Keeping up with legislation changes, amendments to tax laws, and other factors that affect employee pay amounts can be time consuming and complicated. Hiring a payroll company is a great way to make sure you comply with applicable laws without doing the research yourself. The first step in shopping for a company is to know some of the important terminology used by vendors. Payroll services should be able to offer basic features like tax calculation, payment of employment tax, and direct deposit. Knowing a few payroll outsourcing terms and concepts will help you communicate better with vendors.
Accounting Period: Time period covered in an income statement. Accounting periods are most commonly quarterly and/or annually.
Advance Earned Income Credit: Employees who are eligible for the federal earned income tax credit can take an “advance,” or have less withheld from each paycheck to offset the credit amount. Most payroll processing services will be able to determine the applicable amounts.
Archer Medical Savings Account: An account where pre-tax money can be deposited by an employee or employer (not both) to be used for medical expenses.
Cafeteria plan: The general term for any plan where funds are taken out of employee wages “pre-tax.” Funds can be used for child care, insurance, or other reasons. Internal Revenue Code §125 details qualified plans.
Circular E Employers Tax Guide: An annual guide that outlines employer tax responsibilities.
Compensation: Payment in the form of money, benefits, or stock given to employees in exchange for services rendered.
Deferred Compensation: The delay of payment to a future date, such as for a pension plan or employee savings account.
Defined Benefit Plan: A plan that defines employer contributions to an employee account using a formula that takes into account salary and length of service.
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Direct Deposit: The deposit of employee wages directly into a bank account, rather than payment by check.
EIN (Employer Identification Number): Similar to a social security number, but for a business. This is how an employer is identified for tax purposes.
EFPTS (Electronic Federal Tax Payment System): A system that allows businesses to pay employment taxes and make deposits to qualified government savings plans electronically.
Exempt: The extent to which and employee has tax amounts withheld from paychecks. An employee can elect to take “exemptions” or become exempt from withholding for certain reasons set forth in the tax code.
FICA: Stands for Federal Insurance Contribution Amount, more commonly known as the “social security tax” that is withheld from employee paychecks.
Withholding Amount: Amount taken out of employee wages used to pay employment and other taxes.
Gross Pay: The total amount of employee pay before any deductions are made for tax or other payment.
Independent Contractor: A person that performs services for a business as a non-employee. Independent contractors are identified by a list of different factors defined in the Internal Revenue Code.
IRA (Individual Retirement Account): An account that offers certain tax advantages to employees when contributions are made. Usually money can be deposited into an IRA “pre-tax,” and it is taxed later upon disbursement at a lower rate.
Payroll Register: Report that is generated at the end of an accounting period specifying employee payment amounts, tax amounts, and payments made in association with payroll services.
Percentage Method: A common method for calculating how much tax to withhold from employee pay.
Tax Levy: A government for a business to withhold employee wages for the payment of unpaid employee taxes.
W-2: An end-of-year statement of earnings given to employees. It details withheld amounts and other payments made, such as those to savings accounts of cafeteria plans.
W-4: A form that specifies withholding amounts and exemption status. Employees are able to amend W-4s at any time in order to change the amount of tax withheld.
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