Basic Payroll Terminology

Basic Payroll Terminology Introduction

Recently, I took a job working for ADP in their client services department and underwent a ten week training course in payroll. This was a new avenue of business that I had never been exposed to previously. During my training, I learned the basics of payroll. The following are terminology of payroll and payroll taxes which are helpful when trying to learn a position in payroll.

First let's start with the definition of payroll, which is:

  • Sending paychecks to employees either by live check or direct deposit.
  • Keeping records of employee's pay rate, tax withholding, deductions, paid time off, etc.
  • Also payroll accounts for the total earnings of every employee in a fiscal year.

Gross Pay vs Net Pay

What's the difference?

  • Gross Pay - This amount includes the total of the employee's pay calculated before anything is taken out (such as taxes, deductions etc). How do you calculate gross pay for either salaried or hourly employees?
  1. Hourly - Rate of pay multiplied by hours worked equals total gross pay.
  2. Salary - Set salary amount for employee for that pay period equals total gross pay.
  • Net Pay - This amount includes employee's gross pay, or total amount, minus all tax withholdings and deductions. The net pay equals what the employee is paid on their paycheck or direct deposit.

Basic Payroll Terms

Photo by Stuart Miles
Photo by Stuart Miles | Source

Minimum Wage Requirement

Contact your State Department of Labor or U.S. Department of Labor to learn what the law mandates for a minimum wage in your state. In an instance where your employee is subject to both federal and state minimum wage requirements, you are required to pay the employee the higher rate of the two minimum wage rates.

Time Sheet

Time Sheet - A method should be used to track each employee's time for when they clock in and out of work, for lunch and any personal time off taken during the work day. This is especially important for hourly employees as their hours worked is used to calculate their regular pay as well as any overtime. There are two common methods for collection an employee's time, which include;

  1. Manual Punch cards - this is a card which identifies the employee and is used to manually punch into a machine which places a time stamp on the card. Later, a person in payroll manually enters that time into their system.
  2. Electronic Time tracking - a magnetic card or a thumb stamp can be used to prompt a machine to electronically record the time for the employee. No one has to manually enter these times as they are recorded at the time of the employee's clock punch.

Regardless of which method is used, the purpose is to record the employee's time accurately so that they are paid for the correct number of hours worked.

Regular hours vs. Overtime

What's the difference between regular hours and overtime?

  • Regular rate - This is the employee's regular rate of pay or straight pay. It is their normal rate of pay, for example $12/hour. This amount is multiplied by their first 40 hours worked.
  • Overtime - If the employee works over 40 hours, they are paid overtime for the extra hours. This is their regular rate of pay which is stated as TIME plus half of their regular rate of pay which is stated as AND A HALF. You multiply this amount times the hours worked to receive their overtime rate.

For the above example, if the employee's regular rate is $12/hour their overtime rate is $18/hour ($12 + $6 = $18). You can also calculate the employee's overtime this way: ($12 + ($12X0.5) = $18) or ($12 + ($12/2) = $18).

How do you calculate overtime if the employee worked 42 hours?

40 hours X $12 = $480 regular pay

2 hours X $18 = $36 overtime

Total = ($480 regular + $36 overtime) = $516 GROSS PAY

Overtime Calculation - Basic Payroll Term

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Tax Withholding

Full time employees - For employees that are not considered contract employees, the employer withholds taxes from their paychecks for Federal, State, and Local income taxes. Each employee's tax withholdings is determined differently based on their W-4 that they completed at the time of hire.

  1. Employers should make sure that they are withholding the correct amount of Federal, Medicare, and Social Security for each employee.

Contract employees - are responsible for paying their own income taxes at the end of the year as the employer does not withhold taxes from their pay.

New Hire Forms

Photo by phasinphoto
Photo by phasinphoto | Source

New Hire Forms

There are several forms that need to be completed by the employee at their time of hire. These forms include W4 for Federal income tax withholding, state income tax withholding form, and a form I-9 for employment eligibility.

  • Job Application Form - Information in the job application can be used to enter into your payroll system regarding the employee's name, address, contact information, etc. This information can be verified, such as previous employers and/or education.
  • W4 Federal Income Tax Withholding Form - This form provides information on the employee's marital status, number of dependents, and their elected additional withholding amounts.
  • State Income Tax Withholding Form - You must first register with the state department of revenue agency as an employer in that state. They will inform you on which forms and how much tax to withhold for the employee.
  • Form I-9 - This form is for employment eligibility verification and requires that the new hire provide their proof of eligibility which may consist of their birth certificate, or 'green card'. The employer will verify this information but it does not need to be sent to the state agency.

Other important things to know...

  1. What is e-verify? The employer can use the e-verify system to check their I-9 and compare it with federal databases to make sure that the employee is eligible to work in the US.
  2. State Employment Notification System - Employers must register their employees with the State which allows the state to collect information and payments such as garnishments (ex child support, liens, etc) from these employees.

Pay Period - Pay Date

Photo by Stuart Miles
Photo by Stuart Miles | Source

Pay Period

This is a recurring period of time in which the employees are paid. This can be a weekly, bi-weekly, semi-monthly, or monthly period of time. Knowing the amount of pay period per year is important for each type of pay period for computing total pay for employees for a year.

Weekly - 52 pay periods / year.

Bi-weekly - 26 pay periods / year.

Semi-monthly - 24 pay periods / year.

Monthly - 12 pay periods / year.

Quarter & Year End Payroll Requirements

The following forms can be used to file employer taxes with the IRS or your state agency.

  • Form 941 (Quarterly) - This IRS form summarizes wages paid and is used by employers whether they are tax exempt or not. Every quarter the employer will report the amount of federal payroll taxes withheld, social security taxes, medicare taxes, and any other related payments and/or withholdings.
  • Form 940 (Annual) - This IRS form is utilized by employers to report wages paid and Federal Unemployment Taxes that were accrued on those wages subject to FUTA for the entire year.
  • State Unemployment Taxes - Most employers pay both Federal and State unemployment taxes.
  • W2 Form - Furnish W2's to your employees prior to the deadline. You'll need to file W2 forms with the Social Security Administration by either E-filing and/or filing the actual forms.

Everything You Need to Know About Payroll

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