In this blog post, we define some common payroll terms. Have you ever glanced at a paycheck and been frustrated by some of the more complex words and phrases?
You’re not alone.
By unraveling all the jargon and lingo around employee wages, it becomes much easier to understand your payments – and your payroll team.
The Payroll Glossary: A list of common payroll terms
Below are 15+ of the most common payroll terms and concepts:
Stands for “Automatic Data Processing.” The company ADP is one of the largest payment processors in the world. Because so many employers use ADP for payroll services, workforce management applications like TimeForge include an ADP integration.
Base pay rate
The base pay rate is the rate that has been agreed upon to be the starting point for employee earnings. Non-exempt workers commonly receive an hourly rate, whereas exempt employees typically receive a salary (see the difference between exempt and non-exempt below).
EFTPS is a payroll term that stands for Electronic Federal Tax Payment System. It’s the online system employers use to pay taxes to the federal government.
Unlike the other payroll terms listed here, this one is not actually paycheck related, but it is worth mentioning since you’ll probably hear your HR team or coworkers discuss it. The employee turnover rate just refers to the number of employees who leave and how many positions need to be refilled. It’s a way for businesses to tell if they are doing a decent job of retaining employees.
Employee’s Withholding Allowance Certificate
Also known as the W-4, the Employee’s Withholding Allowance Certificate is an IRS form that tells the employer how much tax to withhold from the employee’s paycheck.
Exempt vs. Non-Exempt
Exempt versus non-exempt refers to whether or not an employee is entitled to overtime pay. Salaried workers are exempt from overtime pay. Unlike non-exempt hourly workers, they do not get time-and-a-half pay for working more than 40 hours per week, for example.
FICA stands for Federal Insurance Contributions Act. It’s the federal payroll tax deducted from every paycheck to help pay for things like Social Security.
Fringe benefits are a type of job perk that employers may offer to better appeal to potential employees. Some types are financial benefits like reimbursement for child care, so they may show up on your paycheck. However, other fringe benefits include stock options or life insurance, which you will not see on a paycheck. Tip: read up on fringe benefit examples to learn more.
The Federal Unemployment Tax Act (FUTA) is a program in which employers pay into an unemployment benefits fund. A company’s FUTA tax rate is decided based on the amount of money the company pays in wages. The rate for this tax also changes based on how much state unemployment insurance an employer is currently paying.
A garnishment is a court-ordered deduction of an employee’s wages. The deducted amount is collected by a third party and used to pay a debt or to satisfy some other legal obligation, such as child care.
The general ledger is a record of a business’s financial transactions, including revenue, expenses, liabilities, and assets.
What are gross wages? This is the term used to explain the full amount an employer pays its staff. It’s the amount the employee gets before withholding various taxes or deductions. Most employees do not collect their gross pay, because a certain amount will be set aside to cover Social Security and other taxes.
The definition of net pay is the amount of pay each employee is left with after tax deductions and withheld taxes. Also called take-home pay, it refers to how much an employee actually gets from each paycheck, as opposed to gross pay, defined above. Net pay is calculated by subtracting all withheld taxes from the gross paycheck and adding any additional financial benefits.
New Employee Orientation
You can typically find out more about all these terms at new hire orientation, which is a meeting or training course new employees take part in shortly after being hired. During orientation, managers will explain the job and the general company culture, as well as how and when to contact HR.
Pre Tax Deductions
Typically, taxes apply to a certain percentage of an employee’s gross wage. However, deductions reduce the taxable portion of your wages. All sorts of things can qualify as a deduction, including:
- Health care insurance
- Dental insurance
- Flexible spending accounts
- Retirement funds
- Health savings accounts
- Tax deferred investments
… just to name a few.
SDI stands for State Disability Insurance. The SDI tax is a type of tax that is withheld from employee wages. The government uses it to pay various disability funds for those who cannot work due to disabilities.
Short for State Unemployment Insurance, SUI is a type of tax that employers have to fund. It provides various short-term benefits when an employee leaves a job. Who is taxed and how much they are taxed varies based on which state they live in. Most employees will not see this tax show up on their paychecks.
Third-party sick pay
Third-party sick pay is sick pay that is paid to an employee by a third party other than the employer for whom services are usually performed. Often, the third party is an insurance company or state insurance program that provides sick pay for non-job-related injuries, illnesses, and conditions, such as maternity or paternity leave. Payments are fully taxable for the first six months, then become exempt from FICA and FUTA after that.
Short for volunteer time off, this is a benefit offered by some companies to both salaried employees and hourly employees. Employees get paid time off (PTO) outside of their regular sick days and vacation time. This extra time is spent on community service. It allows small businesses to improve their brand image while at the same time giving back to the community.
There’s also something called voluntary time off, which is when an employee opts not to come into work on days they’re not needed. Although the time off is unpaid, the benefit is that their employment status is not affected.
Did we help demystify a few payroll terms?
We hope so! At TimeForge, our priority is simplifying labor management. Our workforce management software seamlessly integrates with your payroll systems and makes it easy to centralize employee pay rates, leave accrual, and other details. You can even create your own custom leave types to suit your company’s HR and payroll needs.