arrangement through which an employer or an employee (but not both) can put tax-deferred contributions into an account for the payment of health care deductibles under a high deductible health insurance plan
asset resource acquired by a business that is consumed by the business
Automated Clearing House (ACH) A Federal Reserve Bank acting on behalf of an association of financial institutions that operates a facility (system) that serves as a clearinghouse for direct deposit or other electronic payment transactions; entries are received and transmitted by the ACH under the rules of the association. Funds moved from bank A to bank B must go through the ACH.
balance sheet A financial statement that presents a business’ financial position in terms of its assets, liabilities, and owner’s equity as of a certain date (generally the end of the company’s fiscal year, but may be issued monthly or quarterly as well)
batch a sample or group of items (data) being processed
batch control control that is designed to ensure a batch of data has been entered successfully
biweekly once every two weeks; type of payroll period that can be used in the percentage of wage-bracket method of withholding
cafeteria plan A plan that offers flexible benefits under Internal Revenue Code (IRC) §125. Employees choose their benefits from a “menu” of cash and benefits, some of which can be paid for with pretax deductions from wages.
cash or deferred arrangement (CODA) An arrangement under a retirement plan that allows employees to either receive cash or have the employer contribute an equivalent amount to the plan.
chart of accounts lists each account by a name and an identification number; the numbering scheme is designed to identify the type of account.
commission percentage of sales, collections, etc., paid to an employee
common law test a test that measures the control and direction that an employer has authority to exercise over a worker; where the employer has the right to direct the worker as to how, where, and when the work will be completed, in addition to controllinf the result of the work, the worker is a common law employee
compensation All cash and noncash remuneration given to an employee for services performed for the employer
compound surname last name with more than one part, such as Smith-Johnson or Rodrigues de Perez
constructive receipt occurs when wages are made available to an employee, not when the wages were earned
deduction 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 deferral of a wage payment to a future date. 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 and 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 An employer plan providing dependent care services or reimbursement for such services
direct deposit the electronic transfer of an employee’s net pay directly into financial institution accounts designated by the employee, thus avoiding the need for a paycheck
discretionary bonus bonus paid for services performed; in order to be considered discretionary, the bonus cannot be paid because of a promise made in advance, a contract, or another agreement.
disposable earnings that part of an employee’s earnings remaining after deductions required by law (e.g., taxes); it is used to determine that amount of an employee’s pay that is subject to a garnishment, attachment, or child support withholding order
Earned Income Credit tax credit that is availale to low-income employees; it may be taken when the employee files his or her individual tax return
Electronic Federal Tax Payment System (EFTPS) 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
electronic tax application (ETA) a “same-day settlement” procedure ender which tax deposits are initiated and settled on the same day
employee an individual who performs services for another individual or an organization in return for compensation
employer identification number (EIN) the employer’s acount number with the Internal Revenue Service; it consists of nine digits and is always in the following format: 00-0000000
equity represents the owner’s investment in a company, i.e. the company’s net worth
excise tax tax imposed on a specific transaction
exempt (Form W-4) if an employee claims exempt on his or her Form W-4, the employer does not have to withhold federal income tax from the employee’s wages
exempt employees while this term can refer to anyone not covered as an employee under the Fair Labor Standards Act, it generally means those employees who are exempt from the minimum wage, overtime pay, and certain recordkeeping requirements of the Federal Wage-Hour Law
expense account shows costs for goods and services consumed by the company during the accounting period
Fair Labor Standards Act law which regulates such areas as minimum wage, overtime pay, and child labor for employers and employees covered by the law
fair market value (FMV) used to determine the value of noncash, employer-provided benefits for payroll tax purposes, or the value of facilitiesprovided to employees in lieu of wages
Family and Medical Leave Act (FMLA) law guaranteeing 12 weeks’ unpaid leave to most employees to care for newborn or newly adopted children, or to deal with a serious illness or injury suffered by the employee or an ailing shile, spouse, or parent of the employee
federal income tax withholding (FITW) FIT withheld from employees’ wages when they are paid
Federal Insurance Contribution Act describes the combined taxes levied for social security and Medicare
Federal Unemployment Tax Act (FUTA) requires employers to pay a certain percentage of their employees’ wages (up to a maximum wage limit) as a payroll tax to help fund unemployment compensation benefits for separated employees
filing status marital status of an employee for withholding purposes
flat rate method method of withholding federal income tax on supplemental wages in which the supplemental payment and regular wages are treated separately; the employer withholds 27% of the supplemental wages
Form 940 Employer’s Annual Federal Unemployment Tax Return
Form 941 Employer’s Quarterly Federal Tax Return. Provides the IRS with a report of each employer’s total taxable wages paid and payroll tax liability
For 941c Statement to Correct Information. a form used to make adjustments to Form 941 when taxes have been underwithheld or overwithheld; explains the nature of the adjustment and shows the erroneous and corrected amounts of tax withheld
Form 1099-MISC states how much a contractor was paid for services rendered during the past calendar year
Form 8109 Federal Tax Deposit Coupon. Coupon that accompanies paper tax deposits indicating what type of tax is being deposited, the quarter which the liability was incurred, and the amount of the deposit
Form W-2 Wage and Tax Statement. Employers must file a Form W-2 to report the total amount of wages paid and taxes withheld for each employee in a calendar year
Form W-2c Statement of Corrected Income and Tax Amounts. Form that must be completed by an employer if an incorrect copy of a W-2 has been sent to the SSA
Form W-3 Transmittal of Income and Tax Statements. Form which an employer must also file when filing paper Forms W-2 (Copy A) with the SSA; contains totals of the amounts reported on the employer’s W-2 forms, acting as a “reconciliation” of these forms
Form W-3c Transmittal of Corrected Income and Tax Statements. Form that accompanies Form W-2c in most situations when it is sent to the SSA that totals the information from all the W-2c forms being submitted
Form W-4 Employee’s Withholding Allowance Certificate. The W-4 tells the employer how many withholding allowances the employee is claiming along with the employee’s marital status; it also tells the employer if the employee claims exemption from withholding
Form W-4P Withholding Certificate for Pension or Annuity Payments. Allows retired employees to have input into the amount of federal income tax withheld from a pension or annuity
Form W-4S Request for Federal Income Tax Withholding From Sick Pay. Filed when an employee receives sick pay from a third party insurer due to a disabling non-job-related illness or injury; the employee uses the form to tell the third party how much to withhold from his or her pay
Form W-5 Earned Income Credit Advance Payment Certificate. Must be filed by employees who want to take advantage of advance EIC payments and which attests to their eligibility for the advance payments
FUTA requires employers to pay a certain percentage of their employees’ wages (up to a maximum wage limit) as a payroll tax to help fund unemployment compensation benefits for separated employees
garnishment a legal proceeding authorizing an involuntery transfer of an employee’s wages to a creditor to satisfy a debt
general ledger ledger containing all of the transactions in the debit and credit accounts of a business
golden parachute payment payment made to business executives in excess of their usual compensation (e.g., stock options, bonuses) in the event the business is sold and the executives are terminated from employment
gross income the compensation for services, including fees, commissions, fringe benefits, and similar items
gross pay the total amount received from the employer before any deductions are made
group-term life insurance (GTLI) term life insurance that is provided to employees, with the cost being borne by the employer, the employee, or both
highly compensated employee (HCE) in the context of certain fringe benefit plans, an employee who is an owner or officer of a business or whose salary exceeds a certain amount (indexed each year for inflation). Many benefits offered by employers do not qualify for favorable tax treatment if they discriminate in favor of highly compensated employees. And employers may also be restricted in their use of safe-harbor valuations of benefits provided to such employees
Immigration Reform and Control Act of 1986 (IRCA) Law enacted in 1986 that prohibits employers from hiring persons who are not authorized to work in the U.S. and from discriminating against those who are based on their national origin or citizenship
income statement financial statement showing a company’s results of operations for an accounting period or fiscal year
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
information return a return sent to the IRS (e.g., 1099 series) or the SSA (e.g., Form W-2, Copy A along with Form W-3 or 6559) that indicates information relevant to tax liability
interface the place where two systems meet
Internal Revenue Code (IRC) federal tax laws; generally referred to as the Internal Revenue Code of 1986, which was the year of the latest major overhaul of the Code; the IRC also comprises Title 26 of the United States Code
involuntary deductions deductions over which the employers and employees have no control
leased employees employees of a leasing agency who are hired and trained for the client firm through the agency. Withholding, depositing, and reporting responsibilities remain with the leasing agency
liability debt of a business that has yet to be paid
long-term care insurance an insurance contract providing for coverage of qualified long-term care services, including diagnostic, preventive, treating, mitigating and rehabilitative services, which is treated as an accident and health insurance contract for payroll tax purposes
lookback period the 12-month period running from July 1 of the second preceeding calendar year through June 30 of the preceeding calendar year; the employer’s payroll tax liability during this period determines its depositor status for the current year
Medicare federal hospital insurance program for individuals age 65 or older and some disabled persons; it is funded through the hospital insurance component of FICA tax
minimum wage lowest amount that an employer can pay its employees per hour under federal or state law; the federal minimum wage is $5.15 per hour
monthly once per month; type of payroll period
net pay that part of an employee’s wages that remains after all deductions have been subtracted (e.g., taxes, health insurance premiums, union dues, etc.)
net worth amount by which a company’s assets exceed liabilities
noncash fringe benefits benefits provided to employees in some form other than cash (e.g., company car, health and life insurance, parking facility, etc.), which may be taxable or nontaxable
nondiscretionary bonus contractual or agreed-upon bonus or incentive related to production, efficiency, attendance, quality, or some other measure of performance
nonexempt employees employees who are covered by the minimum wage and overtime provisions of the Fair Labor Standards Act; they may be paid on an hourly or salary basis
nonqualified plan in the context of employee benefiots, an employer plan that does not meet IRS qualification requirements
one-day deposit rule if an employer’s accumulated employment tax liability reaches $100,000 on any day during a monthly or semiweekly deposit period, the taxes must be deposited by the close of the next banking day
originating depository financial institution (ODFI) a financial institution that is qualified to initiate direct deposit entries submitted by an employer as part of the direct deposit process
overtime hours worked by nonexempt employees in excess of maximums set by federal or state law that must be compensated at a premium rate of pay (e.g., under the FLSA, all hours worked over 40 in a workweek must be paid at not less than 150% times the employee’s regular rate of pay)
overtime premium amount equal to one half of an employee’s regular rate of pay times all overtime hours worked
paid time off payment received for time not worked due to holiday, illness, vacation, jury duty, bereavement, or the failure of the employer to provide sufficient work
payroll expense expense that may be recorded in the payroll expense journal by function or by type of pay
payroll register report listing and summarizing the compensation paid and deductions taken from each employee’s wages for the payroll period
percentage method one allowable method for calculating federal income tax withholding from an employee’s wages, most often used when the calculation is automated
percentage method for advance EIC payments one allowable method for calculating the amount of advance EIC payments, most often used when the calculation is automated
pieceworker worker who is paid per unit or piece produced
posting recording a transaction in a journal entry or recording a journal entry in the general ledger
private delivery service delivery service which may meet IRS criteria for submitting tax forms
profit occurs when income exceeds costs and expenses
qualified plan a benefit plan that meets IRS qualification requirements for tax-favored treatment (e.g., nondiscrimination)
quarterly once every three months or four times per year
reasonable basis a standard used to determine whether a worker can be treated as an independent contractor whether or not the common law test is mat, based on prior court and administrative rulings, IRS audits, or long-standing practice in the industry
reconcile to ensure that amounts withheld, deposited, paid, and reported by employers agree with each others and, if they do not, to determine the reasons and make the necessary corrections
reconciliation process of ensuring that amounts withheld, deposited, paid, and reported by employers agree with each other and that is they do not, determining the reasons and making the necessary corrections
regular rate of pay hourly pay rate determined by dividing the total regular pay actually earned for the workweek by the total number of hours worked
reimbursed expense payment for business-related expenses incurred by an employee on behalf of, or for the convenience of, the employer
remuneration payment for services, including benefits
retained earnings amount that a company’s revenue exceeds its expenses, reduced by any amount returned to the owners
retroactive pay pay for time worked in a previous workweek; retroactive pay must be applied to both regular and overtime hours
revenue income received for goods and services provided by an organization
revenue account identifies amounts received for goods sold and services rendered during the accounting period
safe-harbor an IRS-approved alterntive method (usually a short-cut) for complying with IRS rules, regulations, and procedures (for example, per diem allowances and high-low substantiation)
semi-annual twice per year or once every six months
semimonthly twice per month; type of payroll period
severance pay a payment made by an employer 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 (e.g., evenings or late nights)
sick pay replacement wages paid to an employee who cannot work because of an illness or injury that is not work-related
simplified employee pension (SEP) an individual retirement arrangement (IRA) with special participation requirements that is available to certain small employers
social security Old Age, Survivors, and Disability Insurance (OASDI) component of FICA
Social Security Administration (SSA) the federal government agency that administers social security
social security number (SSN) an individual’s taxpayer identification number; it consists of nine digits in the format 000-00-0000
statement of cash flow financial statement that shows the sources and uses of cash during the accounting period
statutory employees special groups of employees identified by law (for example, full-time life insurance sales-peoples or certain homeworkers) whose wages are not subject to FITW, but are subject to FICA and FUTA
subsidiary ledger replaces a journal; summarized entries are posted from the subsidiary ledgers directly to the general ledger; arose with the computerizations of monst companies’ accounting systems
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
system edit warning or alert built into computer software; a system edit checks for errors and either corrects them or notifies the operator that something may be wrong; system edits generally check for calues outside accepted ranges (e.g., negative net pay)
take-home pay in the context of a federal tax levy, the amount of an employee’s wages that remains after all normal deductions in effect at the time the levy was received
tangible type of asset which includes land and improvements, buildings, computers and software, furniture, and automobiles
tax levy requres employers to deduct an amount of money that the employee owes, plus any penalties and interest payments, from the employee’s wages and remit it to the proper government agency
taxpayer identification number (TIN) a social security number, employer identification number, or an individual taxpayer identification number which serves as the taxpayer’s account number with the IRS
temporary help agency employees workers hired through temporary help agencies who are screened and trained by the agency to provide services for client firms. They are employees of the agency, rather than the client firm
tip credit reduction in the minimum wage allowed for tipped employees
Treasury Financial Agent (TFA) organization that verifies the accuracy of EFTPS enrollment information, enters it in its enrollment record database, and notifies employers of EFTPS procedures and receives EFTPS transactions
validity edit shows whether or not data entered meet the requirements set forth by a company
wage base wage limit beyond which an employee’s wages are not taxed
wage-bracket method method for calculating the amount of federal income tax to be withheld from an employee’s wages based on wage-bracket tables classified by the employee’s marital status and payroll period
wage-bracket method for advance EIC method for calculating the amount of advance EIC payments based on wage-bracket tables classified by the employee’s marital status and payroll period
weekly once per week; type of payroll period
white collar employees in the context of the Federal Wage-Hour Law, these are executive, administrative, professional (including computer-related professionals), or outside sales employees who are exempt from the law’s minimum wage, overtime pay, and certain recordkeeping requirements
withholding subtracting amounts from an employee’s wages for taxes, garnishments, or levies, and other deductions (e.g., medical incurance premiums, union dues); these amounts are then paid over to the government agency or other party to whom they are owed
withholding allowance reduces the amount of wages subject to federal income tax withholding based on exemptions and deductions claimed on federal income tax Form 1040
workweek 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 7-day (168 hour) period chosen by the employer (e.g., Saturday through Friday, Wednesday through Tuesday)

About Johnson Hur

After having graduated with a degree in Finance and working for a Fortune 500 company for several years, Johnson decided to follow his passion by embarking on a path to the digital world. He has over 8 years of experience with large companies setting marketing strategy.

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