Payroll - The Basics

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Whether you’re starting a new business or looking to get a better sense of your expenses, understanding of the basics of payroll is essential. Here are some useful terms to keep in mind and what they can mean for your business. 

People That Influence Payroll

Payroll is a lot more than just signing checks and handing them to employees. Here are some staff members who might be involved in the payroll process:

  • Payroll Administrator (For a 1-Person Department) - Performs all activities necessary to process 1 or more payrolls, including maintaining related records, filing tax reports and voluntary deduction reports, processing involuntary deductions such as levies and garnishments, preparing accounting transactions and documents, documenting and updating procedures, and preparing special reports for management.
  • Payroll Director - Manages and guides the payroll team. Uses knowledge of third-party processes and systems to ensure payroll accurately computes and records time, earnings, employee benefits, special deductions, taxes, garnishments, and other items that affect employees’ net pay and / or company liability.
  • Payroll Accountant/Payroll Analyst - Maintains payroll-related accounts and is responsible for the reconciliation and accuracy of one or more accounts within a complex accounting system.
  • Payroll Benefits Administrator - Maintains payroll and related records recording the accumulation and use of vacations, holidays, sick days, and miscellaneous leaves of absence. May calculate deductions for group health, life, and disability insurance premiums and communicate to employees and payroll staff.
  • HR Director - Manages and guides human resources practices and company policies.
  • Compliance Officer - Identifies potential areas of compliance vulnerability and develops policies and procedures to minimize or eliminate any challenges.
  • Labor Relations - Maintains relationships with union employees and unions, and potentially renegotiates union contracts.
  • 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.

Payroll Terms To Know

Now let’s simplify some industry-standard terms that will likely come up in your payroll system as your company grows and develops:

  • Accrual - The recognition of assets, expenses, liabilities, or revenues after the cash value has been determined but before it is transferred.
  • Deduction - 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.
  • Employer - An employing unit, as defined, subject under state or federal unemployment compensation laws.
  • Employee - An individual performing services for an employing unit, as defined by state law, under a master/servant or employer/employee relationship.
  • Employee Leasing Company (Professional Employer Organization) - 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.
  • Fair Labor Standards Act (FLSA) - The Fair Labor Standards Act (1938) regulates minimum wage, overtime pay, and child labor laws for employers and employees covered by the law.
  • Federal Insurance Contribution Act (FICA) - 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.
  • Independent Contractor - An individual who is self-employed and is free from the direction and control of an employer covered under state and federal unemployment laws. The Internal Revenue Service (IRS) uses certain guidelines to determine the independent contractor relationship. Many states utilize the same guidelines. 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.
  • Leave of Absence (LOA) - Official permission to be excused from work or duty.
  • Minimum Wage - The lowest hourly amount an employer can pay employees under federal or state law.
  • Nonexempt Employee - If you are a “nonexempt” employee, generally you are protected by the wage and hour laws of your state or of the federal government (Fair Labor Standards Act). Wage and hour laws require employers to pay at least a certain minimum hourly wage rate and a premium rate for “overtime” work. They are also a guide for determining which on-the-job hours constitute “work” and thus must be compensated.
  • Overtime - Hours worked by nonexempt employees in excess of maximums set by federal or state law that must be compensated at a premium rate of pay (e.g., under the FLSA, all hours worked over 40 in a workweek must be paid at not less than 1.5 times the employee’s regular rate of pay).
  • Pay Period - The term “pay period” refers to the frequency with which an employer chooses to pay employees and contractors. Common pay periods include weekly, biweekly and monthly. The chosen pay period is defined by its beginning and ending dates.
  • Severance Pay - A payment made by an employer to terminated employees (usually those who are terminated through no fault of their own) that is designed to hold them over until new employment is secured.
  • Social Security Number (SSN) - An individual’s taxpayer identification number; it consists of nine digits in the format 000-00-0000.
  • Supplemental Wages - Compensation other than regular pay received by an employee. This may include bonuses, commissions, and severance pay; income tax may be withheld from such payments at a flat rate (or supplemental tax rate) under certain circumstances.
  • Taxable - The actual amount of wages or compensation that is subject to a tax type and used to calculate the tax due.
  • Wages - Employee earnings and compensation.
  • W-2 - A statement of an individual’s annual wages and taxes; this is provided by an employer and must be included with the employee’s federal, state, and city income tax returns.
  • W-4 Employee’s Withholding Exemption Certificate - A government form used to indicate the number of personal exemptions an employee wishes to claim.
  • Workers' Compensation - A state-administered insurance covering a worker 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.

Hopefully these definitions help to round out your payroll vocabulary and gain a better understanding of what goes into the payroll process. Share this useful glossary with your peers and coworkers, and let us know what other concepts you want to see defined. 

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