1099: Statement given to each independent contractor who was paid at least $600 in fees, commissions, or any other form of compensation for services rendered when there is no employer-employee relationship. There are no income taxes withheld on payments made. Also see Independent Contractor.
125 Plan: Also known as “Cafeteria Plan” or “Flex Plan”. Out-of-pocket costs an employee pays for certain benefit plans. If this is available to the employee, premium payments can be taken on a before-tax basis, reducing the employee’s federal, social security, Medicare and most state taxes. See also Cafeteria Plan.
401(k) Plan: A cash or deferred arrangement that allows employees to authorize their employer to place pretax dollars in a retirement plan that invests the money. The contributions (including those matched by the employer) and any earnings on them are not subject to federal income tax (and most state income taxes) until they are withdrawn.
403(b) Annuity: An annuity or mutual fund that provides retirement income for employees of public schools and certain tax exempt organizations.
940 Form: See Form 940.
941 Form: See Form 941. Back to Top
Accelerated Deposit Rule: This rule requires employers who accumulate a tax liability of $100,000 or more during a deposit period to deposit withheld taxes within one banking day of the day the liability was incurred. This is also known as the one-day or $100,000 rule.
Accrual: The recognition of assets, expenses, liabilities or revenues after the cash value has been determined, but before it is transferred.
Advance Earned Income Credit (AEIC): Payments of earned income credit during the year to employees who expect to be eligible for the credit. Employers make the payments out of federal income, Social Security and Medicate taxes withheld from the employees wages.
After-Tax Deduction: A deduction from an employees pay that does not reduce the employees taxable wages. It is taken out only after all applicable taxes and other deductions have been withheld (e.g., union dues, garnishments, charitable contributions).
Alien: A citizen of a country other than the U.S. or one of its territories or possessions.
Amended Tax Return: A corrected tax return of a return previously filed with a government agency. An amended tax return may require the payment of additional tax, possibly with interest and penalty, or it may be accompanied by a claim or refund.
Annual Wage Reporting (AWR): The Social Security Administrations system of recording wages reported annually by employers on Forms W-2.
Automated Clearing House (ACH): A Federal Reserve Bank or private financial institution acting as a clearinghouse for direct deposit transactions. Entries are received and transmitted by the ACH under the rules of the association. Back to Top
Backup Withholding: Income tax withholding required from non-employee compensation when the payee fails to furnish the payer with a taxpayer identification number (TIN) or the payer is notified by the IRS that the payees TIN is incorrect.
Base Period: As it relates to unemployment compensation, it generally consists of 52 weeks or four of the last five quarters, immediately preceding the claimants benefit year.
Base Period Wages: Wages earned during the base period. The amount is generally one of several criteria used in determining a claimants eligibility for unemployment compensation.
Bi-Weekly: A pay frequency whereby employees are paid alternating weeks on the same day of the week. There are 26 pay periods per year. Ten months of the year there are two pay periods per month, with the remaining two months containing three pay periods.
Benefit Accruals: The earning and use of time off granted as an employee, e.g., Sick, Vacation, PTO. Often tracked during payroll. Back to Top
Cafeteria Plan: A plan that offers flexible benefits under the Internal Revenue Code 125. Employees choose their benefits from a “menu” of cash and benefits, some of which can be paid with pretax deductions from wages. Also see 125 plan.
Child Support Withholding: The process of withholding amounts from an employees compensation to satisfy a child support order from a court or state child welfare administrative agency. The employer is responsible for withholding the amounts and paying them over to the party named in the withholding order.
Circular E: IRS Publication 15, Employers Tax Guide. This publication contains the basic rules, guidelines, and instructions for withholding, depositing, reporting, and paying federal employment taxes. Compensation: All cash and non-cash remuneration given to an employee for services performed for the employer.
Compensatory Time: Paid time off granted to an employee for working extra hours. The Federal Wage-Hour Law places severe restrictions on the use of compensatory time to avoid paying overtime, although special exemptions are allowed for certain public sector employees (e.g., police officers and firefighters).
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA): Federal law that requires employers with group health care coverage to offer continued coverage to separated employees and other qualifying beneficiaries. The person seeking coverage may be required to pay up to 102% of the premium for the coverage. COBRA also requires public sector employers to withhold and pay Medicare tax on the wages of all employees hired after 3-31-86 if the employer is not covered by a 218 agreement.
Credit: An accounting entry that increases liabilities and revenues and decreases assets and expenses. Back to Top
Debit: An accounting entry that increases assets and expenses and decreases liabilities and revenues.
Deduction: An amount subtracted from an employees gross pay to reach net pay, or an amount allowed to taxpayers as an offset against income.
Deferred Compensation: the postponement of a wage payment to a future date. Usually describes a portion of wages set aside by an employer for an employee and put into a retirement plan on a pretax basis.
Direct Deposit: The electronic transfer of an employees net pay directly into financial institution accounts designated by the employee, thus avoiding the need to receive a “live” paycheck.
Disposable Earnings: The part of an employee’s earning remaining after lawful deductions are withheld. Back to Top
Earned Income Credit (EIC): A tax credit that is available to low-income employees with one or more qualifying children. It may be taken when the employee files his or her individual tax return, or partially paid in advance by the employer during the year.
Electronic Funds Transfer (EFT): The transfer of money electronically from an account in one financial institution to an account in another financial institution.
Electronic Federal Tax Payment System (EFTPS): System that allows employers to make federal tax deposits electronically through the ACH network.
Electronic Filing: The process of filing tax and information returns directly from one computer to another.
Employee: An individual who performs services for another individual or an organization in return for compensation.
Employees Withholding Allowance Certificate (W-4): The federal Form W-4 or an equivalent state or local form on which the employee states their marital status and the number of withholding allowances he or she claims. The form is used by the employer to determine the amount of federal, state, and local income taxes to withhold from the employee’s compensation.
Employer: An individual or organization that hires individuals to perform services in return for compensation, and that has the authority to control and direct the work of those individuals as part of the employer-employee relationship.
Employer Identification Number (EIN): The employers account number with the Internal Revenue Service, consisting of nine (9) digits (00-0000000).
Exempt: See White Collar Employees.
Experience Rating: In the context of unemployment compensation, it is the employers past record of unemployment claims activity. This record is used to determine the employers unemployment tax rate (i.e. a high unemployment rate results in a higher tax rate). SUI tax is based on this system. Back to Top
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.
Family Medical Leave Act of 1993 (FMLA): Law guaranteeing 12 weeks of unpaid leave to most employees to care for newborn or newly adopted children, or to deal with a serious injury or illness suffered by an employee or an ailing child, spouse, or parent of the employee.
Federal Income Tax (FIT): A withholding tax levied against employees. The amount of withholding varies with the amount of earnings, frequency of pay, number of claimed exemptions, and marital status.
Federal Insurance Contributions Act (FICA): The taxes imposed under this law fund Social Security. The employer is required to match the 6.2% Social Security tax rate imposed on the employee’s first $97,500 (2007 amount) of taxable wages as well as the 1.45% Medicare tax rate imposed on all of the employee’s taxable wages in the 2007 tax year. No credits or withholding exemptions are permitted for the calculation of FICA taxes. When there is more than one employer, each must withhold FICA tax for the employee up to the table wage base.
Federal Unemployment Tax Act (FUTA): It requires employers to pay a certain percentage of their employees’ wages (up to a maximum wage limit) as a payroll tax to help fund unemployment compensation benefits for separated employees.
Federal Employer Identification Number (FEIN): A number assigned to taxpayers and businesses by the federal government. This number is used for all tax transactions. Also referred to as EIN.
Fringe Benefit: Compensation other than wages provided to an employee such as health and life insurance, vacation, employer-provided vehicles, public transportation subsidies, etc., that may be taxable or non-taxable.
Form 940 (Employer’s Annual Federal Unemployment Tax Return): Provides the IRS with a report of each employer’s total taxable wages for federal unemployment and reconciles quarterly FUTA tax payments.
Form 941 (Employer’s Quarterly Federal Tax Return): Provides the IRS with a report of each employer’s total taxable wages paid and federal payroll tax liability. (Social Security, Medicare, Federal Withholding, EIC.)
Form 941c (Statement to Correct Information): A form use to make adjustments to Form 941 when taxes have been under withheld or over withheld; explains the nature of the adjustment and shows the erroneous and corrected amounts of tax withheld.
Form W-2: See W-2. Back to Top
Garnishee: In a payroll context, an employer that receives an order requiring withholding from an employees wages to satisfy a debt.
Garnishment: A legal proceeding authorizing an involuntary transfer of an employees wages to a creditor to satisfy a debt.
General Ledger: Ledger containing all of the transactions in the debit and credit accounts of a business.
Gross-Up: An IRS-approved formula that employers can use to determine the taxable gross payment when the employer wishes to pay the employees share of the tax.
Group-Term Life Insurance (GTL): Term life insurance that is provided to employees, with the cost being borne by the employer, the employee, or both.
Guaranteed Annual Wage: A plan guaranteeing employees their annual income (regardless of the work available) or that they will be kept on the payroll (although possibly at a lower wage). Back to Top
Independent Contractor: A non-employee contracted by a business to perform services. Although the business specifies the result of the work to be performed, it has no right to control the details of when, how or who will ultimately perform the work.
Information Return: A return sent to the IRS (i.e., 1099 series) or Social Security Administration (i.e., W-2, Copy A), that indicates information relevant to tax liability.
Information Statement: A statement sent to a payee (i.e., 1099) or an employee (i.e., W-2) that indicates payments made and taxes withheld by the party issuing the statement.
Immigration and Naturalization Service (INS): Federal agency charged with enforcement of United States Immigration laws.
Internal Revenue Code (IRC): Federal tax laws.
Internal Revenue Service (IRS): Federal Agency charged with enforcement of United States tax laws and collection of taxes. Back to Top
Leased Employees: Employees of a leasing (personnel) agency who are hired and trained for the client firm through the agency. Withholding, depositing, and reporting responsibilities remain with the leasing agency.
Levy: The seizure of wages, bank accounts or other property or rights through lawful process or by force.
Liabilities: Debits of a business that have yet to be paid. Back to Top
Magnetic Media Reporting: Use of a computerized method of filing information with government agencies, such as magnetic tape, diskette, cartridge, or electronic filing from one computer to another.
Medicare (MHI): A federal hospital insurance program for individuals 65 or older and some disabled persons. It is funded through the hospital insurance component of FICA. Employer and employee pay matching amounts; no annual wage limit.
MICR: Used to encode the client’s bank account number on the bottom of each check. A check must be encoded with a MICR number to be negotiable.
Minimum Wage: The lowest hourly amount an employer can pay employees under federal or state law. Back to Top
New Hire Reporting: The reporting of newly hired/rehired employees to state agencies to assist in collecting child support and/or uncover abuse of the states unemployment compensation, workers compensation or public assistance programs.
Net Pay: Money remaining after subtracting taxes and adding or subtracting deductions from Adjusted gross. Amount of money for which the check is written, i.e. take home pay.
Non-cash Fringe Benefits: Benefits provided to employees in some form other than cash (i.e., company care, health or life insurance, parking) which may be taxable or nontaxable.
Nonexempt Employee: Employees who are covered by the minimum wage and overtime provisions of the Fair Labor Standards Act. They may be paid on an hourly or salary basis.
Nonqualified Plan: In the context of employee benefits, an employer plan that does not meet IRS qualification requirements. Back to Top
Overtime: Hours worked in excess of maximum set by federal or state law that must be compensated. Back to Top
Per Diem: A daily allowance, usually for travel, entertainment, employee compensation or miscellaneous out-of-pocket expenses while conducting business. The sum of money is always calculated on a daily basis an d may be paid in advance or after the expense is occurred.
Pay Period : The time duration within which the amount a worker has earned is determined so that the worker can be paid properly. (Period Begin through Period End).
Payroll Tax: Any tax levied by a government agency on employees wages, tips and other compensation.
Pre-note: A verification process for magnetic tape reporting. A test file is sent to an employee’s bank on behalf of an employee who authorizes direct deposit to begin. The bank verifies the accuracy of the information and has up to 10 banking days to reject the information and notify Precision Payroll of an error.
Pre-tax Deduction: A deduction taken from gross pay that reduces taxable wages. Back to Top
Qualified Plan: A benefit plan that meets IRS qualification requirements for tax-favored treatment (i.e., nondiscrimination). Back to Top
Resident Alien: In the context of payroll, an individual who passes either the “green card” or “substantial presence” test for determining resident status in the US . Resident aliens are generally subject to federal income tax withholding and Social Security and Medicare taxes on the same basis as US citizens.
Resident Income Tax (RIT): Taxes an individual pays related to their state of residence. These taxes are separate from taxes related to the state in which an individual works. Back to Top
Semi-Monthly: Pay frequency having two pay periods a month and 24 pay periods per year.
Shift Differential: Extra pay received by employees for working a less-than desirable shift (i.e., late nights, evenings).
Simplified Employee Pension (SEP): An Individual Retirement Arrangement (IRA) with special participation requirements that is available to certain small employers.
State Income Tax (SIT): State taxes paid by individuals to the state in which they work.
Social Security: The Old Age, Survivors, and Disability Insurance (OASDI) component of FICA.
Social Security Administration (SSA): The federal government agency that administers Social Security. It is part of the Department of Health and Human Services.
Social Security Number (SSN): An individuals taxpayer identification number, consisting of nine (9) digits (xxx-xx-xxxx).
Sole Proprietor: A type of business where all of the assets and liabilities of the company are the assets and liabilities of the owner. The individual owner is not considered an employee of the company.
State Unemployment Insurance (SUI): Requires employers to pay a certain percentage of their employee’s wages (up to the state’s wage base limit) as a payroll tax to help fund unemployment compensation benefits for separated employee’s. Straight Time: The standard number of work hours during a workweek for which an employees regular rate of pay will be paid.
Supplemental Wages: Compensation received by employees other than their regular pay, such as bonuses, commissions, and severance pay. Income tax may be withheld from such payments at a flat rate under certain circumstances. Back to Top
Taxable Wage Base: The maximum amount of employee compensation subject to Social Security, FUTA, and state unemployment insurance taxes.
Taxpayer Identification Number (TIN): A Social Security number or employer identification number that serves as the taxpayer’s account number with IRS and Social Security.
Third (3rd) Party Sick Pay: Payments made by a third party, such as a state or private insurer, to employees because of non job-related illness or injury.
Tip Credit: A reduction in the minimum wage allowed for tipped employees earning at least $30 per month in tips.
Tipped Employee: An employee who works in an occupation in which the employee regularly receives $30 or more a month in tips.g> Back to Top
Unemployement Insurance: A federal-state program that provides economic security for workers during periods of involuntary unemployment. Back to Top
W-2 (Wage and Tax Statement): Employers must file a Form W-2 to report the total amount of wages paid and taxes withheld for each employee in a calendar year.
W-2c (Statement of Corrected Income and Tax amounts): Form that must be completed by an employer if an incorrect copy of a W-2 has been sent to the SSA.
W-3 (Transmittal of Income and Tax Statements): Form that an employer must also file when filing paper Form W-2’s (Copy A) with the SSA; contains totals of these amounts reported on the employer’s W-2 (Copy A) with the SSA, acting as “reconciliation” of these forms.
W-3c (Transmittal of Corrected Income and Tax Statements): Form that accompanies Form W-2c in most situations when it is sent to the SSA that totals the information from all the W-2c forms being submitted.
W-4 (Employee’s Withholding Allowance Certificate): The W-4 tells the employer how many withholding allowances the employee is claiming along with the eployee’s marital status; it also tells the employer if the employee claims exemption from withholding. Also see Employees Withholding Allowance Certificate.
W-5 (Earned Income Credit Advance Payment Certificate): Must be filed by employees who want to take advantage of advanced EIC payments and attests to their eligibility for the advance payments. Also see Earned Income Credit & Advanced Earned Income Credit.
Wage Continuation Sheet: A periodic report (i.e., quarterly) from an employer to the state unemployment agency containing employee information and unemployment taxable wages.
White Collar Employees: In the contest of the Federal Wage-Hour Law, these are executive, administrative, professional (including computer-related professionals), or outside sales employees who are exempt from the laws minimum wage, overtime pay, and certain record keeping requirements.
Withholding: Subtracting amounts from an employees wages for taxes, garnishments or levies, and other deductions (i.e., medical insurance premiums, union dues). These amounts are then paid over to the government agency or other party to whom they are owed.
Work Week: The basis for determining an employees regular rate of pay and overtime pay due under the Federal Wage-Hour Law. It can be any consecutive 7-day (168-hour) period chosen by the employer (i.e., Saturday to Friday, Wednesday to Tuesday). Back to Top