Blog

Get expert advice on every topic you need as a small business owner, from the ideation stage to your eventual exit. Our articles, quick tips, infographics and how-to guides can offer entrepreneurs the most up-to-date information they need to flourish.

Subscribe to our blog

15 payroll terms small businesses must understand

Posted by Shivali Anand

August 24, 2021    |     5-minute read (849 words)

The responsibility for payroll management starts as soon as you bring on your first employee. Payroll is a critical aspect of every business with employees, regardless of company size. Using your payroll records, you should be able to keep track of all of your employees' earnings as well as any deductions taken and incentives they've received.

Payroll is your method of compensating employees for the job they have performed for your organization or company, but how you manage it is dictated by a network of federal, state and local laws.

And like everything else payroll has its own terminology. If you’re in charge of payroll for a small- or medium-sized firm, these are the standard payroll terms you must know so you don't make any potentially expensive mistakes.

Certified payroll professional: The CPP is a credential given to people who pass the Certified Payroll Professional test.

Employee: An employee is a person who has been formally hired to serve a specific role inside a company. They are paid a wage and may be eligible for benefits, generally if they work at least 40 hours per week. Taxes are usually deducted from their pay.

Employer identification number: The EIN is a business's equivalent of a Social Security number. Employers who apply for an EIN from the IRS are given a nine-digit number that is unique to them. This number aids in the identification of firms when they create bank accounts, submit taxes or apply for business financing. It's a must-have for every company that processes payroll.

Fair Labor Standards Act: The FLSA is federal legislation that includes regulations to ensure that employees are paid and treated fairly by their employers. This legislation covers the federal minimum wage and overtime standards, as well as child labor laws and recordkeeping regulations.

Federal Insurance Contribution Act: FICA is a federal statute that directs payroll tax revenues to Medicare and Social Security. Both employers and employees pay the FICA tax. Employees have FICA taxes deducted from their paychecks, whereas business owners make their own contributions.

401(k): A type of retirement plan offered by an employer. Workers can opt to have money taken from their paychecks both pre-and post-tax to go into such an account. Some companies match employees' savings up to a specific percentage. Employee contributions to 401(k) plans are usually free from federal income tax withholding and, depending on the state, may also be exempt from state income tax withholding. They are not free from withholding under the Federal Insurance Contribution Act, more commonly known by its acronym, FICA.

Garnishments: These are court-ordered deductions that require employers to take a specific amount from an employee's salary and send it to a court or other agency to satisfy an outstanding debt. Garnishments are most commonly used against employees who have not paid child support, school loans or other obligations.

Gross pay/ gross earnings: Gross pay refers to an employee's entire remuneration before taxes and deductions are subtracted.

Independent contractor: An independent contractor is contracted to do specific projects or activities. They aren't not employees who work regularly for the employer and aren't covered by federal labor laws or minimum wage requirements. Employers often do not pay payroll taxes on contractors' earnings and instead give them a 1099-MISC form.

Minimum wage: This comprises the lowest amount per hour that a company can legally pay employees, according to the Department of Labor. In addition to federal minimum wage legislation, certain states and municipalities have their own minimum wage laws. Employers are obligated to pay the larger of the two wages in this situation. The Fair Labor Standards Act contains the federal minimum wage standards.

Net earnings: After all deductions from gross earnings are accounted for, net pay is the remaining portion of an employee's compensation. It's also known as take-home pay.

Pay period: Employees' hours worked are documented, and salaries are paid over a repeating time known as a pay period. The number of paychecks your employees receive each year is determined by the pay period. Pay may be distributed on a monthly, weekly, biweekly or other basis.

Payroll deduction: This is the money withheld from an employee's wages to pay for benefits such as insurance premiums and other expenses such as taxes and child support.

1099-MISC Form:  The 1099-MISC form is a federal tax form used by business owners to record payments made to independent contractors. When paying $10 or more in gross royalties, or $600 or more in rentals or salaries, employers must fill out a Form 1099-MISC.

W-2 form: This is a federal form that details an employee's earnings for the year, as well as any taxes and withholdings. By January 31 of every year, employers must submit a W-2 form with the Social Security Administration and provide a copy to each employee. They don't have to give this form to 1099 contractors, who receive a 1099-MISC report instead.

This list is not a comprehensive guide to all terms you may encounter in payroll management. But understanding these key terms goes a long way to ensuring your business runs effectively.

Learn how we can put more time back in your day.