A Glossary of Payroll Terms

The Worker Adjustment and Retraining Notification (WARN) Act was signed in 1988 in hopes of protecting employees and their families from the economic fallout surrounding unannounced mass layoffs. Under this law, employers are required to notify employees at least 60 days before a plant closing or other type of mass layoff. Health Savings Account (HSA) funds what is a 12 month rolling forecast can be used for qualified medical expenses and are wholly owned by the employee. Those funds are not subject to certain taxes at the time of deposit. When they pair the HSA with a high-deductible health plan (HDHP), employees contributing to an HSA are given a certain level of personal control over their spending on health care costs.

• It is entirely up to the discretion of the employers if they want to offer paid time as a part of their compensation package.
• Exempt employees are paid overtime for any excess hours they work over 40 in a week.
• A business may also say that it's "doing payroll," which could mean that it's processing paychecks or calculating the taxes it owes for those employees.

This limit is determined by the combined total of all plans an employee paid toward and will change from year to year. A legal proceeding authorizing an involuntary transfer of an employee’s wages to a creditor to satisfy a debt. To encourage your workers to take the overnight shift, you might offer any takers an additional $5 per hour. Payroll tax forms are documents created to collect and report information related to employee compensation.

Payroll Terms You Should Know

Payroll simply refers to the compensation that a business pays to its employees. Employers don’t match income tax deductions, but they pay federal unemployment taxes. The IRS's Income Withholding Assistant will help you determine how much federal income taxes your employees owe. Their company pays employees every two weeks for a total of 26 pay periods. How you calculate payroll taxes will depend on your business and your local laws.

• Compensation includes total cash and noncash payments made to an employee in exchange for his or her services rendered.
• The current federal minimum wage is $7.25 per hour; however, this can vary depending on the state.
• From 1 January 2024, the components which must be included when calculating ‘normal’ rate of pay are defined in regulations.
• Payroll is used at the end of the fiscal year to assess annual employee wages.
• For example, workers typically on a fixed monthly salary, if they take a week’s holiday, they will receive the same pay at the end of the month as they normally receive.

Here are the most commonly used payroll tax terms that you may come across when processing payroll. Accruals also often happen as part of an employee benefits package. Many employers offer paid vacation, sick, and personal time, which is often earned on an accrual basis. This means that a certain amount of time off is earned per pay period. Payroll accruals are funds owed to workers for hours they previously worked but haven’t yet been compensated for.

Understanding the basics of payroll

Her statutory entitlement in days is the lower of 28 days or 5.6 x 4 days (22.4 days). For example, staff working 6 days a week are only entitled to 28 days’ paid holiday. For monthly pay, you’ll typically calculate the gross pay by dividing the annual salary by 12 (for 12 months in a year).

Most often, you will pay federal taxes when you pay Social Security and Medicare taxes. Once you have taken out pre-tax deductions, the remaining pay is taxed. The FICA tax rate is 7.65%—1.45% for Medicare and 6.2% for Social Security taxes. Other tax rates will be determined by Federal, state, or local laws and your employee’s W-4. The payroll service may also maintain a record of how much vacation or personal time employees have used. Holiday pay for the leave accrued should then be calculated using an average of the 2 weeks in which they were paid.

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Employees are the individuals or workers that the company has formally hired to fill a specific role within the company. It is crucial to distinguish employees from independent contractors regarding payroll processing and calculations. Disposable income refers to an employee’s wages after the employer has taken all the necessary taxes and deductions from their paycheck. Authorities use this amount to determine the pay level subject to child support withholding or garnishment.

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Paul would not qualify as an irregular hours worker if his contracted hours are fixed during both week 1 and week 2. Given that Paul does not work overtime, it is not the case that his hours worked are wholly or mostly variable. Instead, Paul’s hours are fixed (just worked in a rotating shift pattern).

Consult your state for information on state income tax withholding. 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. Most deductions don't affect the amount of an employee's taxable income, but some are considered pre-tax. These are subtracted from the employee's gross income to reduce their taxable income. Examples are retirement plan contributions and some health care costs.

EFTPS (Electronic Federal Tax Payment System)

Most payroll taxes are calculated as a percentage of employee earnings. Each payroll tax comes with its own set of rules, exceptions, and limitations. Unlike payroll taxes, employers never contribute to paying their employees’ federal or state income taxes. Income tax withholding refers to the money an employer keeps, or withholds, from an employee’s paycheck to remit for paying federal or state income taxes. Employees fill out Form W-4 and a state withholding certificate to direct their employers how much to withhold for income tax payments.

Enjoy a simple 3-step process, free USA-based support, and so much more. Outsourcing payroll is the most expensive (but least time-consuming) payroll option. Although you free up precious time from doing payroll by hand, you should consider whether doing so is in your budget. This option is the most time-consuming (but least expensive) payroll option. Deposit state and local taxes depending on the tax agencies’ rules.

New hire reporting is the process employers follow to report their newly hired employees to the state. Federal law dictates that employers report every new hire within 20 days of hiring. Some states can have stricter deadlines; for example, Alabama mandates new hire reporting within seven days.