Complete glossary of 46 payroll terms for HR professionals

Basic payroll terms

These foundational terms cover key payroll concepts, payment practices, and regulatory frameworks that every payroll professional should know.

• Accrual: Accumulated salaries and wages that employees have earned but haven’t yet received.
  ‍
• ‍Compensable time: The time hourly employees are paid for, including hours worked, public holidays, and approved paid absences within a pay period.
  ‍‍
• Compensation: Total monetary and non-monetary rewards an employee earns, including hourly wages, salary, overtime pay, bonuses, commissions, fringe benefits, and stock options.
  ‍
• ‍EFTPS (Electronic Federal Tax Payment System): Online system provided by the US Department of the Treasury that allows businesses and individuals to pay federal taxes electronically. Employers often use EFTPS for submitting payroll taxes, ensuring secure and timely payments.
  ‍‍
• Employee benefits: Also called “fringe benefits,” these are non-salary perks that employers offer. Examples include insurance, wellness offerings, flexible work arrangements, home office stipends, and training resources.
  ‍‍
• Minimum wage: The minimum hourly rate that employees can earn, as defined by federal, state, or local laws. In the United States, the federal minimum wage is currently US$7.25 an hour for covered nonexempt employees under the Fair Labor Standards Act (FLSA). However, many states and localities set their own minimum wage rates, which may be higher than the federal rate. When an employee is subject to both federal and state (or local) minimum wage laws, they are entitled to the higher rate.
  
  For an up-to-date list of state minimum wage rates, visit the US Department of Labor’s website.
  ‍‍
• Nonexempt employees & exempt employees
  
  Nonexempt employees: Covered under the Fair Labor Standards Act (FLSA), these employees are entitled to overtime pay for hours worked over 40 in a workweek. They are typically paid hourly, though some salaried employees can also be classified as nonexempt based on their earnings and job duties.
  
  Exempt employees: Exempt from the FLSA’s overtime pay requirements, these employees must meet specific criteria related to their job duties, responsibilities, and earnings, including a minimum salary threshold. They are typically in executive, administrative, or professional roles.
  

• Off-cycle payroll: This may occur when you need to pay team members outside of standard payroll cycles, including for bonuses, commissions, or reimbursements.
  ‍‍
• Paid time off (PTO): When employees take time off from work and continue to receive compensation.
  ‍
• Payroll cycle: The period that employees are paid for, which most often includes weekly or biweekly pay periods. Team members receive their pay after the cycle ends.
  ‍
• Payroll processing: The practice of carrying out payroll to compensate employees for their work. It includes reconciling work records, calculating and filing the necessary taxes, and paying team members.
  ‍
• Payroll software: Tools that help companies automate payroll tasks. These systems may enable users to track employee hours, prepare and distribute payslips, calculate and withhold deductions, and transfer funds upon approval.
  ‍
• Salary proration: The process of adjusting an employee’s salary based on the portion of time worked during a specific pay period. For example, in a monthly payroll system, proration may occur when an employee joins mid-month, resulting in a partial salary for that month. In weekly or biweekly payroll systems, proration typically applies when an employee starts or leaves partway through a week.
  ‍

Employee pay-related terms

Understand the components of employee compensation, from base pay to variable bonuses and benefits that make up total earnings.

• Base pay: The initial, guaranteed salary or hourly rate paid to an employee, excluding bonuses, commissions, or other benefits.

• Bonus: Variable or fixed compensation based on performance, retention (retention bonuses), and other terms outlined in employment contracts (especially common in leadership positions).

• Fixed salary: Regular, fixed base salary that an employer pays an employee according to a set schedule.
  
  
• Gross pay: An employee’s total earnings before deductions like taxes and health insurance contributions.
  
  
• Hourly salary: Earnings per hour worked. Hourly workers have a fixed hourly rate, so payroll teams determine how much they receive at the end of every pay period by multiplying their hourly rate by the number of hours they worked.
  
  
• Net pay: Also called “take-home pay,” this is an employee’s earnings after all deductions, including taxes, benefits, and other withholdings. Providing clear pay statements helps employees understand their net pay.
  

• Salary component: The various elements that make up total compensation, including base pay, bonuses, commissions, and benefits. Transparency in salary components fosters trust and compliance.
  
  

Tax-related terms

Payroll taxes and related concepts support compliance with federal and state regulations. These terms explain tax calculations, contributions, and filing requirements.

• Payroll taxes: Taxes calculated and paid based on employees’ taxable income (including wages and salaries). These taxes typically finance social programs like Medicare and Social Security in the United States, for example.

• Federal income tax: Tax that people pay to the federal government based on their income. Some states in the United States also have a state income tax, which is filed separately. This may work differently based on where your company operates, but many countries have distinct federal and regional income tax laws.
  
  
• Federal Insurance Contributions Act (FICA): Taxes deducted to pay for Medicare and Social Security in the United States. Employers and employees each pay half of the total 15.3% FICA tax rate. However, FICA taxes apply only up to a certain income threshold, which is set at US$168,600 for 2024. Earnings above this threshold are not subject to FICA, resulting in a lower effective rate on higher salaries.
  
  
• Federal Unemployment Tax Act (FUTA): A federal law in the United States that imposes a payroll tax on employers to fund unemployment compensation programs. Employers are responsible for paying this tax; it is not deducted from employees’ wages. The standard FUTA tax rate is 6% on the first US$7,000 of each employee’s annual wages. However, employers who pay State Unemployment Taxes (SUTA) on time and meet specific requirements may qualify for a tax credit of up to 5.4%, effectively reducing the FUTA tax rate to 0.6%.
  
  
• Federal vs. State Taxes / Contributions
  
  Federal taxes: Taxes mandated by the federal government. In the US, these include federal income tax, Social Security, and Medicare. These taxes apply uniformly across the United States and fund programs like national defense, healthcare, and Social Security.
  
  State taxes: Taxes imposed by individual states, which can vary significantly. State taxes may include state income tax, unemployment insurance contributions, and state disability insurance, depending on the state.

• Imputed income: Non-cash compensation value received by an employee (e.g., gym membership), taxable in the United States under Social Security and Medicare, but not federal income tax.
  
  
• Internal Revenue Service (IRS): The agency responsible for collecting federal taxes in the United States. The IRS oversees tax returns and processes tax payments. If you’re unsure of tax law or requirements, be sure to consult the IRS’ website for more information.

• Medicare: A federal health insurance program primarily for individuals aged 65 and older, as well as some younger individuals with disabilities. Employers and employees contribute to Medicare through payroll taxes under the Federal Insurance Contributions Act (FICA).
  
  
• State Unemployment Tax Act (SUTA): A state-level payroll tax that employers pay to fund unemployment benefits for workers who lose their jobs. Unlike the federal FUTA tax, SUTA rates and wage bases vary by state and may change annually to reflect local economic conditions. SUTA contributions are required by most employers, and timely payment of these taxes can help employers qualify for reduced FUTA rates.
  
  For details on SUTA rates and requirements in your state, visit the US Department of Labor's State Unemployment Insurance Tax Directory.
  
  
• Tax forms: These forms provide essential information for employers to file taxes and manage payroll properly. In the United States, forms W-4 and W-2 help ensure accurate payroll processing and compliance with tax regulations.
  
  Form W-4: Completed by employees upon hire, this form specifies their tax withholding preferences based on personal information such as marital status and dependents. Employers use it to calculate the amount of federal income tax to withhold from each paycheck.
  
  Form W-2: Issued annually by employers, this form reports an employee’s total earnings and tax withholdings for the year. Employees use it to file their personal income tax returns.

• Tax rate: The rate at which someone’s income is taxed based on their total earnings and other considerations (depending on the country). For example, in the United States, there are established tax brackets that determine how much income tax employees have to pay.
  ‍
• ‍Taxable income: Any income subject to federal or state taxes, potentially including wages, salaries, commissions, royalty payments, stock options, self-employment income, as well as dividends and interest.
  ‍

Deduction-related terms

Explore deductions that affect take-home pay, including pre-tax and post-tax options for savings, benefits, and other employee contributions.

• Payroll deductions: A predetermined amount of money removed from an employee’s paycheck during payroll processing. Deductions may include union dues, healthcare benefits, retirement contributions, and life insurance premiums.
  
  
• Pre-tax deductions: These deductions are taken from an employee’s pay before any taxes are withheld. They can reduce the employee’s overall tax burden and increase take-home pay. Some of the most common pre-tax deductions are retirement contributions.

• 401(k): An employer-sponsored retirement savings plan allowing employees to contribute a portion of their salary pre-tax. Employers may offer matching contributions.
  
  
• Commuter benefits: Also known as transportation fringe benefits, commuter benefits allow employees to set aside pre-tax income for eligible commuting expenses, such as public transit passes, vanpooling, or parking fees. These programs offer a way for employees to save money on their commute while reducing their taxable income. Employers often offer commuter benefits as part of a holistic compensation package, enhancing workplace satisfaction and engagement.

• HSA (Health Savings Account): Tax-advantaged savings account for individuals enrolled in high-deductible health plans (HDHPs). Funds in an HSA can be used for qualified medical expenses and grow tax-free. Contributions are made pre-tax, reducing taxable income.

• FSA (Flexible Spending Account): Pre-tax savings account offered by employers to help employees cover eligible healthcare expenses. Unlike an HSA, an FSA doesn’t require enrollment in a high-deductible health plan (HDHP). However, funds in an FSA are typically subject to a “use-it-or-lose-it” rule, meaning employees must use the money within the plan year or forfeit it. FSAs provide immediate access to the full annual contribution at the start of the year, making them a valuable option for managing predictable medical costs.
  
  
• DCFSA (Dependent Care Flexible Spending Account): Pre-tax account specifically for dependent care expenses — such as childcare, after-school programs, or eldercare for dependent adults. Contributions reduce taxable income and help employees manage the high costs of caregiving. Unlike a general FSA, DCFSA funds are allocated exclusively for dependent care and are subject to annual contribution limits set by the IRS.
  
  

Miscellaneous payroll terms

This section includes other specialized terms essential for payroll management and compliance.

• Automated Clearing House (ACH): Employees receive payments directly into their bank accounts from an electronic network dedicated to credit and debit transfers in the United States. This allows team members to get paid via direct deposit.
  
  
• COBRA (Consolidated Omnibus Budget Reconciliation Act): A federal law that allows employees and their families to maintain health insurance coverage after leaving a job, experiencing reduced work hours, or encountering other qualifying events. COBRA requires eligible employees to pay the full premium for continued coverage.
  
  
• Employer Identification Number (EIN): Also known as the Federal Employer Identification Number (FEIN) or the Federal Tax Identification Number (FTIN), this is a unique nine-digit number assigned by the Internal Revenue Service (IRS) to business entities operating in the United States for identification purposes.

• Fair Labor Standards Act (FLSA): Establishes multiple employment conditions for private businesses in the United States, including federal minimum wage, overtime pay, recordkeeping practices, and youth employment standards. Some positions may be exempt from this act.
  
  
• Severance pay: The payout employees receive after being laid off. The amount of severance pay depends on the employment contract and other factors — such as length of employment, company policies, and cause of termination.
  
  
• Social Security Number (SSN): An identification number that the Social Security Administration provides to individuals in the United States. Having an employee’s SSN is essential to pay them.
  
  
• Workers’ compensation insurance: Insurance that provides cash benefits or medical care for employees who become ill or injured due to their work. In many parts of the United States, employers must pay for this insurance in full.
  ‍