Managing your company's own payroll can be difficult because, for example, the payroll/employment tax process involves a whole new vocabulary.
These terms are the most important ones you will encounter when you start working with employee paychecks, which is the beginning ofpayroll. These paychecks are used for two main purposes:
- For bookkeeping while you create paychecks for employees and enter payroll amounts into your company's accounting system
- For taxes as you collect, pay, report and file themjobTaxes in accordance with federal and state tax regulations.
Even if you have your payroll accounting done by an accountant, use payroll software or a payroll services company, you should be familiar with common technical terms.
payrollis a general term and has several meanings. It could be:
- The amount of money paid to all employees on a payday, as in "This morning we calculate payroll for tomorrow's payday".
- A company's financial records pertain to the payment of wages and salaries to employees.
- The overall record of employee earnings for a year.
gross salaryis the total amount paid to an employee in each pay period, before deductions for taxes or other purposes, and is determined in a variety of wayssalaried and part-time employees.
Forcontracted employeesGross salary is determined as an annual amount. To determine the gross salary for a salary period, the annual salary is divided by the number of salary periods in the year.
For hourly workers, gross pay is the employee's hourly rate multiplied by the number of hours worked during that pay period; Overtime is also included in gross salary.
The IRS does not consider gross wages; Instead, the term "gross income" or "total income" is used, which is the income that must be reported on an employee's annual payroll tax report (Form W-2).
net salaryis the wage an employee receives after all withholdings and deductions from gross wages. In other words, Take-Home Pay is the amount of the employee's paycheck.
The net salary calculation starts with the gross salary. Federal and state income tax amounts are then deducted, as well asFICA-Steuer(Social Security and Medicare). Finally, discretionary deductions such as health insurance contributions and pension plan amounts are eliminated.
Apayment termis a recurring period in which the employee's salary is recorded and paid. Some common payment periods are:
- Monthly (12 payment periods per year)
- Weekly (52 pay periods per year)
- Fortnightly (every other week, 26 pay periods per year)
- Fortnightly (twice a month, 24 pay periods a year).
The number of pay periods in a year is important for calculating total employee pay for a year.
Withholdings and Deductions
|federal taxes||insurance premiums|
|state income tax||Contributions to pension schemes|
retentionrefers to amounts deducted from an employee's paycheck for various types of taxes:
- federal taxes
- FICA (Social Security and Medicare) taxes
- state income tax
Deductions are other types of payments that are deducted from an employee's paycheck. Most deductions do not affect an employee's taxable income, but some are included pre-tax. Input tax deductions are deducted from a person's gross income to reduce their taxable income. Some examples are pension contributions and some health costs.
An employee's federal income tax withholding is calculated using information from aForm W-4completed by the employee at the time of employment and for state income tax using a state Form W-4 or other tax form.
Withholding tax does not need to be approved by employees as these amounts are required by law. All deductions from an employee's paycheck must be approved in writing by the employee, except court-ordered deductions.
In addition to withholdings and deductions, there is a third type of payment that some workers are required to make. Courts sometimes issue garnishment orders for debts such as student loans, small claims judgments, child support, or other amounts owed by the employee.If you receive a garnishment notice ordering your company to garnish wages, you must comply with the order. Garnishment is usually by paycheck, so you'll need to add that to your list of deductions.
Employees vs. per hour
The terms "employee" and "hourly worker" specifically refer to how these employees are paid. Salaried employees receive an annual salary, while hourly employees receive an hourly rate multiplied by the hours worked.
Over timeare supplements paid to hourly workers who work more than 40 hours a week, who work weekends, or other supplements. For employees who work more than 40 hours in a work week, overtime must be paid at one and a half times the individual hourly wage. Of course, you can pay overtime at higher rates.
Overtime will be chargeddifferently for hourly and salaried workers. Most employees are exempt from overtime, but your company may have to pay some overtimeexempt workers with lower wages.
Exempt and non-exempt employees
freedmeans "exempt from overtime". Employees with and without time off are usually classified according to the work they do. Most exempt employees work in professional, managerial, and managerial positions, sometimes referred to as "white-collar exemptions."
But not all white-collar professionals are exempt from overtime. To be exempt, they must be above a standard wage level of $684 per week ($35,568 per year for a full-time worker). In other words, if a furloughed employee earns less than $684 a week, you will have to pay overtime.
Other workers are not considered exempt, which means you have to pay overtime. An employee is considered non-exempt (eligible for overtime) unless the employer can demonstrate an exemption.
The terms wage and hourly wage and who is and is not exempt from overtime are often confusing. This comparison may help clear up the confusion.
|contracted employees||hourly staff|
|payment annually||paid hourly rate|
|May be exempt due to a specific position||never set you free|
|Low-income workers must receive overtime pay||Always get paid for overtime|
payment of damages
employee compensationis a term often used in place of the term salary, but it is a more general term that covers other payments made to employees. Some types of compensation that are taxable for the employee include:
- advantages ofCompany car use
- storage options
- Bonuses, prizes and giftsfor employees (unless they are very small)
- SomeBenefits for passengers and transport
- Someeducational benefits
- Other benefits such as meals may or may not be taxable for employees depending on the circumstances.
Because these payments are taxable, you must separate them in payroll accounting and include them in the employee's taxable pay for the year and report that pay on the employee's W-2 form.
Payroll Terms FAQ
Can an employer fire an employee whose salary has been pledged?
Federal law protects an employee from being fired because his or her paycheck has been garnished for a debt and limits how much can be deducted from an employee's paycheck each week.
In some years, there are 27 periods for biweekly workers. How to deal with it?
You have several alternatives to pay the27. Co-payment period. The two most important things to remember are not to overcomplicate things and make sure you let employees know when you make changes to their paychecks.
How long do I have to keep the payslips?
The US Department of Labor requires employers to keep all paychecks for three years.That's itDOL data sheetit has more detailsMandatory IRSthat all tax records, including payroll records, be retained for a minimum of three years and, in some cases, longer.
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fast books. "What is Payroll? A 2020 Guide to Payroll Processing." Accessed April 29, 2021.
IRS. "Topic nº 401 Salaries and Wages." Accessed April 29, 2021.
Michigan State University. "Gross salary x net salary: do you know the difference?Accessed on April 15, 2021.
Consumer Financial Protection Agency. "understand the payroll deduction." Accessed April 15, 2021.
United States Department of Labor"Wages and hours worked: garnishment of wages." Accessed April 29, 2021.
United States Department of Labor"Calculation of overtime pay." Accessed April 29, 2021.
United States Department of Labor"exceptions." Accessed April 29, 2021.
United States Department of Labor"Final Rule: Overtime Update." Accessed April 29, 2021.
United States Department of Labor"Wage garnishment confederation." Accessed April 29, 2021.
US Department of Labor, Department of Wage and Hour. "Handout #21: Fair Labor Standards Act (FLSA) Record Retention Requirements." Accessed April 29, 2021.