10 Payroll Terms To Learn Before Doing Payroll

Gross Pay, Net Pay, Withholding, Deductions, and More

Want to do your own payroll for your business? It's tricky and the payroll/payroll tax process involves a whole new vocabulary. Everything about payroll and payroll taxes is specific and bound by IRS regulations. 

So, before you begin working on the payroll process, these are some terms you will need to know.

01
Payroll

The term "payroll" is a general term, and it has several meanings. It can be:

  • The amount of money paid to all employees in a payday, as in "we ran payroll this morning for tomorrow's payday"
  • The financial records of a company relating to the payment of wages and salaries to employees
  • The total record of earnings of all employees for a year

02
Gross Pay

Gross pay is the total paid to an employee each pay period, and it is determined in different ways for salaried and hourly employees. 

For salaried employees, gross pay is stated as an annual amount. To determine gross pay for a pay period, the annual salary is divided by the number of pay periods in the year. 

For hourly employees, gross pay is the worker's hourly rate times the number of hours worked in that pay period; overtime is included in gross pay, too.

Gross pay is the amount reported to the IRS and is the amount the employee pays income taxes on. 

03
Net Pay

Net pay is the amount of pay an employee receives after all withholding and deductions from gross pay. In other words, net pay is the amount of the employee's paycheck. 

The calculation for net pay begins with gross pay. Then withholding for federal and state income taxes are taken out, as well as deductions for FICA tax (Social Security and Medicare). Finally, discretionary deductions like health plan and retirement plan amounts are taken out. 

04
Withholding

Withholding refers to amounts taken from an employee's paycheck for federal and state income taxes. Withholding is determined for federal income tax by a Form W-4 completed by the employee at hire, and for state income tax by a state W-4 or other tax form. 

The calculation for withholding includes:

  • The employee's gross pay for the pay period
  • Information on the employee's status as salaried or hourly
  • Information on marital status from the W-4 form
  • And information on any additional withholding amounts the employee directs on the W-4 form

05
Overtime

Overtime is the additional amounts paid to hourly employees who work over 40 hours in a week, who work on weekends, or other additional amounts. The federal minimum overtime requirement is that overtime must be paid at 1 1/2 times pay rate for employees who work more than 40 hours in a work week. Of course, you can pay overtime at higher rates. 

Overtime is calculated differently for hourly and salaried employees. Most salaried employees are exempt from overtime, but your business may be required to pay overtime to some lower-paid exempt employees. 

06
Work Week

A work week is considered as 168 consecutive hours of work in a seven-day period. This term is used in calculating overtime for hourly and some salaried employees. 

07
Pay Period

A pay period is a recurring length of time over which employee pay is recorded and paid. Some common pay periods are monthly, weekly, bi-weekly (every other week) and semi-monthly (twice a month). 

A weekly pay period results in 52 pay periods in a year.

A bi-weekly pay period results in 26 pay periods in a year, while semi-monthly pay results in 24 pay periods in a year. The difference is important in computing total pay for employees for a year.

In some years, there could be an extra 27th pay period, because of the way the weeks fall at the end of the year. 

08
Compensation

Employee compensation is a term that is often used instead of using the term "pay," but it is a more general term that includes other payments to employees. Some other types of employee compensation that are taxable to the employee include: 

09
Salaried vs. Hourly Employees

The terms "salaried employee" and "hourly employee" relate specifically to how these employees are paid. 

Salaried employees are paid an annual salary. Hourly employees are paid an hourly rate times hours worked.

10
Exempt vs. Non-exempt Employees

Exempt means "exempt from overtime." Exempt and non-exempt employees are categorized typically by the work they do.

Exempt employees (sometimes called a "white collar exemption") work in professional, managerial, and executive positions. Other workers are non-exempt. As noted, your business may be required to pay overtime to some exempt employees.