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Payroll Terms and Glossary
# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
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1099 - Refers to a set of forms that are used to show different types of income other than wages paid by companies to employees and contractors.
These include: 1099-A, -B, -DIV, -G, -INT, -MISC, -OID, -PATR,
-R, and -S.
218 Agreement – An agreement between a state or local government employer and the state social security agency under which the employees are subject to social security and Medicare coverage.
401(k) Plan – A cash or deferred arrangement that allows employees to authorize their employer to place pretax dollars in a retirement plan that invests the money. The contributions (including those matched by the employer) and any earnings on them are not subject to federal income tax (most state income taxes also) until they are withdrawn.
403(b) Annuity – An annuity or mutual fund that provides retirement income for employees of public schools and certain tax exempt organizations.
457 Plan – An annuity or mutual fund that provides retirement income for employees of public sector employers (e.g., state and local governments).
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A
Accelerated Deposit Rule – Also known as the one-day rule, it requires employers that accumulate a tax liability of $100,000 or more during a deposit period to deposit the withheld taxes within one banking day of the day the liability was incurred.
Account – Representation of assets, expenses, liabilities and revenues in the general ledger, to which debit and credit entries are posted to record changes in the value of the account.
Accountable Plan – An employer’s business expense reimbursement plan that satisfies all IRS requirements regarding substantiation, business connection, and return of excess amounts in a reasonable period of time.
Accrual – Recognition of assets, expenses, liabilities or revenues after the cash value has been determined but before it’s been transferred.
Actual Deferral Percentage (ADP) – Percentage of wages deferred by employees participating in a salary reduction plan (e.g., 401(k) plan). The IRS uses the ADP to determine whether the plan meets the agency’s nondiscrimination requirements.
ADA – American with Disabilities Act. Federal Act that broadly prohibits discrimination against individuals with disabilities who can perform the essential functions of a job with or without reasonable accommodation.
AD&D – Accidental Death and Dismemberment insurance.
ADEA – Age Discrimination in Employment Act of 1967. Federal law that prohibits employment discrimination on the basis of an individual’s age (40 or older).
Adjusting entry – Entry made at the end of an accounting period to update or adjust an account before financial statements are prepared.
Adoption Assistance – Financial benefit provided by an employer to an employee to help with the child adoption process. Within certain limitations, it is excluded from federal income tax withholding, though not social security and Medicare taxes.
Advance Earned Income Credit (AEIC) – Payments of earned income credit during the year to employees who expect to be eligible for the credit. Employers make the payments out of federal income, social security, and Medicare taxes withheld from the employees’ wages.
Advice – The word “advices” refers to the record (either hard copy or available on line) of gross pay, taxes, other deductions, and direct deposit information that is used by employees who select direct deposit for their earnings rather than a “live” check.
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 (e.g., union dues, garnishments, charitable contributions).
Aggregate Method – Method of withholding federal income tax from supplemental wages in which the supplemental wage payment is combined with the regular wages paid during the most recent payroll period; after calculating withholding on the total amount using the wage-bracket or percentage method, the amount already withheld from the last wage payment is subtracted to reach the amount that must be withheld from the supplemental wage payment.
Alien – Citizen of a country other than the U.S. or one of its territories or possessions.
Annual Wage Reporting (AWR) – Social Security Administration’s system of recording wages reported annually by employers on Form W-2.
Application Service Provider (ASP) – Outsourcing arrangement where the outsourcing company hosts each application at its location and the client gains access through the Internet.
Arrears – What happens when there is not enough net pay to cover all of an employee’s deductions, e.g., pay is docked; gross pay is lower than normal and cannot cover all deductions. Not all deductions are placed into arrears.
Authorization Agreement – Written agreement authorizing an employer to withhold and distribute a portion of an employee’s wages to a party designated by the employee (e.g., direct deposit, union dues, savings bonds).
Automated Clearing House (ACH) – A Federal Reserve Bank or private financial institution acting on behalf of an association operating a facility that serves as a clearinghouse for direct deposit transactions. Entries are received and transmitted by the ACH under the rules of the association.
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Back-Pay Award – A cash award made to an employee that generally results from legal action to remedy a violation of federal or state wage-hour or employment discrimination laws.
Backup Withholding – Income tax withholding required from non-employee compensation when the payee fails to furnish the payer with a taxpayer identification number or the payer is notified by the IRS that the payee’s TIN is incorrect.
Balance – The value of an account, as determined by calculating the difference between the debits and credits in the account.
Base Period – When dealing with unemployment compensation, it generally consists of the first 4 of the last 5 quarters immediately preceding the claimant’s benefit year.
Base Period Wages – Wages earned during the base period. The amount is generally one of several criteria used in determining a claimant’s eligibility for unemployment compensation.
Batch – Sample or limited amount of all the data being processed.
Batch Control – Control that is designed to ensure that a batch of data has been entered successfully.
Batch processing – Processing data as a group, either to increase controls or processing efficiency.
Benefit Wages – In the context of unemployment compensation, an amount charged to an employer’s account when a former employee receives unemployment benefits. The amount is determined by the base period wages paid by that employer to the claimant.
Benefit Year – In the context of unemployment compensation, the 52-week period beginning on the first day a claim for benefits is filed.
BLS – Bureau of Labor and Statistics
Bona Fide – Refers to actions taken in good faith, without pretense or fraud.
Business Standard Mileage Rate – A cents-per-mile figure issued annually by the IRS. Reimbursements for employee transportation expenses incurred while using their vehicles for business are not included in income up to the business standard mileage rate.
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Cafeteria Plan – Plan that offers flexible benefits under IRC Section 125. Employees choose their benefits from a “menu” of cash and benefits, some of which can be paid for with pretax deductions from wages.
Cash or Deferred Arrangement (CODA) – An arrangement under a retirement plan that allows employers to either receive cash or have the employer contribute an equivalent amount to the plan.
Catch-up Contributions – Elective deferrals by an employee to a defined contribution retirement plan or IRS above any statutory or plan-mandated limit.
Child Support Withholding – Process of withholding amounts from an employee’s compensation to satisfy a child support order from a court or a state child welfare administrative agency. The employer is responsible for withholding the amounts and paying them over to the party named in the withholding order.
Circular E – IRS Publication 15, Employer’s Tax Guide. Contains the basic rules, guidelines, and instructions for withholding, depositing, reporting, and paying federal employment taxes.
Common Law Test – Test that measures the control and direction that an employer has the authority to exercise over a worker. Where the employer has the right to direct the worker as to how, where, and when the work will be completed, in addition to controlling the result of the work, the worker is a common law employee.
Common Paymaster – One of two or more related corporations that pays employees who work concurrently for the related corporations. Under this arrangement, the related corporations are treated as a single employer for social security, Medicare and FUTA tax purposes.
Compensation – All cash and noncash remuneration given to an employee for services performed for the employer.
Compensatory time – Paid time off granted to an employee for working extra hours. The Federal Wage-Hour law places severe restrictions on the use of compensatory time to avoid paying overtime, although special exemptions are allowed for public sector employees.
Concurrent Employment – Working for more than one related corporation under a common paymaster arrangement.
Consolidated Omnibus budget Reconciliation Act of 1985 (COBRA) – Federal law that requires employers with group health care coverage to offer continued coverage to separated employees and other qualifying beneficiaries.
Constructive Receipt – An IRS rule that considers wages to have been paid to an employee when the employee has access to the wages without substantial limitations or restrictions.
Consumer Credit Protection Act (CCPA) – Federal Law that restricts the amount of an employee’s earnings that can be garnished to pay creditor debts, including child support.
Control Group – Group of key or highly compensated employees in a company whose proportion of benefits is limited under the qualification requirements of certain benefit plans (e.g., Section 125 or 401(k) plans).
Cost-of-Living-Adjustment (COLA) – An adjustment of wages or benefit payments to account for changes in the cost of living, generally based on changes in the CPI.
Covered Employees – For each law affecting payroll and human resources, this term defines those workers who are subject to the law.
Credit Reduction – Reduction in the credit an employer receives against FUTA tax owed for state unemployment taxes paid, where the state has not repaid a federal loan under the joint federal/state unemployment compensation program.
CSEA – Child Support Enforcement Agency
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De Minimis – Anything that is too insignificant to merit legal scrutiny, such as a fringe benefit that is provided occasionally and is too small to justify accounting for or recording it. This does not apply to cash or cash equivalents except in very specific instances, such as supper money.
Deduction – An amount subtracted from an employee’s gross pay to reach net pay, or an amount allowed to taxpayers as an offset against income (pre-tax deduction).
Deemed Substantiation – Safe-harbor rules under which IRS requirements regarding the substantiation of amounts spent on employee business expenses are considered to have been met, e.g., per diem allowances.
Deferred Compensation – The postponement of a wage payment to a later date. Usually describes a portion of wages set aside by an employer for an employee and put into a retirement plan on a pretax basis.
Defined Benefit Plan – Retirement plan that uses a formula (generally based on an employee’s salary and length of service) to calculate an employee’s retirement benefits and is not funded by employee contribution to the plan.
Defined Contribution Plan – Retirement plan with benefits determined by the amount in an employee’s account at the time of retirement; depends on the amount of the contributions as well as the gains or losses on the account. The account may be funded by contributions from both the employer and the employee.
Dependent Care Assistance Program – An employer plan providing dependent care services or reimbursement for such services.
Dependent Group –Term Life Insurance – Term life insurance that gives and employee death benefits should the employee’s spouse or other dependents die.
Direct Deposit – The electronic transfer of an employee’s net pay directly into financial institution accounts designated by the employee, thus avoiding the need for a paycheck.
Discretionary Bonus – Bonus paid for services performed. In order to be considered discretionary, the bonus cannot be paid because of a promise made in advance, a contract, or another agreement.
Discrimination – In the context of employee benefits, favorable treatment of highly compensated employees under an employer’s plan.
Dismissal Pay – Amounts paid to employees who are terminated from employment, also known as payments in lieu of notice, termination pay or severance pay.
Disposable Earnings – That part of an employee’s earnings remaining after deductions required by law (e.g., taxes). It is used to determine the amount of an employee’s pay that is subject to a garnishment or child support withholding order.
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E
Early Retirement Age – The earliest age at which social security retirement benefits can be received – currently age 62. Individual company retirement plans may provide for benefits at an earlier age.
Earned Income Credit – A tax credit available to low-income employees. It may be taken when the employee files his or her individual tax return, or partially paid in advance by the employer during the year (AEIC)
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) – Significant tax cut legislation enacted in 2001 that reduced income tax rates and increased pension plan elective deferrals.
EDI – Electronic data interchange.
Educational Assistance Program – An employer plan providing for payment or reimbursement of an employee’s educational expenses.
EEOC – Equal Employment Opportunity Commission. This federal agency is responsible for administering and enforcing the Civil Rights Act of 1964, the Age Discrimination Act of 1967, the Americans With Disabilities Act of 1990, and the Equal Pay Act of 1963.
EFT – Electronic Funds Transfer.
EFTPS – Electronic Federal Tax Payment System.
Elective Deferral – The amount of pretax dollars that an employee chooses to have the employer contribute to a qualified deferred compensation (e.g., 401(k) plan) in the employee’s behalf, also known as pretax contributions or employer contributions.
Electronic Tax Application – Term for same-day settlement procedures for electronic tax deposits made through the Electronic Federal Tax Payment System.
Employee – An individual who performs services for another individual or an organization in return for compensation.
Employee Retirement Income Security Act of 1974 (ERISA) – Federal law regulating the operation of private sector pension and benefit plans.
Employee Self-Service – An application that gives and employee access to personal and company data and allows the employee to review, print out, and/or update certain portions of that data. It can be accomplished by phone, at a centralized computer workstation, or on individual personal computers.
Employee Stock Purchase Plan (ESPP) – An employer plan under which all employees are given the opportunity to buy the employer’s stock at a discount, subject to strict limitation.
Employee Verification Service (EVS) – Service offered by the Social Security Administration allowing employers to verify the accuracy of their employee’ social security numbers by sending in a paper listing, magnetic tape or diskette of their data for review by the SSA.
Employer Identification Number (EIN) – Employer’s account number with the Internal Revenue Service.
Employment Verification – Process of determining whether a newly hired employee is authorized to work in the United States under the Immigration Reform and Control Act.
Enterprise Coverage – Test for determining whether an employer’s entire operation is covered by the Fair Labor Standard’s Act. It is based on the employees’ involvement in interstate commerce and the employer’s annual volume of revenue.
Escheat – In the context of payroll, the turning over of unclaimed wages to the state after a period of time determined by state law.
Excess Deferral - Amount of an employee’s deferred compensation that exceeds the IRS’s annual contribution limit.
Exempt Employee – While this term can refer to anyone not covered as an employee under a certain law, it generally means those employees who are exempt from the minimum wage, overtime pay, and certain recordkeeping requirements of the Federal Wage-Hour Law.
Exercise Price – Price an employee pays for a stock when a stock option granted by an employer to an employee is exercised by the employee.
Excise Tax – Tax imposed on a specific transaction.
Expatriate – For U.S. payroll purposes, a U.S. citizen or resident alien who lives and works outside the U.S.
Experience Rating – In the context of unemployment compensation, it is the employer’s past record of unemployment claims activity. This past record can then be used to determine the employer’s unemployment tax rate (i.e., the higher the turnover rate, the higher the tax rate).
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Family and Medical Leave Act of 1993 (FMLA) – Law guaranteeing 12 weeks’ unpaid leave to most employees to care for newborn or newly adopted children, or to deal with a serious illness or injury suffered by the employee or an ailing child, spouse, or parent of the employee.
FAVR – Fixed and variable rate mileage allowance.
FICA – Federal Insurance Contributions Act. Also describes the combined taxes levied for social security and Medicare.
Field Service Advice – Written advice to the IRS field agents and examiners from the IRS Chief Counsel’s office to guide them in handling particular factual situations.
Filing Information Returns Electronically (FIRE) – The IRS’s system for filing information returns (e.g., Forms 1099 MISC), electronically.
Filing Status – Marital status of an employee for withholding purposes only.
Financial Accounting Standards Board (FASB) – The group that sets the standards for sound financial management.
Financial Control – The right of a business to direct and control the economic aspects off a worker’s job.
FIT – Federal Income Tax
FITW – Federal income tax withholding; FIT withheld from an employee’s wages when they are paid.
Flexible Benefits – The option to choose from a menu of benefits offered by an employer.
Flexible Spending Account (FSA) – An arrangement that allows an employee to have pretax dollars deducted from wages and put into an account to pay for health insurance deductibles and co-payments and dependent care assistance (there are separate accounts for medical and dependent care assistance FSAs).
Float - The dollar amount represented by checks that have been deposited but not cleared. For example – many tax filing outsourcers – remove the tax money from your account several days before the taxes are actually due and puts it into their own account (paying the taxes when they are due) – by doing this the outsourcer gains interest on that money and the customer loses the interest.
Fluctuating Workweek – An arrangement between an employer and a nonexempt employee to pay the employee a fixed weekly salary even though the employee’s hours may vary from week to week.
FMV – Fair Market Value. Used to determine the value of non-cash, employer-provided benefits for payroll tax purposes, or the value of facilities provided to employees in lieu of wages.
Foreign Earned Income Exclusion – An election by a U.S. citizen or resident alien working abroad to exclude up to a certain amount of foreign earned income from the taxpayer’s gross income.
Foreign Housing Cost Exclusion – An exclusion from income for reasonable foreign housing expenses exceeding a base housing amount that is available to U.S. employees working abroad whose tax home is not in the U.S.
Form 941 – Employer’s Quarterly Federal Tax Return; provides the IRS with a report of each employer’s total taxable wage paid and payroll tax liability.
Form 941c – Statement to Correct Information; a form used to make adjustments to Form 941 when taxes have been under or over withheld ; explains the nature of the adjustment and shows the erroneous and correct amounts of tax withheld.
Form W-2 – Wage and Tax Statement; employers must file a Form W-2 (to both the employee and the Social Security Administration) to report the total amount of wages paid and taxes withheld for each employee in a calendar year.
Form W-2c – Statement of Correct Income and Tax Amounts; form that must be completed by an employer if an incorrect copy of a W-2 has been sent to the SSA.
Form W-3 – Transmittal of Income and Tax Statements; form which an employer must also file when filing paper Forms W-2 (Copy A) with the SSA; contains totals of the amounts reported on the employer’s W-2 forms, acting as a “reconciliation” of these forms.
Form W-3c – Transmittal of Corrected Income and Tax Statements; form that accompanies Form W-2c in most situations when it is sent to the SSA that totals the information from all the W-2c forms being submitted.
Form W-4 – Employee’s Withholding Allowance Certificate; federal (or an equivalent state or local) form on which the employee states the number of withholding allowances he or she claims. The form is used by the employer to determine the amount of federal, state, and local income taxes to withhold from the employee’s compensation.
Form W-4P – Withholding Certificate for Pension or Annuity Payments; allows retired employees to have input into the amount of federal income tax withheld from a pension or annuity.
Form W-4S – Request for Federal Income Tax Withholding From Sick Pay; filed when an employee receives sick pay from a third-party insurer due to a disabling non-job related injury; the employee uses the form to tell the third party how much to withhold from his or her pay.
Form W-5 – Earned Income Credit Advance Payment Certificate; must be filed by employees who want to take advantage of advance EIC payments and which attests to their eligibility for the advance payments.
Fringe Benefits – Compensation other than wages provided to an employee such as health and life insurance, vacations, employer-provided vehicles, public transportation subsidies, etc., that may be taxable or nontaxable.
FTE – Full time equivalent; a term used to describe the time or effort expected relative to a full time appointment (which is 1.00 FTE)
FUTA – Federal Unemployment Tax Act. Requires employers to pay a certain percentage of their employees’ wages (up to a maximum wage limit) as a payroll tax to help fund unemployment compensation benefits for separated employees.
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Garnishee – An employer that receives an order requiring withholding from an employee’s wages to satisfy a debt. A garnishee can also be a debtor against whom a creditor has brought a process of garnishment.
Garnishment – A legal proceeding authorizing an involuntary transfer of an employee’s wages to a creditor to satisfy a debt.
Golden Parachute – Payments made to business executives in excess of their usual compensation (e.g., stock options, bonuses) in the event the business is sold and the executives are terminated from employment.
Green Card – INS Form I-551. Permanent Resident Card, which entitles the bearer to permanent resident status in the U.S. and provides proof of work authorization and identity under the Immigration Reform and Control Act (IRCA).
Gross Income – The compensation for services, including fees, commissions, fringe benefits, and similar items.
Gross Pay – The total amount received form the employer before any deductions are made.
Gross-Up – An IRS approved formula that employers can use to determine the taxable gross payment when the employer wishes to pay the employer’s share of tax.
Group Legal Services Plan – An employer plan providing for the advance provision or prepayments of personal legal services for employees and their dependents.
Group Term Life Insurance (GTL) – Term life insurance that is provided to employees, with the cost being borne by the employer, the employee or both.
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Health Insurance Portability and Accountability Act (HIPAA) – Law passed in 1996 restricting the right of group health plans to limit participation by newly hired employees and their dependents because of preexisting medical conditions.
HI – Hospital Insurance (the Medicare component of FICA).
Highly Compensated Employee (HCE) – In the context of certain fringe benefit plans, an employee who is an owner or officer of a business or whose salary exceeds a certain amount (indexed each year for inflation). Many benefits offered by employers do not qualify for favorable tax treatment if they discriminate in favor of highly compensated employees. An employer may also be restricted in their use of safe-harbor valuations of benefits provided to such employees.
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I
Illegal Immigration Reform and Immigrant Responsibility Act of 1996 – Law enacted in 1996 that amends IRCA by reducing the number of documents that employers must accept to prove a new hire’s identity and work authorization.
Immigration Reform and Control Act of 1986 (IRCA) – Law enacted in 1986 that prohibits employers from hiring persons who are not authorized to work in the U.S. and from discriminating against those who are based on their national origin or citizenship.
Impute – The addition of the value of cash/non-cash compensation to an employee’s taxable wages in order to properly withhold income and employment taxes from the wages.
Incentive Stock Option (ISO) – A stock option plan that gives an employee the opportunity to buy the employer corporation’s stock at a fixed price for a certain period of time, and that offers favorable tax treatment if certain conditions are met.
Income Tax Treaties – Treaties between the U.S. and foreign countries that may have provisions governing the tax treatment of U.S. employees working in those countries, as well as aliens from those countries working in the U.S.
Independent Contractor – A nonemployee contracted by a business to perform services. Although the business specifies the result of the work to be performed, it has not right to control the details of when, how, or who will ultimately perform the work.
Individual Retirement Arrangement – A trust created or organized for the exclusive benefit of an individual or his or her beneficiaries.
Individual Taxpayer Identification Number (ITIN) – A tax reporting identification number issued to aliens in the U.S. who cannot get a social security number but are required to file a tax or information return with the IRS.
Information Return – A return sent to the IRS (e.g., 1099 series) or the SSA (e.g., Form W-2, Copy A along with Form W-3 or 6559) that indicates information relevant to tax liability.
Information Statement – A statement sent to a payee (e.g., 1099 series) or an employee (Form W-2) that indicates payments made and taxes withheld by the party issuing the statement.
INS – Immigration and Naturalization Service.
Interactive Voice Response (IVR) – A telephone system that allows employees to make changes by touch-tone phone to their payroll and/or personal data.
Internal Audit – An audit of a business’s policies, procedures, operations and records carried out by employees of the business as opposed to outside parties.
Internal Control – Measures used by a company to safeguard company assets by preventing errors, waste, embezzlement, and fraud.
Internal Legal Memorandum (ILM) – An interpretation of a point of tax law designated for internal use by the IRS.
Internal Revenue Bulletin (IRB) – Issued regularly (weekly except during the summer) by the IRS, the IRB contains recently issued regulations, revenue procedures, and other agency announcements.
Internal Revenue Code (IRC) – Federal tax laws. Generally referred to as the Internal Revenue Code of 1986, which was the year of the latest major overhaul of the Code. The IRC also comprises Title 26 or the United States Code.
Internal Revenue Service (the Service) – Federal agency charged with interpreting, implementing and enforcing the tax laws of the U.S.
Internal Revenue Service restructuring and Reform Act of 1998 – Law enacted in 1998 to reform the governance structure of the IRS to make it more responsive to taxpayers and to promote electronic filing of information.
Interstate Commerce – The exchange of good and/or services across state lines. It provides a basis for congressional and federal government agency regulation of wages and hours of work and other employment related matters.
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Key employee – In the context of fringe benefit plans, an officer or owner (of all or a significant part) of a business whose annual pay exceeds a certain amount. Many benefits offered by employers do not qualify for favorable tax treatment if they discriminate in favor of key employees. In the context of the FMLA, a high salaried employee who may not be entitled to reinstatement after FMLA if doing so would cause the employer serious economic injury.
Kiosk – A centrally located, specialized workstation located for easy employee access, where employees can inquire about and modify their payroll and personal data, as well as view company-provided information.
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Leased Employees – Employees of a leasing agency who are hired and trained for the client firm through the agency. Withholding, depositing, and reporting responsibilities remain with the leasing agency.
Levy – An attachment to satisfy a tax debt or a court judgment.
Liabilities – Debts of a business that have yet to be paid.
Local National – An employee who works in the country where his home base is located, even though the employee may actually be a citizen of another country.
Long-Term Assignment – A job assignment that is realistically expected to last more than 12 months.
Longer-Term Care Assistance – An insurance contract providing for coverage of qualified long-term care services, including diagnostic, preventive, treating, mitigating and rehabilitative services, which is treated as an accident and health insurance contract for payroll purposes.
Lookback Period – the 12-month period running from July 1 or the second preceding calendar year through June 30 of the preceding calendar year. The employer’s payroll tax liability during this period determines its depositor status for the current year. The period may be different for some employers.
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Magnetic Media Reporting – Use of a computerized method of filing information with government agencies, such as magnetic tape, diskette, cartridge, or electronic filing from one computer to another.
Magnetic Media Reporting and Electronic filing (MMREF) Specifications – Set of specifications for filing Forms W-2 and W-2c with the Social Security Administration on magnetic media or electronically.
Matching Principle – Matching revenue earned during an accounting period with the expenses incurred in generating the revenue.
Medical Savings Accounts (MSA) – An arrangement through which an employer or an employee (but not both) can put tax-preferred contributions into an account for the payment of health care deductibles under a high deductible health insurance plan.
Medical Support Withholding – The process of withholding amounts from an employee’s compensation to satisfy a medical support order from a court or a state child welfare administrative agency. The employer is responsible for withholding the amounts and paying them over to the party named in the medical support withholding order.
Medicare – A federal hospital insurance program for individual age 65 or older and some disabled persons. It is funded through the hospital insurance (HI) component of FICA tax.
Minimum Wage – the lowest amount that an employer can pay its employees per hour under federal or state law.
MQGE – Medicare Qualified Government Employee, who only has the Medicare component of FICA, and not the social security, withheld from wages.
Multiple Worksite report (MWR) – A report developed by the Bureau of Labor Statistics to help it collect statistical information on U.S. businesses with multiple worksites.
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Negative Account Employer – An employer whose state unemployment tax payments are less than the benefits charged to it unemployment reserve account.
Negative Election – A salary deferral to fund pre-tax employee benefits that is begun without the employee making an affirmative election to begin the deferral.
Net Pay – That part of an employee’s wages that remains after all deductions have been subtracted (e.g., taxes, health insurance premiums, union dues, etc.).
New Hire Reporting – The reporting of newly hired and rehired employees to state agencies to facilitate the collection of child support and/or to uncover abuse in the state’s unemployment compensation, workers’ compensation, or public assistance programs.
No-Additional Cost Services – A tax-free fringe benefit for employees consisting of free services offered by an employer at not substantial additional cost to the employer.
Nonaccountable Plan – An employer’s business expense reimbursement plan that does not meet the requirements regarding business connection, substantiation, and returning excess amounts. Payments made under the plan are included in employees’ income.
Noncash fringe benefits – Benefits provided to employees in some form other than cash (e.g., company car, health and life insurance, parking, etc.) which may be taxable or nontaxable.
Nondiscretionary Bonus – Contractual or agreed-upon bonus or incentive related to production, efficiency, attendance, quality, or some other measure of performance.
Nondiscrimination Testing – Tests that determine whether benefit plans provided by an employer discriminate in favor of highly compensated or key employees. If such discrimination is found, the employer will lose its favorable tax treatment for the benefit. Benefits provided under the plan may be taxable to employees receiving them.
Nonexempt employees – Employees who are covered by the minimum wage and overtime provisions of the FLSA. They may be paid on an hourly or salary basis.
Nonqualified Plan – an employer plan that does not meet IRS qualification requirements.
Nonqualified Stock Option/Nonstatutory Stock Option (NSO) – A stock option plan that gives an employee the opportunity to buy the employer corporation’s stock at a fixed price for a certain period of time, without the conditions that apply to an incentive stock option plan.
Nonresident Alien – An individual from a foreign country working in the U.S. who does not pass either the “green card” or “substantial presence” residency test, but is subject to federal income tax on U.S. source income.
Normal Credit – Amount of an employer’s required contributions paid timely into a state unemployment insurance fund, to a maximum of 90% of the employer’s basic federal unemployment tax rate, taken as a credit against the employer’s federal unemployment tax.
Normal Retirement Age – Currently 65, the age at which retirees may receive unreduced social security benefits.
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OASDI – Old Age Survivors and Disability Insurance, also known as social security.
OCSE – Office of Child Support Enforcement
One-Day Deposit Rule – If an employer’s accumulated employment tax liability reaches $100,000 on any day during a monthly or semiweekly deposit period, the taxes must be deposited by the close of the next banking day.
OMB – Office of Management and Budget
On-Call Time – Nonwork time during which employees are required to be available to handle job-related emergencies.
Online Processing – Processing performed under direct control of the computer (can be batch or realtime)
Online Wage Reporting Service (OWRS) – Method for reporting Form W-2 information electronically to the Social Security Administration.
Opportunity Wage – A reduced minimum wage that can be paid to teenagers during their first 90 days at work.
Originating Depository Financial Institution (ODFI) – A financial institution that is qualified to initiate deposit entries submitted by an employer as part of the direct deposit process.
Other Compensation – Compensation not subject to federal income tax withholding that an employer must report on an employee’s W-2.
Outplacement Services – Services provided by employers to help employees find a new job after a layoff or reduction in force.
Overtime – Hours worked in excess of maximums set by federal or state law that must be compensation at a premium rate of pay (e.g., under the FLSA, all hours worked over 40 in a workweek must be paid at no less than 1½ times the employee’s regular rate of pay.
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Payroll Period – The period of service for which an employer pays wages to its employees.
Payroll Register – A report listing and summarizing the compensation paid and deductions taken from each employee’s wages for the payroll period.
Payroll Tax – any tax levied by a government agency on employees’ wages, tips, and other compensation.
Percentage Method of Withholding – One allowable method for calculating federal income tax withholding from an employee’s wages, most often used when the calculation is automated.
Per Diem Rates – a flat daily rate that an employer may give to its employees for overnight travel, meals and incidentals expenses, rather than requiring employees to substantiate actual expenses. Employees must still provide the business connection and may not receive more than the IRS published rate nor may they receive a per diem for more days than they are traveling without incurring taxable income.
Positive Account Employer – An employer whose state unemployment tax contributions are more than the benefits charged to its unemployment reserve account.
Preliminary and Postliminary Activities – time spent by employees to get ready for work or to get ready to leave work, which is generally not compensable time unless the activities are essential to the employee’s principal work activity.
Premium Pay – In a payroll context, there can be two meanings. It can be the extra pay above an employee’s regular rate of pay that is paid for working overtime hours. Or it can be a special pay rate for work done on weekends, on holidays, during undesirable shifts, or for doing dangerous work.
Pretax Deduction – A deduction taken from gross pay that reduces taxable wages.
Private Delivery Service (PDS) – a private sector company that delivers packages. If their services are “designated” by the IRS, materials delivered to them by a taxpayer for delivery to the IRS are considered postmarked on the date the delivery to the PDS is recorded on their database or marked on the package.
Private Letter Ruling (PLR) – A ruling provided by the IRS when requested by a taxpayer who wants to know how the tax laws apply to a particular factual situation. The ruling applies only to the taxpayer requesting it, and cannot be relied upon by other taxpayers.
Professional Employer Organization (PEO) – An employee leasing firm that arranges with clients to lease employees back to the client and handle all payroll and human resources functions for the client.
Public Sector Employer – An employer that is a state or local governmental unit (e.g., county, town, village) or a political subdivision of such a unit (e.g., school district).
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Qualified Plan – A benefit plan that meets IRS qualification requirements for tax-favored treatment (e.g., nondiscrimination).
Qualified retirement Planning Services – Certain retirement planning advice or information provided by an employer, the value of which is excluded from employees’ income if it is provided in a nondiscriminatory manner.
Qualified Transportation Fringe – Certain employer-provided transportation benefits that can be excluded from employees’ income up to certain annually adjusted limits (i.e., transit passes, vanpools, parking).
Qualifying Event – A job-related event that triggers application of a federal or state law or workplace policy. Relating to COBRA benefits, a qualifying event, such as job separation, leads to the employee’s right to claim continued health coverage under the employer’s group health plan.
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Reasonable Basis Test – A standard used to determine whether a worker can be treated as an independent contractor whether or not the common law test is met, based on prior court and administrative rulings, IRS audits, or longstanding practice in the industry.
Receiving Depository Financial Institution (RDFI) – Financial institution that qualifies to receive direct deposit entries from an Automated Clearing House.
Reciprocity – In payroll, a relationship between states under which privileges granted by one are returned by the other (e.g., reciprocal enforcement of child support orders, reciprocal agreements not to tax non-residents working in a state).
Reconciliation – The process of ensuring that amounts withheld, deposited, paid, and reported by employers agree with each other and that if they do not, determining the reasons and making the necessary corrections.
Regular Rate of Pay – An hourly pay rate determined by dividing the total regular pay actually earned for the workweek by the total number of hours worked.
Regulations – The means by which government agencies administer and enforce laws (e.g., rules issued by the IRS to enforce the tax laws).
Rehabilitation Act of 1973 – A federal law prohibiting discrimination against qualified disabled individuals by federal government contractors and grantees.
Reimbursement Financing – An unemployment insurance financing system that allows employers to pay back to the state unemployment trust fund any benefits paid to their former employees, rather than paying a tax based on their experience rating. This form of financing is most often used by nonprofit groups and public sector employers.
Related Corporations – A group of corporations meeting certain common ownership and concurrent employment requirements that may be treated as one employer for social security, Medicare, and FUTA purposes.
Relocation Expenses
Costs incurred by an employee as the result of a move to a job in a new location. Reimbursement of these expenses may be made at an employer’s discretion. Certain employee-incurred relocation (qualified under IRC Section 132) expenses are tax deductible under the Internal Revenue Code and if paid by the employer are excluded from income.
Resident Alien – In the context of payroll, an individual who passes either the “green card” or “substantial presence” test for determining resident status in the U.S. Resident aliens are generally subject to federal income tax withholding and social security and Medicare taxes on the same basis as U.S. citizens.
Revenue Procedures (Rev. Proc.) – Official statements from the IRS on how to carry out tax compliance.
Revenue Rulings (Rev. Rul.) – Published decisions issued by the IRS that apply the tax laws to a particular set of facts. They can be used by taxpayers to determine their tax liability in similar factual situations.
RRTA – Railroad Retirement Tax Act
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Safe-Harbor – An IRS-approved alternative method (usually a short-cut) for complying with IRS rules, regulations, and procedures 9e.g., per diem allowances and high-low substantiation.
Segregation of Duties – A basic principle of internal control that prevents individuals from having responsibility for all phases of a job process, thus guarding against misuse or misappropriation of company assets.
Severance Pay – A payment offered by some employers to terminated employees (usually those who are terminated through no fault of their own) that is designed to tide them over until new employment is secured.
Shared services – the consolidation of related functions and integration of the processes involved with them throughout an entire organization.
Shift Differential – Extra pay received by employees for working a less-than-desirable shift (e.g., evenings or late nights).
Short Term Assignment – A job assignment that is realistically expected to and in fact does last less than 12 months.
Sick Pay – Replacement wages paid to an employee who cannot work because of an illness or injury that is not work-related.
SIT – State income tax.
Social Security – The Old Age, Survivors and Disability Insurance (OASDI) component of FICA,
Social Security Administration – The federal government agency that administers social security.
Social Security Number – An individual’s taxpayer identification number, it consists of nine digits.
Social Security Statement – The earnings and benefits verification statement sent by the Social Security Administration annually to employees over age 24 in the U.S. who are not currently receiving social security benefits.
Special Accounting Rule – A safe-harbor rule that allows employers to treat certain Noncash fringe benefits provided to employees in November or December as received in the following year. If an employer uses the special accounting rule, the employee must also report the benefit for the same period.
Special Wage Payments – payments made to employees or former employees for services performed in an earlier year. These payments require special reporting by employers so that retirees’ social security benefits are not reduced under the annual earnings test because of amounts earned in prior years.
Split-dollar Life Insurance – An arrangement where an employer pays that part of an annual life insurance premium representing the increase in the cash surrender value of the policy during the year, while the employee pays the remainder of the premium.
Split Shifts – A workday that is divided into two parts, separated by a spread of hours longer than the conventional meal or rest period.
State Disbursement Unit (SDU) – a centralized location for the collection and disbursement of withheld child support payments throughout a state.
Statute of Limitations – A period of time established by law during which parties can take legal action to enforce their legal rights.
Statutory Employees – Special groups of employees identified by law (e.g., full-time insurance salespeople, certain homeworkers) whose wages are not subject to FITW, but are subject to FICA and FUTA.
Statutory Nonemployees – Special groups of workers who may qualify as common law employees but are treated under the law as independent contractors (e.g., qualified real estate agents and direct sellers) whose compensation is not subject to federal income tax withholding or employment taxes.
Statutory Stock Option – An Incentive Stock Option or an option exercised under an Employee Stock Purchase Plan.
Straight Time – The standard number of work hours during a workweek for which an employee’s regular rate of pay will be paid.
Substantiation – The requirement that employees keep records of the time, place, and business purpose of reimbursable expenses they incur, including receipts.
Substitute Forms – Tax forms that are printed by private printers rather than the Internal Revenue Service. They must meet certain specifications to be acceptable for filing.
SUI – State Unemployment Insurance
Supper Money – The irregular and occasional payment of amounts to employees who work late to cover the cost of meals eaten during that extra working time.
Supplemental Unemployment Benefits (SUB) – Employer plans that provide supplements to state unemployment compensation benefits.
Supplemental Wages – Compensation received by employees other than their regular pay, such as bonuses, commissions and severance pay. Income tax may be withheld from such payments at a flat rate under certain circumstances.
System Edit – Warning or alert built into computer software; a system edit checks for errors and either corrects them or notifies the operator that something may be wrong; system edits generally check for values outside accepted ranges.
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Table I – Refers to IRS Uniform Premium Table I, which is used to calculate the value of group-term life insurance over $50,000.
Take-Home Pay – In the context of a federal tax levy, the amount of an employee’s wages that remains after all normal deductions in effect at the time of the levy have been subtracted.
Tax Equalization Plan – A plan offered by an employer to an employee working abroad that would provide the employee with the same take-home pay he or she would have in the U.S.
Tax Protection Plan – A plan offered by an employer to an employee working abroad that would guarantee the employee a foreign tax obligation no larger than he or she would have in the U.S.
Tax Reform Act of 1986 (TRA ’86) – Sweeping tax reform legislation that lowered tax rates and sought to eliminate many of the loopholes in the tax laws.
Taxable Wage Base – The maximum amount of employee compensation subject to social security, FUTA and state unemployment insurance taxes.
Taxpayer Identification Number (TIN) – social security number or employer identification number, which serves as the taxpayer’s account number with the IRS.
Temporary Help Agency Employees – Workers hired through temporary help agencies who are screened and trained by the agency to provide services for client firms. They are employees of the agency, rather than the client firm.
Third-Party Sick Pay – Payments made by a third party, such as a state or private insurer, to employees because of non-job-related illness or injury.
Third-Party Designees – An individual authorized by an employer to correspond with the IRS regarding the completion and processing of an employment tax return (e.g., Forms 940, 941, 945).
Time-and-a-Half – Payment of 1½ times an employee’s regular rate of pay for hours worked over 40 in a workweek, as required by the Federal Wage-Hour Law (for non-exempt employees only).
Tip Credit – A reduction in the minimum wage allowed for tipped employees.
Title VII – The employment discrimination portion of the Civil Rights Act of 1964, which prohibits job bias based on race, sex, color, religion or national origin.
Totalization Agreements – Agreements between the U.S. and foreign countries that prevent double social security and Medicare taxation of U.S. employees working abroad and aliens working in the U.S.
Treasury Financial Agent (TFA) – One of two banks chosen to implement the Electronic Federal Tax Payment System for depositing federal taxes electronically.
Trust Fund Taxes – The amounts withheld by employers from employees’ pay for federal income, social security and Medicare taxes. They are referred to as trust fund taxes because the money is held in a special trust fund for the U.S. government. Amounts withheld for state and local income taxes are held in trust for the state or local government.
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Uniform Interstate Family Support Act (UIFSA) – Model state child support enforcement law under which employers must put into effect a child support withholding order from another state’s child support enforcement agency if the order appears “regular on its face.”
Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA) – Federal law guaranteeing, among other things, the right of U.S. veterans to make additional elective deferrals under their employer’s §401(k) plan for the time they spent in military service.
Universal Availability – Requirement that employers provide an equal opportunity for employees to make elective deferral catch-up contributions.
USC – United States Code, where federal laws are compiled.
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Validity Edit – shows whether or not data entered meet the requirements set forth by a company.
Voluntary Contributions – Advance payments of unemployment tax that can reduce an employer’s state unemployment tax rate.
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Wage Assignment – A voluntary agreement by an employee to transfer portions of future wage payments (e.g., insurance premium deductions, credit union deductions).
Wage Attachment – An involuntary transfer of an employee’s wage payment to satisfy a debt.
Wage-bracket Withholding Method – A procedure for calculating the amount of federal income tax to be withheld from an employee’s wages based on wage-bracket tables classified by the employee’s marital status and payroll period.
Wage Continuation Sheet – A periodic report (e.g., quarterly) from employers to state unemployment agencies containing employees’ names, total wages, and unemployment taxable wages.
Web-enabled applications – An application that use the Internet as another means of accessing an organization’s data and the HRMS logic itself.
White Collar Employees – In the context of the Federal Wage-Hour Law, these are executive, administrative, professional (including computer related professionals), or outside sales employees who are exempt from the law’s minimum wage, overtime pay, and certain recordkeeping requirements.
Withholding – Subtracting amounts from an employee’s wages for taxes, garnishments or levies, and other deductions (e.g., medical insurance premiums, union dues). These amounts are then paid over to the government agency or other party to who they are owed.
Withholding Allowance – Reduces the amount of wages subject to federal income tax withholding based on exemptions and deductions claimed on federal income tax Form 1040.
Work-sharing Plan – An agreement to reduce some employees’ hours to avoid laying off other employees. Those employees whose hours were reduced receive partial unemployment benefits.
Worker Classification – The process of determining whether an individual performing services for a business is either an employee or an independent contractor.
Workweek – The basis for determining an employee’s regular rate of pay and overtime pay due under the FLSA. It can be any consecutive 7-day (168 hour) period chosen by the employer (e.g., Saturday through Friday, Wednesday through Tuesday).
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