Congratulations! If you are a startup adding your first employee, this is more than just an exciting time. You are adding employees to meet the growing demand for your products or services. However, wrapping your head around all of the payroll and IRS terminology can be somewhat confusing, to say the least. So here are the most common payroll terms you need to know.
Super Common Payroll Terms You Need to Know
Don’t let all of the terms, forms, and acronyms get your down! We have pulled together a list of super common payroll terms you will see everywhere. Whether you are searching for worker classification, payment methods, or tax information here is the vocabulary you are bound to encounter over and over again.
Many of the terms we associate with classifications have an opposite meaning. While some of these terms seem rather complicated, these comparisons that will make understanding your payroll simpler.
Contractors Vs. Employees
Understanding the classification of your workers is one of the most vital things you can do when taking on a new hire. Typically an employee receives training for their positions and is managed by you or a supervisor. A contractor usually works for multiple companies and has total control over when and where their work is completed. Payments are also a flat fee or rate that is given once the task is completed.
So why is knowing the distinction important? As an employer, you have very different responsibilities depending on the type of worker your business employs. Everything from labor laws to health benefits will depend on this classification. Most importantly you will need to withhold and pay tax for your employees but not for any contractors you employ.
Hourly Vs. Salary
When you are an hourly employee, you are paid a specific rate for every hour you work. Furthermore, you don’t have a contract and are only paid for the hours you worked. Also, you the employer will determine the hours worked each week.
Therefore salaried employees receive a set sum of money based on the yearly amount they are offered. Salary is divided between the pay period determined by business for the year based on a 2080-hour year. Most salaried employees are offered a contract when accepting the position. These employees are also not required to sign into work or account for their time.
Exempt vs. Nonexempt
This one seems to trip up most employers. So under the Fair Labor Standard Act (FLSA), there are two separate types of employees: exempt and nonexempt.
Exempt employees are therefore excused or exempt from protections enforced in the FLSA. These are salary employees and you are not obligated to pay overtime and in some cases not eligible for minimum wage. Nonexempt employees are those employees who are subject to the rules of FLSA.
Common Payroll Terms
The pay period is the amount of time your paycheck covers. These pay periods come in several different increments depending on cash flow, employee preference, and state requirements. Typically pay periods are as follows: Weekly, bi-weekly, semi-monthly, or monthly. So this increment of time can vary based on your trade or business.
An off-cycle payroll is a payment to an employee outside of the normal payment schedule. Bonuses and contractor invoices are examples of off-cycle payroll payments.
Pay Stub Terms
The salary or wages you earn before taxes and deductions are withheld.
Pre-Tax Deductions/ Contributions:
Tax-free deductions are removed before taxes are calculated. For example, health benefits, dependent care assistance, and 401(K) contributions are removed before taxes are withheld.
These deductions are removed after employee taxes are withheld from each paycheck. For example, charitable donations, Roth 401(k), and other voluntary contributions are removed after taxes are withheld from your employee’s paycheck.
Net pay is the amount your employees take home after all taxes and education are withheld.
Payroll Tax Terms
If you don’t know what FICA is, you apparently didn’t react the way I did when I got my first paycheck….“Who is FICA and why is he getting all my money?”… FICA or the Federal Insurance Contributions Act is the employers and employees portion of Social Security and Medicare. As the employer, you are responsible for withholding this amount from each employees paycheck at the end of the pay period.
The state and federal taxes withheld from employee wages.
The ACA (Affordable Care Act or Obamacare):
If you have yet to hear about the ACA you have been living under a rock for the past ten years. The federal government requires all companies with 50 or more employees to provide health insurance plans to those working 30 or more hours.
Business Tax Extension (IRS Form 7004):
If you are unable to file by the March 15th deadline, you will need to file a six-month extension. This extension does extend the time to file forms with the federal government but does not extend the tax payment due. If you need to file any of the following forms, but will not complete them before the deadline you will need to apply for a business extension IRS Form 7004:
Level Complete: Payroll Upgrade
Got the basics down pat? Well, we sure think you do! You are one step closer to getting your first payroll in order.
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