Payroll Meanings: Employee Taxes Glossary of Terms

If you are unfamiliar with some payroll meanings you will likely encounter when selecting a service, use this glossary to help you sort through the various payroll processing services terms. These terms relate to Retirement Plans, which may be able to be administered by your service if you choose.

If you are just starting the process of deciding whether to do your business payroll online or to do your payroll in-house, read ths article.

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accumulated liability: The total amount of undeposited taxes. Most payroll processing services providers refer to this as the "float".

ACH (Automated Clearing House): A computerized facility that serves as the central agency for the processing and transferring of funds from one financial institution to another using electronic data instead of paper items. The ACH processing and delivery facility provides for the distribution and settlement of electronic financial transactions. ACH provides for the clearing of debits and credits electronically. All payroll processing services are capable of this function.

additional fed dates: Due to the volume of federal payments requested through prior quarter adjustments (PQAs), additional federal due dates are scheduled each quarter to accommodate these requests. Although these payments may still be considered late, this allows payments to be entered directly into the collection and payment form by your payroll processing services provider.

amended return: A corrected version of a previously filed return. Amended returns must be filed by you or by your payroll processing services provider when there are corrections to a previous quarter’s wages, or employees’ names or other information needs to be added/changed.

annual reconciliation: A state return filed annually to reconcile liabilities and deposits for a calendar year. It is not required by all tax agencies. Your payroll processing services provider can provide this function.

backdate: When your payroll processing services provider processes payroll with a check date that falls on or before today’s date.

backup withholding: A method used to ensure the payment of income tax when the payee fails to provide a taxpayer identification number (TIN) or when the IRS notifies the payer that the payee's TIN is incorrect. Backup withholding applies to interest, dividends, and other non-wage payments and is withheld at 31 percent.

balance: To verify as part of the client load process that employee totals equal client control totals and liabilities, as well as previous quarter tax returns.

check date: Each check generated by your payroll processing services provider has a date printed on it. It is that date that validates the check for cashing and thereby makes the client liable for the taxes. Within a single payroll run for a client, there may be only one check date.

check register: Payroll meanings - An itemized listing of all net pay amounts for any given payroll. The report may be generated after each payroll run or on a one-time basis by your payroll- processing services provider. This is a standard report for most payroll processing services providers.

Circular E: Employer's Tax Guide published by the Internal Revenue Service. This guide tells how to withhold, deposit, report, and pay federal income, social security (FICA), and federal unemployment (FUTA) taxes.

common paymaster: A member of a group of corporations that pays remuneration to an employee of related corporations.

compensation not subject to withholding: Payroll meanings - Wages that are reported as taxable on tax returns.

constant: A fixed value that may change at some time, but not on a steady or regular basis.

Constructive Receipt of Income: Implies free and "easy" access to compensation, earnings, or income.

controlled ownership: When one or more companies are owned by the same owners or stockholders and the amount of ownership is at least 80 percent.

correction notice: A notice produced for a previous liability period in the current quarter that is before the present liability period. Make sure that your payroll processing services provider is not the address of record--make sure you are, so these come to you directly.

cost of living adjustment (COLA): Some defined benefit plans contain a COLA provision, which means that the benefits are adjusted periodically to keep pace with changes in the cost of living.

covered employees: Workers whose services or wages are subject to payroll law. Employees covered under one payroll law are not necessarily covered under others. Your payroll processing services provider can determine who is covered under the various laws

credit cycle: The period of time defined by the credit frequency.

credit entry: The addition of funds to a bank account.

credit frequency: The credit frequency is how often earned benefits are made available to the employee.

crediting: Crediting is the process by which earned benefits are made available for an employee’s use.

current quarter: The quarter in which the client is processing quarter-end.

data record: A group of fields organized in a specific manner.

debit entry: The subtraction of funds from a bank account.

deductible: A cost-sharing arrangement typical to traditional health insurance. The patient pays a fixed amount each year before benefits are payable by the insurance company.

default: A value that the software automatically selects if the user does not specify a substitute.

deferred payment: Income that an individual has chosen to receive at a later date.

deposit date: The actual date the client made the deposit payment. When deposits are calculated and printed on your payroll processing services system, the deposit date is often the same as the due date.

determination period: A calendar year used by your payroll processing services provider to calculate the threshold amount to determine if and when taxpayers are required to use EFTPS.

direct deposit (DD): The electronic deposit of payroll using the Automated Clearing House (ACH) System. Each pay period, the net direct deposit payroll is transferred from the client’s bank account directly into the employees' accounts by your payroll processing services provider. Most payroll processing services provider can provide your employees with the ability to direct-deposit to multiple accounts.

Discharge of Debtor: This is sent to all creditors that have filed a Proof-Of-Claim with the bankruptcy courts. It is the final result in the proceeding, and it absolves the debtor of any responsibility of the debts incurred up to the date the petition was filed in the courts.

Dismissal of Debtor: This form is sent to all creditors who have filed a Proof-of-Claim with the bankruptcy courts. This form indicates that the bankruptcy proceedings have ceased, and that all pre-petition debts are no longer protected by the bankruptcy courts.

document management system (DMS): A document management system is a combination of hardware and software that allows designers to store, manage, track, and modify Web pages and other files. A DMS deals with documents as a whole.

DOL: Department of Labor

due date: Refers to the date by which payroll taxes must be paid to the appropriate governing agency.Your payroll processing services provider keeps track of these dates and pays them automatically for you.

Earned Income Credit (EIC): A tax credit allowed a taxpayer whose earned income is less than a specified amount and who meets certain other IRS qualifications.

earning increment: The employment unit upon which benefit time is earned.

earning rate: The specific earning increment associated with a benefit level. Employees whose length of service is less than or equal to the number of months in one benefit level, but greater than the months in the previous level, will earn benefits according to the entered earning rate.

earnings distribution: A program that charges an employee's hours and earnings to the different departments in which they worked during the payroll period.

earnings statement: Every paycheck issued by your payroll processing services provider carries a check stub or earnings statement. Each earnings statement contains valuable information for an employee: exemptions, marital status, social security number, itemized earnings, taxes, and adjustments for that pay period and year-to-date adjustments.

Electronic Data Interchange (EDI):A standard set of transaction sets that are used to facilitate electronic commerce transactions between trading partners.

Electronic Federal Tax Number (EFT Number): The Electronic Federal Tax number assigned to the tax depositor after being accepted and processed by the EFT system. The EFT number provides proof of tax deposit initiation.

Electronic Federal Tax Payment System (EFTPS):The electronic remittance processing system that the federal government will use to process all electronically-transmitted tax payments. Payments to be transmitted electronically include employment and other federal depository taxes.

electronic funds transfer (EFT): The movement of funds from one bank account to another by means of electronically-communicated payment instructions, called a payment order.

Electronic Invoice Payment (EIP): A payment method that allows clients to pay their invoices through Electronic Funds Transfer (EFT).

Electronic Tax Application: The Federal Reserve Bank information system that receives and processes same-day tax deposits and reports tax deposit detail information to the IRS. THE ETA systems also stores taxpayer and tax deposit information and sends summary information to Treasury Tax and Loan, the New York Money Desk, the Federal Reserve Board of Governors, and the Treasury.

Employee Tax Withholding Information Report An optional report that your payroll processing services provider can give you which provides the client with pertinent employee tax information for federal, state, and local taxes as coded in the Employee Maintenance.

Employees Retirement Income Security Act of 1974 (ERISA): The law designed to protect the rights of participants and their beneficiaries in employee benefit plans. Established in 1974.

Employer Identification Number (EIN) The identifying number assigned to each employer upon their registration with the Internal Revenue Service. This number is also called the Federal Identification Number (FEIN).

Employment Training Tax (ETT): A California employer tax.

excess: Term used to describe wages over and above (in excess of) the taxable wage base.

exclusion ratio: Rate that represents the employee's contributions or investment as a fraction of the expected return. Benefits that result from an employee's contributions are not taxable.

exempt compensation: Term used to describe compensation amounts not considered taxable or not subject to withholding for a particular tax.

exempt employees: Workers who perform services and receive wages not subject to a payroll law. Employees who are exempt under one payroll law are not necessarily exempt under other payroll laws.

exempt employers (SUI): Employers specifically excluded from unemployment insurance coverage.

exemption: A deduction allowed a taxpayer because of the taxpayer's status or circumstances rather than specific economic costs or expenses during a taxable year. Exemptions reduce the amount of income upon which one is taxed.

experience rating: The process each state unemployment agency uses in determining every employer's annual tax rate. This is a percentage based on previous contributions made by the employer and benefits paid to eligible claimants.

Fair Labor Standards Act (FLSA): This 1932 act, commonly called the Federal Wage and Hour Law, contains provisions and standards concerning minimum wages, equal pay for equal work regardless of sex, overtime pay, record keeping, and child labor

Federal Employer Identification Number (FEIN): The identifying number assigned to each employer upon registration with the Internal Revenue Service. It is commonly referred to as federal ID number or Employer Identification Number (EIN).

Federal Identification Number: The identifying number assigned to each employer upon registration with the Internal Revenue Service. It is commonly referred to as federal ID number or Employer Identification Number (EIN).

Federal Insurance Contribution Act (FICA): This act imposed a tax on employees and employers as part of the Social Security program.

Federal Reserve Bank The central bank of the United States that controls monetary policy and operates check clearing centers for its member banks.

Federal Tax Deposit Coupon (Form 8109): Payroll meanings - A reprinted payment coupon issued by the federal government that must accompany any federal tax deposit except those paid through EFTPS.

Federal Tax Liability: Payroll meanings - The amount of federal taxes an employer must pay based upon the day wages are paid. Federal tax liability includes federal withholding, employee FICA, and employer FICA. (Federal withholding + employee FICA + employer FICA – earned income credit, or EIC )

Federal Unemployment Tax Act (FUTA): An employer tax to finance a federal unemployment program. FUTA established a joint federal-state program. Although a federal tax is collected from employers, benefits are not paid from the federal fund. Unemployment benefits are paid from the state fund. If the state fund is depleted, the state may borrow from the federal government. The federal fund is used to pay administrative expenses incurred by the states.

Federal Withholding Tax: Payroll meanings - All employees who earn more than a minimum figure set by the government have federal income tax withheld from their wages. The amount of the withholding is dependent upon total taxable wages, frequency of pay, marital status, and the number of allowances. Your payroll processing services provider will sweep the tax every pay period and deposit it with the government as part of the employer federal tax deposit.

FICA taxable: Term used to identify the part of total compensation paid to employees that is taxable for FICA (social security and Medicare).

forfeitable: Circumstance under which employees have no guarantee they will get a return on their employer's investment.

frequency: Payroll meanings - Refers to the regularity of pay for use by your payroll processing services provider in determining the amount of payroll taxes to be withheld. Possible frequencies are weekly, biweekly, semimonthly, monthly, quarterly, semiannually, and annually.

garnishee: Employer (business or individual) who is required to withhold a portion of an employee's (debtor's) earnings to remit payment to a creditor on a legal claim.

garnishment A legal procedure authorizing a deduction from an employee's earnings to satisfy a debt. Your payroll processing services provider can automatically deduct this amount.

garnishment administrative fee: A fee that an employer charges an employee to administer a garnishment payment.

garnishment agency: An entity that accepts payments on behalf of a creditor. An agency may be defined at the federal or state level, or it may be a private collection group or an individual.

garnishment amount: Payroll meanings - The amount that is withheld from an employee's wages to satisfy a garnishment.

gross receipts of sales: The income a business receives from sales of its products or services.

highly compensated employee(HCE) Section 125 - Employees identified as either 5 percent owner, officers earning more than $xxx,xxx (this number changes annually), employees earning more than $66,000 and are in the top 20 percent paid, and employees earning more than $99,000.

hours worked: The hours an employee physically worked. Paid holiday, sick, or vacation hours are not "hours worked".

HR: Human Resources provides information on company policies, employment opportunities, benefit programs, corporate compensation, and more.

independent contractor: A classification of workers hired to do specific jobs over which the person hiring has no right to control the manner in which the work is done. The workers generally have a distinct trade or business offered to the public and are often paid a lump-sum amount for the completed job. An independent contractor is not considered an "employee."

Internal Revenue Code (IRC): Payroll meanings - Body of law that is the foundation of all federal payroll tax and retirement laws.

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.

split-shifts: A work period divided into two parts. The spread of hours between shifts is normally longer than that of a rest period.

SS-4: This is an Internal Revenue Service (IRS) form, "Application for Employer Identification Number" used to apply for an employer identification number, or EIN.

SSA (Social Security Administration) The Social Security Administration is responsible for advancing the economic security Americans through compassionate and vigilant leadership in shaping and managing social security programs.

state unemployment insurance (SUI): Payroll meanings - An unemployment fund in each state that was initiated to provide temporary relief for the unemployed. Payments are made to the fund by employers on a quarterly basis. Your payroll processing services provider will initiate this payment for you. The amount of payment depends on wages paid to the employees and the employer's experience rate, which is set by the state. Recently, some states have also begun to tax the employees for unemployment insurance.

state unemployment number: The identifying number (often referred to as registration number) assigned to each employer by its state unemployment agency.

state withholding (SWH): Portion of an employees wages retained by the employer for the purpose of paying various taxes, insurance plans, pension plans, union dues, and other deductions. Your payroll processing services provider will provide this function.

statutory deduction A withholding tax mandated by the various levels of government. For example, federal income tax is a statutory deduction.

stock bonus plan: A retirement plan in which contributions may or may not be dependent on the employer's profits, and benefits are usually in the form of the employer's stock.

Sub chapter S Corporation: A company whose shareholders will report the corporation's taxable income (loss) on their own tax returns in a manner similar to a partnership.

sub date: A date indicating when the client has been sent to prenote or canceled from a particular tax agency. There are applied sub dates and cancel sub dates for each tax agency for each client.

subject to withholding: Payroll meanings - "Subject to withholding" is synonymous with "it is taxable."

SUI Return Payroll meanings - Quarterly tax return reporting state unemployment insurance information by client to designated state tax agencies.

supplemental wages: Compensation received other than regular pay such as bonuses, commissions, and overtime pay.

surcharge A state-mandated SUI charge in addition to the standard employer rate.

SVP State Verification Process.

Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA): A program designed to produce additional revenue through various reform measures. One important reform was to the reporting of tips by employers of large food and beverage establishments.

tax exempt organization: A non-profit organization that meets the requirements of the Internal Revenue Code §501 to be considered exempt from taxation.

tax exempt trust: A trust that meets the conditions of the Internal Revenue Code §401(a).

tax sheltered annuity (TSA) Annuity of a tax-exempt organization. The annuity must meet certain requirements of the Internal Revenue Code §403.

taxable compensation: Payroll meanings - Compensation reported as taxable on tax returns. It is the amount on which tax is calculated.

taxable wage base: Term used to identify the maximum amount of wages paid to employees that is taxable. There are taxable wage bases for FICA, SUI, FUTA, and some local and disability taxes. They are subject to revision periodically.

tax-sheltered: Retirement plan income on which taxes are not paid until a later date.

terminate: To end employment. The system removes the employee's name from Pay Entry but continues to retain all data for tax purposes until year-end cleanup.

terminated employer: Employer who ceases to pay wages and is no longer required to file a Form 941.

third-party sick pay (TPSP or 3PSP): Payroll meanings - Sick or accident benefits paid by a third party, usually an insurance company, that are taxable for FICA in the same ratio as the employer's contributions to the insurance premiums. The portion of any benefit attributable to an employee's contribution towards the premium is exempt.

threshold amount: Payroll meanings - The amount of federal taxes paid during the determination period. Your payroll processing services provider will use this to determine if a taxpayer is mandated for EFTPS or not. The tax types used in calculating an employer’s threshold amount are Forms 941, 943, 945, and CT-1.

TIN (Taxpayer Identification Number): Payroll meanings - A TIN is an identification number used by the Internal Revenue Service (IRS) in the administration of tax laws. It is issued either by the Social Security Administration (SSA) or by the IRS. A social security number (SSN) is issued by the SSA whereas all other TINs are issued by the IRS.

Treasury Financial Agent (TFA): The two government-authorized financial agents assigned to receive and process all EFTPS tax payments.

true gross: Payroll meanings - A payroll accounting term for all earnings minus reimbursements

Treasury Tax and Loan (TT&L) account: The federal bank account maintained at commercial banks into which all tax payments are made.

UME: Unreimbursed medical expenses

Uniform Commercial Code: A law adopted by almost all states that governs commercial transactions (such as Sales of Goods, Commercial Goods, Bank Deposits & Security Transactions).

variance: Payroll meanings - The difference between the control totals provided by the client and the accumulation totals calculated by the computer.

vest/vestature: Payroll meanings - The process by which an employee obtains a non-forfeitable right to the employer's contributions paid to a plan. This right is generally granted over a period of time.

VIS: Payroll meanings - Vision policy.

void: Payroll meanings - A type of voucher that reduces wages and liabilities.

void and reissue: The process of voiding an incorrect check and reissuing a new check to reflect the correct amount. Your payroll processing services provider can provide this process.

voluntary deductions: Payroll meanings - Amounts an employee chooses to have withheld from his pay, such as health insurance premiums and 401(k) contributions. Your payroll processing services provider will keep track of these amounts.

voluntary participants:Taxpayers whose deposits made during the determination period fall below the threshold amount may choose to deposit electronically. They can use Form 8109 in the event they are unable to make an electronic payment until they become mandated.

voucher:A voucher is normally used to either make a correction in the payroll system (for example, void an entry) or enter a manual check that the client has issued.

withholding allowances: Payroll meanings - Exemptions are allowable on the federal income tax return for self, spouse, age, blindness, and dependents.

W-2 Wage and Tax Statement: Payroll meanings - All employers must provide all their employees with a statement of wages paid and taxes withheld for the previous calendar year on or before January 31. This statement is used by the employees when filing their annual tax return. Your payroll processing services provider will provide this, possibly with an additional fee.

W-3 Transmittal of Income and Tax Statements: Payroll meanings - All employers are required to file this transmittal form accompanied with Copy A of their employees' issued Form W-2s. The transmittal reflects payroll totals for the year and must be filed for the previous calendar year with the Social Security Administration on or before the last day of February. Your payroll processing services provider can do this for you.

Employee Withholding Allowance Certificate: This certificate is completed by each employee for the purpose of establishing his/her withholding allowances for federal income tax. The W-4 remains in effect until a new one is filed with the employer.

W-5 Earned Income Credit Advance Payment Certificate: This certificate, filed annually before January 1 with the employer, makes an individual eligible to receive earned income credit through their employer. To file this certificate, the individual must first conform to certain requirements set by the IRS.

Workers’ Compensation Classification Code: Payroll meanings - A number assigned to each type of job duty. This code is regulated by each state.

Workers’ Compensation Classification Rate: Payroll meanings - Workers’ Compensation classes each have a rate associated to them. This rate is regulated by each state.

Workers’ Compensation Experience Modification Rate Calculation that measures a particular business with other similar businesses. The lower the modification rate, the lower the Workers’ Compensation premiums.

Workers’ Compensation Insurance: Mandatory insurance carried by the employer to cover on-the-job injuries or illnesses to employees.

wrap-around: Payroll meanings - Circumstances under which the premium from an annuity is invested in a mutual fund.

zero return: Payroll meanings - There are two different types of zero returns. The first kind has wages to report, but no money due. The second kind has no wages to report and no money due. Zero return filing requirements vary from agency to agency. The packing instructions will state if zero returns are required to be filed for that agency.

zero SUI rate: Payroll meanings - A state-assigned employer zero contribution rate. Employers may receive a zero SUI rate due to excellent history with timely SUI contributions, no unemployment claims, or because of a surplus in the employer's unemployment fund.

zero wages: Payroll meanings - Term used to describe a new load with no employee year-to-date wages.

› Payroll Meanings : Employee Taxes Glossary






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