Payroll can be a difficult task for many small business owners, who will often outsource it to an experienced employee or local firm. There are a lot of terms and laws to follow and to navigate, which can result in huge errors that can be catastrophic. To make understanding payroll terms easier, here are the definitions of 10 payroll terms everyone should know.
1. Exempt versus Non-Exempt Employees
The payroll terms exempt and non-exempt are in reference to two types of classifications for employees that are dependent upon whether employers will pay overtime to these employees. The Fair Labor Standards Act (also known as the FLSA) requires that all employees be paid overtime wages if they work more than 40 hours in a standard work week. However, this law has allowed several categories of employees to be exempt from these requirements due to the nature of their jobs. Professionals, executives, administrative workers, and even some IT jobs are considered to be FLSA exempt if they meet certain criteria. Other workers are considered to be non-exempt from the law unless the employer can show that the worker’s position meets or exceeds the qualifications for exemption.
2. Electronic Federal Tax Payment System
This payroll term is also known as the EFTPS and was created with the goal of automating the otherwise clumsy payroll process of handling tax payments that are physically mailed. With the Electronic Federal Tax Payment System, employers and workers can pay their taxes by phone or internet at no charge. The EFTPS program can significantly reduce costs for both workers and bosses while making it easier for all taxpayers to pay on time, as well as have a secure means of doing so.
3. Contractors
A contractor is also at times called an independent contractor and someone who performs work for a business generally under some form of contract. A contractor is not a full or part time employee. Contractors only work a short time and do not rely on one business for work, as they support themselves with additional work outside of the current business. At the end of the year, businesses often send a Form 1099-MISC to all contractors that were paid during the fiscal year.
Not sure if your current employee is a full/part timer or a contractor? Answer this great New DOL Test to Identify Independent Contractors to find out.
4. Employee Identification Number
Also known as the EIN, it is a tax code for employers and is very similar to a social security number given to individual workers. The EIN is used by both the IRS and by individual state tax systems most often to identify contractors, corporations, and independent employees.
5. Deductions
Employers and small businesses must withhold money from employee wages, and the deduction is the amount of money that is withheld. Payroll laws require all employers to make deductions in wages for taxes, and employers and workers can also enter into an agreement where wages are voluntarily deducted for health insurance, retirement plans, life insurance, and more.
6. Family Medical Leave Act
Also known as the FMLA, it is a federal law that allows employees to take up to twelve weeks of unpaid leave from work. These employees can use the time off to engage in personal or family related medical care when taking care of a child, parent, or spouse. However, the FMLA applies only to employers who have 50 or more employees and often changes from year to year.
7. Backup Withholding
This is a procedure used to ensure that federal income tax is paid on worker earnings even if the worker has not yet been identified with a Social Security Number or EIN. Employers must report non-wage earnings paid on Form 1099 and can withhold up to 28% of the interest, dividends, or fees.
8. Partial Pay
In normal circumstances, employers process payroll at the end of a predetermined pay period. But if a worker is hired, promoted, or fired the payroll may begin or end in the middle of this period. This is when a partial pay system is utilized. Salaried employees receive a partial pay rate calculated by dividing the annual salary by the number of work days in a year.
9. Net versus Gross Wages
Net wages are equal to the amount of money an employee takes home and are an employee’s total wages minus deductions. Gross wages are what an employee earns before taxes, insurance, and all the other items commonly removed in a paycheck.
10. De Minimis
This payroll and occasional legal term is to describe an amount that is of insufficient significance to warrant judicial attention, such as a one time expense calculated in cents. A de minimis fringe benefit is one that is so small it would be too costly to account or record.
Payroll Terms in Houston
And if you are in need of expert payroll services in Houston to help you navigate these and other complex payroll practices, please contact us.