Home > Payroll - The Basics
Whether you’re starting a new business, looking to get a better sense of your expenses, have new people starting in payroll, or are just starting in payroll yourself, creating a strong understanding of the basics of payroll is essential.
Here are some of the basic payroll terms and definitions that every payroll professional, HR professional, or business owner should know.
There are a few different areas of payroll terminology that every professional should know. These include people or roles within a company that affect and influence payroll, terms related to payroll compliance, and terms related to payroll tasks and the physical processing of payroll.
Payroll involves much more than signing checks and handing them to employees. Various other teams or members of the organization may be involved in the process.
Here are some basic payroll terms for people who influence or work with payroll:
A payroll administrator performs all activities necessary to process one or more payrolls, including:
Typically, businesses that have a payroll administrator don't have any other roles or positions relating to payroll.
Payroll directors manage and guide the payroll team.
Using knowledge of third-party processes and systems, the director ensures payroll is done accurately and computes and records time, earnings, employee benefits, special deductions, taxes, garnishments, and other items that affect employees’ net pay and / or company liability.
The payroll accountant sometimes referred to as a payroll analyst or specialist, maintains payroll-related accounts and is responsible for the reconciliation and accuracy of one or more accounts within a complex accounting system. Generally speaking, these are the team members who actually process payroll.
A payroll benefits administrator maintains payroll and related records recording the accumulation and use of vacations, holidays, sick days, and miscellaneous leaves of absence.
The person in this role may calculate deductions for group health, life, and disability insurance premiums and communicate these deductions to employees and payroll staff.
Compliance officers are in charge of identifying potential areas of compliance vulnerability and developing policies and procedures to minimize or eliminate any challenges related to payroll compliance.
The internal auditor analyzes data obtained for evidence of deficiencies in controls, duplication of effort, fraud, or lack of compliance with laws, government regulations, and management policies or procedures.
People who work in labor relations typically maintain relationships with union employees and unions. They may also renegotiate union contracts.
Your HR director typically manages and guides human resources practices and company policies. They may also take on responsibilities of the aforementioned roles if none exist. They may also help to monitor and ensure compliance in the payroll process.
An employer, as defined, is an employing unit or organization subject to state or federal unemployment compensation laws.
An employee is considered to be an individual performing services for an employing unit, as defined by state law, under a master/servant or employer/employee relationship.
A company that leases employees to another business on a contract basis. They handle all personnel matters and are generally considered the employer of the leased employees.
Payroll involves many moving parts and presents a number of opportunities for errors and non-compliance.
Proper compliance begins with understanding the basic payroll terms regarding compliance:
The Fair Labor Standards Act (FLSA) of 1938 regulates minimum wage, overtime pay, and child labor laws for employers and employees covered by this federal law.
Important to note is that every state has its own set of payroll processing requirements and laws that should also be taken into account and understood. These vary from state to state.
FICA is a tax consisting of Social Security and Medicare taxes levied on employers and employees. Employers must match employee Social Security and Medicare tax contributions, using the same rate and taxable wage amounts.
An individual who is self-employed and is free from the direction and control of an employer covered under state and federal unemployment laws is often classified as an independent contractor.
The Internal Revenue Service (IRS) uses certain guidelines to determine the independent contractor relationship. Many states utilize the same guidelines. You can learn more about FLSA employee status classification and independent contractor definitions by reading our article.
Upon termination of the independent contractor’s services, the individual may attempt to collect unemployment benefits. The company should be prepared to prove to the state that the contracted individual was not an employee within the meaning of the law.
Minimum wage refers to the lowest hourly amount an employer can pay employees under federal or state law. You can view every minimum wage by state by taking a look at this chart.
A “nonexempt” employee, is generally protected by the wage and hour laws of the state or of the federal government through the FLSA and thus must receive things such as overtime pay.
An “exempt” employee, is someone who is not covered by federal or state overtime laws and thus is not owed overtime compensation.
Workers' compensation is a state-administered insurance covering a worker's job-related injury and illness. Workers' compensation provides an employee with a percentage of his or her wages while he or she is unable to work.
Here are some of the terms and definitions about processing payroll and the tasks associated with payroll to be aware of:
This is the accumulated amount of salaries, wages, and other compensation such as PTO that employees have earned during a pay period, but which still needs to be paid out to them.
Employee earnings and compensation.
An employee’s regular rate of pay or pay rate is their normal hourly wage. If an employee’s pay rate differs at times, then the average pay rate should be used as the regular rate of pay.
To determine an employee’s regular rate of pay add together weekly compensation (not including overtime) and divide by the total number of hours an employee worked during the week.
Compensation included in such calculations can include:
Supplemental wages include compensation other than regular pay received by an employee.
This may include:
Under the FLSA, any hours worked by a non-exempt employee in excess of 40 in a week shall be considered overtime hours.
Non-exempt employees must be paid at an overtime pay rate of no less than 1.5 times their regular rate of pay, for all overtime hours.
A payment made by an employer to terminated employees, (usually those who are terminated through no fault of their own) designed to hold them over until new employment is secured.
The payment may often be referred to as a severance package.
The term “pay period” refers to the frequency with which an employer chooses to pay employees and contractors.
Common pay periods include:
Any time a predetermined amount of money is taken from an employee’s check at the end of the pay period, it is referred to as a deduction.
Most often, deductions are made for functions such as health benefits and union dues, as well as various tax laws and legislation.
The actual amount of wages or compensation that is subject to a tax type and used to calculate the tax due is considered taxable income.
Commonly referred to as a W-2, this form is a statement of an individual’s annual wages and taxes. It is provided by an employer and must be included with the employee’s federal, state, and city income tax returns.
Commonly referred to as a W-4, this form is an Employee’s Withholding Exemption Certificate. It is used to indicate the number of personal exemptions an employee wishes to claim for tax purposes.
An individual’s taxpayer identification number.
It consists of nine digits in the following format: 000-00-0000.
Official permission to be excused from work or duty, often for an extended period of time.
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