The Employee’s Payroll Terms to Know

Unless you’re in HR, payroll terminology and abbreviations can be intimidating. But when the process is understood by everyone, the shared knowledge it brings elevates an entire organization.

And we’ve created a payroll glossary to help you kick-start this effort! From common terms and lingo to federal laws impacting payroll, give employees this resource to help them better grasp the process affecting them most.

In it, you’ll find these terms and definitions:

401(k) contribution limit is the cumulative cap of funds an employee may elect, often for retirement plans. This limit is determined by the combined total of all plans an employee paid toward and will change from year to year. For example, the 401(k) contribution limit for 2022 is $20,500.

Accrual is the buildup of interest, income or expenses.

Base pay rate is only the wages paid to an employee for their work, which is often broken down as an hourly, monthly or annual salary.

Compensation is the funds paid to a person for their services or to make up for loss or injury; the latter is typically court-ordered.

Deductions are funds subtracted from one’s total earnings to pay for things like taxes, benefits and garnishments.

Exempt and nonexempt employees are defined by their eligibility for overtime, which is determined through the Fair Labor Standards Act (FLSA).

A flexible spending account (FSA) is an allowance employees may voluntarily set aside prior to tax deductions to use for health care and health-related expenses throughout the year. These funds must be available at any time and are often accompanied by an FSA debit card for timely access. Though only a certain amount of funds carry over each year, employees have until mid-March to spend the remaining balance of their FSA from the previous year.

Fringe benefits are extra funds and perks given to employees, usually exclusive to a specific employer and to cover work-related costs for certain employees or drive the satisfaction of an entire workforce.

Garnishments are often court-ordered deductions from an employee’s wage to pay for things like child support, back taxes and defaulted debt.

General ledger is the system used for tracking all of an employer’s transactions. This is comprehensive and may be used to produce a business’s annual financial statements. What a general ledger looks like varies between companies, but it will likely include information related to revenue, assets and expenses.

Gross pay is an employee’s total wages before any deductions are taken.

I-9 — or Form I-9, officially known as the Employment Eligibility Verification — is a federally required document new hires complete to confirm their eligibility to work in the United States.

Income tax is any federal or state-level tax deducted from an employee’s gross pay. This is backed by an annual income tax return, which addresses any under- and overpaid taxes.

Independent contractors are not employed by a company they serve or contract with and usually just work with the company on a specific project.

Net pay, also known as take-home pay, is the wages an employee receives after deductions.

Overtime is a provision outlined in the FLSA that allows nonexempt employees to receive a minimum of 1.5 times their normal hourly wage for every hour worked over 40. Unlike time differentials, overtime is only determined by the amount of time worked, not when.

Paid time off , often abbreviated as PTO, is a business’s policy that awards hours for an employee to use for sick, vacation or otherwise personal days that would keep them from working.

Pay period is the window of time — usually biweekly or monthly — that determines when paychecks go out.

Pay stub is a document accompanying each paycheck that details gross pay and deductions.

Payroll taxes are any deductions withheld from an employer’s pay and paid to a state or the federal government by an employer. Payroll tax forms include:

• Form W-4, which identifies an employee’s taxability based on their marital status, dependents and other factors
• Form W-2, a summary of annual wages and taxes an employer must send to their employees by Jan. 31
• Form 940, which employers use to report their annual tax under the Federal Unemployment Tax Act (FUTA), to help fund state workforce agencies
• Form 941, which reports any federal taxes withheld from an employee’s paycheck and enables an employer to pay their portion of the Social Security or Medicare tax

Shift differentials are extra wages awarded to an employee for working an undesirable shift and are added to their base pay before deductions.

Social Security is often used to provide retirement benefits and disability income; the tax used to fund this federal program is applied to virtually all eligible employees in the United States.

Taxable wage base is the maximum amount of income that is affected by Social Security taxes. While most employers will automatically deduct this amount before dispersing their workforce’s paychecks, employees are ultimately responsible for ensuring the payment of their taxes.

Time sheet is a system or document outlining the hours worked by every employee.

Tip credit is defined under the FLSA as a credit employers may take toward the federal minimum wage requirement for their tipped employees, often in food service or hospitality, equal to the difference between the mandated cash wage ($2.13 as of January 2022) and the federal minimum wage ($7.25 as of January 2022).

Variable pay refers to any program that awards individual employees or entire teams based on performance, which is further defined by variables outlined by an employer.

Withholding is a payroll deduction that is given directly to a federal, state or local authority for the purpose of paying applicable taxes.

To learn more, download the The Employee’s Payroll Terms to Know guide.

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