When you are running your business and focusing on delivering the products and services you set out to deliver, the last thing you need is to deal with all the jargon associated with payroll. Yet having that understanding helps you to know not only what is needed from your employees but also how is the outcome reflected on your business’s financial statements.
If you are looking for a quick reference to the different terms used by most payroll services, read on. We list those terms out for you in simple easy to understandable the terminology.
Salary and Wages:
When processing payroll through a system, you will see the below terms each time you run payroll and create a report:
1. Gross Pay/ Gross Earnings – it is the amount of income your employee has earned before any deductions including commission, bonuses, and other payments.
2. Net Pay – it is the amount of income your employee has earned after deductions and taxes. Technically, this is the amount the employee takes home.
3. Salary – This is the yearly wages for the employee. It is then divided and distributed on a set payment schedule that could be weekly, bi-weekly, or monthly.
4. Hourly wages- the amount of money paid per hour for the employee who is not receiving a set salary.
5. Overtime – If an employee works over 40 hours per week, then any additional hour is considered overtime. The rate used for overtime is normally more than the normal rate.
6. Contract-based work – do not withhold taxes. Each contractor is responsible for his/her own taxes.
7. Bonuses – all bonus money is subject to taxes.
8. Tips – These additional monies received by the employee are taxed and as such should be accounted for as part of payroll.
9. Commissions – commissions are supplemental income and are taxed at the regular rate.
Tax Withholdings:
1. Federal Income Tax Withholding
This is the amount withheld from an employee’s paycheck each month to pay federal income taxes. The rate varies depending on the income level and allowances reflected on the employee’s W4.
2. State Income Tax Withholding
This is the amount of money withheld from an employee’s paycheck each month to pay state income taxes. Just like Federal Income Tax, the rate varies depending on the income level and allowances.
3. Social Security
Social Security tax is a federal income tax taken out of all employees’ wages. There is also an employer share that must be paid as well. Combined with Medicare, both make what is called payroll taxes.
4. Medicare
Medicare is considered the cost by the government for employment. This rate is collected from the employee’s paycheck and sent to the IRS throughout the year.
Deductions:
Deductions are amounts taken from the employee’s paycheck. They can be voluntary deductions such as retirement plan contributions and health care insurance premiums. Or involuntary deductions, such as a child support order or a tax garnishment. The deductions can be either pre-tax or post-tax depending on the deduction.
Benefits:
Some small business owners think they cannot afford benefits. But the truth is, they cannot afford not to. Often, benefits are part of the criteria that an employee decides upon when taking on a job. When it comes to benefits, you need to check your state regulations to know what is legally required. Some of these legally required benefits are:
1. Worker’s compensation
2. Time off to vote or serve in the military
3. State and federal unemployment tax
4. Comply with Family Medical Leave Act
Retirement Plans:
While you are not required to provide a retirement plan, often having one affects employee retention. Retirement plans also have favorable tax consequences. Several options exist as retirement plans. For a small business owner, a Simple IRA or a Simple 401K are easy to implement. Your payroll system can help with employer and employee contributions.
Health Care:
As part of the Affordable Care Act, if you are an employer of 50 or more full-time employees for more than six months out of the year, then you need to provide health insurance to your employees.
Time-off:
Time off takes on several forms. It can be family and medical leave, paid vacation time, or sick leave. When your payroll system includes information about your business’s time off. It can easily calculate adjustments to your employees’ paychecks.
Paid Time-off:
While it is not mandatory that you offer paid time off for your employees, it often reflects positively on the employees’ moral, physical, and mental health. Once you set your policy, that is, how many days can an employee take in a year, what happens to the unused days, are employees paid a regular or amended rate, your payroll system can automate this process for you.
Contact us for a free 30-minutes consultation session to discuss your needs and how can we help address them.
