Simplified payroll terms to help you quickly grasp the concept of payroll.
A type of retirement savings account where employees contribute after-tax dollars. Unlike traditional 401(k) contributions, Roth withdrawals in retirement are tax-free.
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Accrual refers to the method of recording wages or benefits that have been earned by employees, even if they haven’t been paid out yet. In payroll, it’s commonly used for leave (like vacation or sick time). If an employee accrues 8 hours of vacation each month, the payroll software should reflect that build-up, even if they haven't taken time off yet.
It is the total amount an employee would earn in a full year based on their current pay rate. For example, if a part-time worker earns $5,000 per month, their annualized salary is $60,000. Employers use this figure to compare compensation levels across roles, determine benefits eligibility, and forecast payroll costs.
At-will employment means that either the employer or the employee can end the working relationship at any time, for any lawful reason, and without prior notice. It's the default rule in most US states. While it offers flexibility, employers are still encouraged to document the reasons for employee exits.
It is the fixed amount an employee earns before any bonuses, commissions, overtime, or deductions. This is the core of an employee’s compensation and is usually set in hourly or salary terms.
It is a pay schedule where employees receive their pay checks every two weeks, typically on the same day (like every other Friday). Over a year, this results in 26 pay periods. Biweekly is one of the most popular payroll frequencies as it helps employers balance their administrative workload and allows employees to plan their finances better.
Bonus pay refers to rewards given to employees in addition to their regular wages. These may be offered for meeting performance goals, during holidays, or to celebrate company milestones. Bonuses are considered supplemental wages and are taxed differently from regular pay.
A Section 125 Plan, often called a cafeteria plan, lets employees choose between taxable salary and a variety of pre-tax benefits, such as health insurance or dependent care. The plan is established under the IRS Code and gives employees flexibility to tailor benefits to their needs while lowering their taxable income.
Compensatory time, or comp time, is paid time off given to an employee instead of overtime pay for extra hours worked. While common in public sector jobs, it’s generally not allowed in the private sector under federal law. Instead, private employers must pay overtime wages as defined by the Fair Labor Standards Act.
It is the date on which employees actually receive their pay check, whether by direct deposit or printed check. This is an important payroll marker because it determines tax reporting periods for both the employer and the employee. Make sure your check date aligns with tax filing deadlines to avoid penalties.
Deductions are amounts subtracted from an employee’s gross wages before they receive their net pay. These can be mandatory (such as federal and state taxes, Social Security, and Medicare) or voluntary (like health insurance premiums, retirement contributions, and wage garnishments).
In the context of payroll, a dependent is a person (usually a child or relative) who relies on the employee for financial support and whom the employee can claim on their tax return to reduce taxable income. Dependents must meet specific criteria defined by the IRS to qualify for certain tax benefits, such as exemptions and credits.
Direct deposit is the electronic transfer of an employee’s net wages directly into their bank account on payday. It streamlines payroll, reduces the risk of check fraud, and improves accuracy. Most employees prefer it for its convenience, and many states, including Washington and Michigan, promote it as a standard payment method.
A unique nine-digit number issued by the IRS to identify your business for tax purposes. Think of it like a Social Security number for your company. You’ll need an EIN to run payroll, pay federal taxes, and file tax forms like W-2s and 941s.
An exempt employee is someone who is exempt from overtime pay requirements under the Fair Labor Standards Act. This status usually applies to salaried workers in executive, administrative, or professional roles. It’s important to classify employees correctly to stay compliant and avoid penalties.
Also called Form W-4, this form tells employers how much federal income tax to withhold from an employee’s pay check. Employees fill it out when they start a new job or want to update their tax withholding after a personal or financial change. Payroll software like Zoho Payroll lets you collect Form W-4 digitally for accurate tax calculations.
Fringe benefits are additional forms of compensation employers provide to employees, such as health insurance, life insurance, commuter benefits, or wellness programs. Some fringe benefits are tax-free, while others are taxable and must be reported on employee W-2s.
FUTA is a federal law that requires employers to pay unemployment taxes, which unemployment fund benefits for workers who lose their jobs. These taxes are reported annually using Form 940.
It is a legal order telling an employer to hold back part of an employee’s wages to pay off debts like child support, taxes, or loans. Employers must follow these orders carefully, while staying within federal and state limits on how much of the income can be withheld.
Gross earnings represent the total compensation an employee earns before any deductions or taxes are taken out. This includes wages, salaries, overtime, bonuses, and commissions, and it forms the basis for tax withholdings and benefit calculations.
Group health insurance is a health coverage plan offered by an employer to their employees, often at a reduced cost compared to individual plans. The employer typically pays a portion of the premium, and the remaining amount is deducted from employees' pay checks with the help of payroll software.
These employees are paid based on the number of hours worked, typically tracked through timesheets and managed using payroll software. Employers must pay at least the minimum wage for all hours worked and overtime rates for any hours beyond 40 per week, unless the employee is exempt.
Health Insurance Portability and Accountability Act is a federal law that protects employees’ sensitive health information. When handling payroll deductions for health benefits or managing employee medical records, employers must maintain confidentiality and secure data according to HIPAA regulations.
The I-9 is a government form used to verify an employee’s eligibility to work in the U.S. To complete the form, employees must provide identity documents, such as a passport, and employment authorization documents, like a Social Security card, at the time of onboarding.
It is the process where employers deduct federal, state, and local income taxes from an employee’s pay check based on their W-4 form submissions.
A job description clearly defines an employee’s duties, responsibilities, qualifications, and pay structure. Accurate job descriptions help employers determine correct payroll classifications, exemption status, and benefits eligibility, which supports compliance and fair pay practices.
A geographic area (such as a state, city, or county) that sets its own tax and labor laws. Payroll taxes and requirements often vary by jurisdiction. For example, if you have remote employees in different states, you must follow each state’s tax rules.
Also known as Schedule K-1, it is a tax form used to report income, deductions, and credits for individuals involved in partnerships or S corporations. If your business is structured this way, employees or partners who receive profit shares will get a K-1 instead of a traditional W-2 during the year-end.
A key employee is defined by the IRS for retirement plan purposes as someone who meets certain compensation thresholds, such as owning more than 5% of the business or serving as a highly compensated officer. Understanding who qualifies as a key employee is important for compliance with 401(k) rules and other retirement benefits.
A period when an employee is away from work but retains their employment status. Leave may be paid or unpaid and can be taken for personal, medical, or other reasons. Admins must track leave accurately to ensure compliance with laws such as the Family and Medical Leave Act.
These are payroll taxes levied by cities, counties, or other local governments. They can be flat amounts or percentages and often fund services like schools or public infrastructure. Payroll software with automated tax filing can help employers determine their obligations and file these taxes accurately.
A federal payroll tax that helps fund the government's Medicare program. As an employer, you’re required to withhold 1.45% from each employee’s wages and match it with your own 1.45% contribution. For high earners, an additional 0.9% must be withheld without an employer match.
It is the lowest hourly rate you’re legally allowed to pay your employees. For covered non-exempt employees under federal law, the minimum wage is currently $7.25 per hour. However, many states and cities have their own minimum wage laws, and when more than one applies, you must pay the highest rate to stay compliant.
Multi-state payroll arises when employees work in more than one state or the business operates across state lines. Each state has its own rules for taxes and wages, so handling it can get tricky. Payroll software with multi-state support helps admins manage it all more easily.
The amount an employee takes home after all taxes, deductions, and contributions are subtracted from their gross pay. It’s often called take-home pay.
A non-exempt employee is someone who is eligible for overtime pay under the Fair Labor Standards Act. Most hourly workers fall into this category and must receive at least one and a half times their regular pay rate for any hours worked over 40 in a week.
These are portions of compensation paid to employees that are not subject to federal income tax, Social Security tax, or Medicare tax. Common examples include employee contributions to Health Savings Accounts or dependent care assistance, up to IRS-established limits.
It occurs when employers issue payroll outside the regular schedule, such as for correcting missed payments or cashing out unused time off. Managing off-cycle payroll ensures employees are never left waiting for pay they have earned and supports trust in your company’s payroll process.
Overtime is any hours worked by a non-exempt employee over 40 in a work week, which must be paid at a premium rate, typically 1.5 times the regular hourly rate.
PTO is an employee benefit that allows them to take time off with pay. This can include vacation days, sick leave, and personal days. Some companies offer separate buckets for each, while others use a combined PTO policy.
It is the recurring schedule that determines how often employees receive pay checks and how frequently you run payroll. Common pay periods in the US include weekly, biweekly, semi-monthly, and monthly.
These are amounts taken from an employee’s gross pay before taxes are calculated. Common examples include contributions to 401(k) plans and health insurance premiums. These deductions reduce taxable income, which can lower the tax liability for both the employee and the employer.
Employers in the US must report payroll taxes to the IRS each quarter using Form 941. This includes federal income tax withheld, Social Security, and Medicare taxes. Using payroll software makes it easier to automate filings and stay compliant with tax laws.
A rehire describes an employee who returns to work after leaving your company, whether through resignation, layoff, or termination. Rehiring may trigger certain payroll tasks, such as reactivating the employee's profile, verifying tax information, etc.
It is the payment made by an employer to an employee for expenses incurred by the employee while carrying out business-related activities on behalf of the company. These include travel expenses, meal expenses, and others.
A type of retirement savings account where employees contribute after-tax dollars. Unlike traditional 401(k) contributions, Roth withdrawals in retirement are tax-free. Employers offering Roth 401(k) plans must manage separate recordkeeping and ensure proper payroll deductions are set up.
This is the tax that self-employed individuals pay to cover Social Security and Medicare. Unlike regular employees, who split these taxes with their employer, self-employed people pay the full amount themselves.
A payroll tax that employers pay to fund unemployment benefits at the state level. Rates and rules vary by state, so it's important to stay updated and use payroll software with built-in tax compliance.
The process of recording when employees start and end their workday, as well as their break times and time off. Accurate time tracking is essential for calculating hours worked, especially for hourly employees.
Money received by employees from customers for services, such as in restaurants or salons. Employers are required to report tip income and ensure that tipped employees earn at least the federal minimum wage when tips are included.
A period of authorized absence from work during which an employee retains their job but does not receive any salary or wages. Employers are not always legally required to offer it in the US, but doing so can support employee retention and well-being.
Pay that changes based on performance, results, or business outcomes. Examples include commissions, bonuses, and incentive-based pay. Unlike fixed salaries or hourly wages, variable pay can fluctuate and is considered part of taxable income.
A check that has been cancelled so it cannot be cashed. Some employers may ask new hires for a voided check to set up direct deposit. It provides the bank account and routing number needed to transfer pay directly into the employee’s account.
It is an insurance program that covers medical expenses and lost wages if an employee is injured or becomes ill due to work. Most states require employers to carry workers' comp, even if they have only one employee, depending on the job's risk factors.
A tax form that employers must give to each employee at the end of the year. It shows total earnings, taxes withheld, and other payroll details for the year. Payroll software like Zoho Payroll automatically generates and distributes W-2s, making year-end compliance easier for you.
It refers to the period of time from the beginning of the current year up to the present day. It is often used in payroll to calculate an employee's earnings and deductions for the current year.
When deductions (like insurance or garnishments) equal or exceed an employee’s gross pay, leaving nothing to deposit. It’s rare but important to flag and resolve quickly.
