Payroll Terms Business Owners Need to Know
As a business owner, you probably already have so much on your plate. Between daily activities, expenses, and so much more, it can be hard to understand every aspect of your business, especially payroll. Whether you handle these services yourself or hire someone else to get the job done, you should know some of the most common payroll terms; join us today as we take a closer look.
1: Accrue
This verb means to build up or accumulate over time. In short, this term involves all forms of compensation owed to the employee but has not been paid to them as of yet. The main aspects of this include:
- wages
- commissions
- salaries
- bonuses
- payroll taxes
2: Deductions
Payroll deductions are necessary to note because there are two different forms of deductions: mandated and voluntary. The employer’s responsibility is to withhold these deductions from every employee’s paycheck, including commissions and bonuses. If these are not withheld, the employer will be liable.
Government-mandated deductions include things such as Medicare taxes, Social Security taxes, and federal income taxes. Child support payments can be withheld from the employee’s paycheck or garnished if there is a court order. Voluntary deductions include 401(k) plans, insurance plans, and possibly union or uniform dues.
3: Employee’s Withholding Allowance Certificate AKA W-4
Even if you are a new business owner, you more than likely already know what a W-4 form is if you have ever worked as an employee. This form will tell your employer how much federal income tax to withhold from your paycheck. Typically, most employers give this form to new employees before they begin working. It’s important to note that you will need to fill out another W-4 form if you have any significant life changes such as:
- married
- had a child
- divorced
- started a side hustle
- paid too little or too much in taxes
The IRS usually recommends that every employee fill out a W-4 form at the beginning of each calendar year to ensure you pay the right amount of taxes. However, if everything remains the same, there may be no need to do so.
4: Tax Exempt
In some cases, an employee can be tax-exempt, which in short means that they are not going to have federal income taxes withheld from them on their paycheck. There are two situations that must apply to the employee for them to claim an exemption on their W-4 form, which are:
- Within the previous year, the employee had a right to a refund on their federal income taxes because they had no tax liability
- In the current year, the employee expects and refund of the federal tax that was withheld
5: Gross Pay
Gross pay is calculated by totaling up an employee’s earnings throughout a given period before any deductions. A simple equation to figure out gross pay is Gross Pay = Net Pay + Taxes and Deductions.
6: Income Tax
Did you know that income tax is one of the most significant revenue sources for the United States’ federal government? Individual employee income taxes fall into three categories: federal, state, and local income tax. Depending on what state you live in, you may only be responsible for federal income tax.
7: Net Pay
Net pay is essential because this is the total amount of money the employee will receive on a typical paycheck. This is calculated by taking their gross pay and subtracting any taxes and deductions.
8: Social Security
Social Security is considered a pay-as-you-go program. When you have a job that takes taxes out of your paycheck, you automatically get social security taxes to take out as well. This money is accumulated by the government and paid back to you every month after you retire. However, if you pass away, this money will be sent to any beneficiaries you may have, such as any surviving spouse or children.
9: Sick Pay
This is a benefit that you, as an owner, can offer your employees if you choose to do so. It’s important to note that there is no federal law requiring business owners to provide this type of benefit to their employees. If you decide to offer sick pay for your employees, make sure to include your compensation for sick pay within the policy since there are a few different ways that you can provide this type of payment.
You can also offer third-party sick pay instead where compensation comes from an insurance company. That insurance company must cover your business to provide this form of compensation. You should note that payment is only taxable in the first six months, and then the employee becomes exempt from taxes on sick pay compensation after the seventh month and so on.
10: Withholding
This term goes along with your employee’s W-4 forms. Withholdings are the portion of an employee’s paycheck directed to federal, state, and local tax collections. To determine the amount of withholdings on an employee’s paycheck, they must fill out the W-4 form. Withholdings can decrease the amount of taxes employees pay at the end of the year. However, if an employer does not withhold enough taxes, it may lead to the employee owing money at the end of the year.
As a business owner, it’s essential to be informed about all aspects of your business, even if it’s something that you do not handle. Payroll can be complicated to understand; however, you’ll understand it a lot better once you know these simple standard payroll terms. Here at Vision HR, we are dedicated to helping your Palm Coast business with our exceptional payroll and timekeeping services; get in touch with us today to learn more!
