Payroll Terms and Definitions

American Payroll Association (APA)
Nation’s leader in payroll education, training, and publications
ACH (Automated Clearing House)
A funds transfer system that provides for the interbank clearing of electronic entries for participating financial institutions.
The recognition of assets, expenses, liabilities or revenues after the cash value has been determined, but before it is transferred.
After-Tax Deduction
Deduction from an employee’s pay that does not reduce the employee’s taxable wages; it is taken out only after all applicable taxes and other deductions have been withheld. Examples are union dues, garnishments, and charitable contributions.
Unpaid child support payments and related assessments for past periods owed by a parent who is obligated to pay
Backup Withholding
Usually Federal Income Tax (FIT) withheld from interest payments to customer bank accounts with no Social Security Number on file. Financial institutions are required to deposit/report this withholding with their federal payroll taxes on the 945 Form. Banks, savings and loans and similar types of institutions are required by law to withhold 31of taxable interest or dividends paid on accounts that have failed to furnish correct taxpayer ID numbers (social security numbers).
Circular E (Publication 15)
An employer’s tax guide, which explains:
• Tax responsibilities as an employer
• Requirements for withholding, depositing, reporting, and paying employment taxes
• Forms an employer must give to their employees
• Forms an employee must give to their employer
• Forms an employer must send to the IRS and SSA
• Tax tables an employer uses to figure the taxes to withhold from each employee
City or Local Income Tax (CIT)
A withholding tax deducted from an employee’s wages as required by a city or local jurisdiction. The amount of withholding varies with the amount of earnings, frequency of pay, number of claimed exemptions, and marital status.
A negative amount applied against accumulated values; usually refers to a credit to the client against impounded taxes or refund due from a taxing agency for overpayment of taxes.
Doing Business As
A charge that usually refers to the charging of taxes, DDF, or employer payroll impound.
Deferred Compensation Plans
The IRS allows employees to invest in qualified tax-deferred savings plans, the most common is the 401(k) plan.
Direct Deposit
An employee’s paycheck is directly deposited to his or her bank account instead of being given to the employee. The employee will then receive a bank voucher instead of a check.
Earned Income Credit (EIC)
An income tax credit for eligible employees.
EFT (Electronic Funds Transfer)
Any system used to transfer payments or funds electronically. EFT refers to any transfer of funds, other than a transaction originated by check, draft, or similar paper instrument, that is initiated through an electronic terminal, telecommunications instrument, computer, or magnetic tape, to order, instruct, or authorize a financial institution to debit or credit an account.
Exempt Employees
Salary employees, who are exempt from the minimum wage and overtime provision of FLSA.
Experience Rate
The rate assigned to an employer based on the number of unemployment claims charged against their company in a given year. This rate percentage is multiplied times the employee’s taxable wages up to their state’s maximum wage limit to determine the amount of SUI or State Unemployment Insurance that a company must pay.
Fair Labor Standards Act (FLSA) of 1938
Establishes minimum wage, overtime pay, recordkeeping, and youth employment standards affecting full-time and part-time workers in the private sector and in federal, state, and local governments:
• Employers must always conform to the law that is more favorable to the employee
• Overtime must be paid for hours worked in excess of 40 per week
• Federal wage garnishment laws set limits on the amount of wages that can be garnished and make it
illegal for an employer to discharge an employee for a single indebtedness
Family Medical Leave Act (FMLA)
Refers to both Federal and State laws governing the rights of persons seeking time off from work for certain medical and family situations. This law guarantees 12 weeks of unpaid leave to most employees to care for newborn or newly adopted children or to deal with a serious injury or illness suffered by an employee or an ailing child, spouse, or parent of the employee.
Federal Income Tax (FIT)
A withholding tax levied against employees. The amount of withholding varies with the amount of earnings, frequency of pay, number of claimed exemptions, and marital status.
Federal Insurance Contribution Act (FICA)
A tax consisting of Social Security and Medicare taxes levied against employers and employees. Employers must match employee Social Security and Medicare tax contributions, using the same rate and taxable wage amounts.
Federal Unemployment Tax Act (FUTA)
Federal law first enacted in 1939 that sets guidelines for the administration of unemployment compensation programs. All liable employers pay a federal tax to fund administration of State and Federal unemployment insurance programs. These monies are also used to fund extended benefits. States must adhere to the minimum FUTA guidelines in terms of taxation and benefit administration, but may set higher standards.
Fixed Deductions
These deductions are the same amount payroll to payroll (e.g., $10.00/payroll for medical insurance)
The length of time between when funds are collected and invested by ADP, and when they are disbursed for payment.
Form 1099
An annual statement showing non-wage compensation that must be reported to the federal government on an individual’s personal tax return. It can be issued to employees or non-employees of a company.
Form 940
Employer’s Annual Federal Unemployment (FUTA) Tax Return. Filed annually, it reconciles the employer’s payment of FUTA taxes during the year, showing the calculation of the full unemployment tax liability and the credit for unemployment taxes paid to the individual states.
Form 941
Employer’s Quarterly Federal Tax Return. A federal return that displays taxable wages and taxes and shows all FIT, Social Security, and Medicare liabilities incurred during a specific quarter.
Form W-4
Income Tax Withholding; the purpose is to indicate to an employer the tax status of an employee.
FSDD (Full Service Direct Deposit)
A banking service similar to ADPCheck. It pays employees through direct deposit using partner banks, whereas ADPCheck uses checks written on an ADP bank account.
A legal proceeding requiring that a portion of a person’s wages or other assets be withheld and applied to the payment of a debt.
Gross Earnings
Aka gross pay or gross wages. This is the total amount of money earned before taxes and deductions.
Group Term Life
Under IRS regulations, employer-provided group term life insurance premiums for coverage in excess of $50,000, is considered taxable income and is subject to Federal Income Tax (FIT), social security, and Medicare taxes.
Immigration and Naturalization Employment Eligibility verification form for the Immigration and Naturalization Service (INS), the Federal agency charged with enforcement of United States Immigration laws.
Immigration Reform and Control Act (IRCA)
Law enacted in 1986 that prohibits employers from hiring persons who are not authorized to work in the US and from discriminating based on national origin or citizenship.
Imputed Income
The fair market value amount of a taxable fringe benefit added to an employee’s earnings.
Internal Revenue Service (
Local Tax Rate
Percentage of withholding for a locality. Also referred to as Local Withholding Rate.
Leasing Companies
Hire and train employees requested by a specific company for a specific position, usually long-term. The workers are employees of the leasing company. Businesses pay leasing companies for the service of their employees.
Minimum Wage
The Fair Labor Standards Act (FLSA) establishes a minimum wage based on a hourly rate.
NACHA (National Automated Clearing House (ACH) Association)
The national association that establishes the standards, rules and procedures that enable depository financial institutions to exchange payments on a national basis.
New Hire Reporting Compliance
States must report employee information for all new hires, rehires, returns from leave of absence, or employees with certain jurisdictional changes. The objective is to strengthen the enforcement of court-ordered child support and fraudulent welfare and discourage unemployment insurance claims.
Net Pay
The portion of an employee’s wages that remain after all deductions have been subtracted (taxes, health insurance, benefits, etc.). Also known as take home pay.
Non-exempt Employee
Employees who are covered by the minimum wage and overtime provisions of the Fair Labor Standards Act. They may be paid on an hourly or salary basis.
Non-exempt Position
A position that requires the payment of overtime wages at the rate of 1 and 1/2 times the normal hourly rate for all hours worked over 40 per work week in compliance with the Fair Labor Standards Act. The following categories of positions are nonexempt: technical/paraprofessional, skilled trades, service/maintenance, and secretarial/clerical.
FLSA requires overtime pay for any hours in excess of 40 worked in a workweek. Each workweek stands alone for overtime purposes.
Post-Tax Deductions
These deductions are taken from earnings after disposable pay is calculated.
A mutual agreement between states to determine the taxability of those employees living out of
state. These agreements also exist on the local tax level.
State Income Tax (SIT)
A withholding tax deducted from an employee’s wages as required by a state. The amount of withholding varies with the amount of taxable earnings, frequency of pay, number of claimed exemptions, and (for some states) marital status.
State Unemployment Insurance (SUI)
A quarterly tax paid to a state unemployment agency. An experience rate assigned to the employer and a taxable wage limit established by the agency determine the amount of the tax due. This tax can be paid by the employee (-EE), paid by the employer (-ER), or both, depending on the state’s rules.
Statutory Deductions
These deductions are mandatory and required by law (e.g., federal income tax, social security, Medicare, etc.).
An earning or other form of compensation subject to specific tax obligations. Also called taxable wages.
Temporary Agencies
Hire and train a number of people for various positions and short-term assignments. Businesses pay the agencies for the services of their employees.
UCM (Unemployment Compensation Management)
ADP service that assists employers in responding to employment benefit claims and controlling agency-assigned SUI experience rates. This service, as well as Tax Service, need unemployment agency notices and forms; therefore, conflicts can occur when one service overrides the POA or Addressee of Record of the other with the agency. Tax & Financial Services headers provide a payroll region UCM code which needs to be input to prevent conflicts. This service is the unemployment compensation service (UCS) offered to National Accounts (over 1,000 employees).
Variable Deductions
These deductions are not necessarily the same amount from payroll to payroll (e.g., percentage of earnings for 401k, per hour worked for union dues, etc.)
Voluntary Deductions
These deductions are employee-authorized deductions (e.g., health insurance, loans, 401k, etc.).
Individual annual wage and tax statement that employees need to file with their personal returns. It is filed with the federal and applicable state/local agencies.
Transmittal of Income and Tax Statements. The form is used as a “cover letter” for the W-2s and summarizes total wages and taxes withheld for the year. It is due to the Social Security Administration by February 28 of each year.
Employee earnings. In addition, an employee may receive other compensation, tips, taxable fringe benefits, etc., that are subject to some EE and ER taxes. However, the employee may elect to have a portion of his/her wages deducted for retirement/investment plans. That portion may be exempt from some EE and ER taxes.
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