When you manage the payroll of your employees in your business, the process can be challenging as it involves its own specific terminology. These terms are the most important ones that you will encounter when you start preparing employee payrolls and initiating the payroll process.
Payroll
Payroll is a general term and has several meanings:
- The amount paid to all employees on payday, such as “We ran payroll this morning for payday tomorrow.”
- The company’s financial records related to the payment of wages and salaries to employees.
- The total record of employee earnings over the year.
Gross Pay
Gross pay is the amount paid to an employee for each pay period before any taxes or other deductions are taken out. It is generally determined differently for salaried employees and hourly employees.
Net Pay
Net pay is the amount an employee receives after all taxes and deductions have been taken out of gross pay. It is the employee’s take-home pay.
Pay Periods
A pay period is the recurring time frame during which employee hours are recorded and payroll is paid. Some common pay periods are:
- Monthly (12 pay periods per year).
- Weekly (52 pay periods per year).
- Bi-weekly (every two weeks, 26 pay periods per year).
- Semi-monthly (twice a month, 24 pay periods per year).
Deductions and Taxes
Deductions refer to amounts withheld from an employee’s pay for various types of taxes, such as:
- Federal income tax.
- Social Security and Medicare tax (FICA).
- State income taxes.
Other deductions are other types of withheld payments. Most deductions do not affect the taxable income amount for the employee, but some are considered pre-tax. These deductions are taken out of the employee’s gross income to reduce taxable income. Examples include contributions to retirement plans and some healthcare costs.
The federal income tax withheld from an employee’s pay is determined using the information on the W-4 form filled out by the employee upon hiring, and for state income tax using a state W-4 form or another tax form.
Wage Garnishment
Some employees may have to deal with a third type of payment. Sometimes, courts issue wage garnishment orders for debts such as student loans, small claims, child support, or any other amounts owed by the employee. You must comply with the order if you receive a wage garnishment notice directing your company to withhold wages. Wage garnishment is typically executed on a per-paycheck basis, so you need to add it to your list of deductions.
Salaried Employees vs. Hourly Employees
The terms “salaried employee” and “hourly employee” specifically relate to how these employees are paid. Salaried employees are paid an annual salary, whereas hourly employees are paid at an hourly rate multiplied by the number of hours they worked.
Overtime
Overtime is the additional pay given to hourly employees who work more than 40 hours in a week, or who work on weekends, or any other additional amounts. Overtime must be paid at a rate of one and a half times the employee’s regular hourly rate for any hours worked over 40 in a workweek. Of course, you can pay overtime at higher rates.
Overtime is calculated differently for hourly employees and salaried employees. Most salaried employees are exempt from overtime, but it may be necessary for your company to pay overtime to some exempt employees who earn low salaries.
Exempt Employees vs. Non-Exempt Employees
Exempt means “exempt from overtime.” Exempt and non-exempt employees are typically classified based on the work they perform. Most exempt employees work in professional, administrative, or executive positions and are sometimes referred to as “white-collar exemptions.”
But
Not all “white-collar” professionals are exempt from overtime. They must earn above a standard salary level of $684 per week ($35,568 per year for a full-time employee) to be exempt. You are required to pay overtime if the exempt employee earns less than $684 per week.
Other workers are considered non-exempt and you must pay them overtime. A non-exempt employee is eligible for overtime unless an exemption can be proven by the employer.
Compensation
Employee compensation is a term often used instead of “wages” but is a broader term that includes other payments to employees. Some types of compensation are taxable to the employee, such as:
- Tip income.
- Benefits of using a company car.
- Stock options.
- Bonuses, awards, and gifts to employees (unless they are very small).
- Some relocation and transportation benefits.
- Some educational benefits.
- Other benefits, such as meals, may be taxable to employees depending on the circumstances.
These types of payments are taxable, so you must itemize them when preparing payroll accounts and include them in the employee’s wages for the year. You must report these wages on the employee’s W-2 form.
Frequently Asked Questions (FAQs)
Here are some common questions:
Can an employer fire an employee who has a wage garnishment?
Federal laws protect the employee from being fired due to a wage garnishment for a single debt, and they set a maximum amount that can be deducted from an employee’s wages each week.
There are 27 pay periods for employees every two weeks in some years. How can I handle that?
You have several options for paying the additional 27th period. You should not make it too complicated and ensure you inform employees if you are making any changes to their wages.
How long should I keep payroll records?
The U.S. Department of Labor requires employers to keep all payroll records for three years. You can find more details in the Department of Labor fact sheet. The IRS requires maintaining all tax records, including those related to payroll taxes, for at least three years, longer in some cases.
These are some basic terms you should know before you start processing payroll and handling payroll-related taxes. You should be comfortable with these terms even if you have an accountant preparing payroll or use payroll software or a payroll service company.
Source: https://www.thebalancemoney.com/payroll-terms-to-learn-397809
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