9 Payroll Terms You Should Know
Once you hire your first employee, it’s time to start running payroll. There’s a lot that goes into paying your team. Keep reading to learn nine terms you’ll likely encounter when writing paychecks.
1. Payroll
Payroll is a list of the workers you pay, including a record of their wages and salaries, withholdings, deductions, bonuses, and paid time off.
2. Payroll processing
Payroll processing is the preparation of your team’s paychecks and payment of employment taxes. It includes distributing paychecks, whether through printed checks or direct deposit. You can calculate paychecks yourself, with the help of a bookkeeper, or through payroll software, like Workful.
Read also: 5 Reasons Your Small Business Needs Payroll Software
3. Gross payroll cost
Your total payroll cost includes three things:
- the wages you agreed to pay your employees
- taxes you’re required to pay, including FICA and unemployment taxes
- employer-paid benefits, such as health insurance and matching retirement contributions
4. Pay period
A pay period is the length of time where you record how many hours your team members worked and pay them for that time. Common periods are monthly, weekly, biweekly, and semi-monthly.
Read also: What is a Pay Period? How Many Pay Periods are in a Year?
5. Workweek
A workweek is 168 consecutive hours – or a seven-day period. Your company’s workweek can be whatever you like, including Sunday through Saturday, Monday through Sunday, or Wednesday through Tuesday.
6. Overtime
You’ll pay your employees overtime for any time worked over 40 hours in one workweek. Under the Fair Labor Standards Act (FLSA), you’re required to pay at least one and a half times a person’s hourly rate for any overtime worked.
Some staff members, however, are exempt from overtime pay. This will depend on how much they’re paid, how you compensate them, and what kind of work they perform.
7. Withholdings
Withholdings are the amounts taken from each paycheck for taxes, including federal and state income taxes, Social Security taxes, and Medicare taxes. The amount you must take out for income taxes is determined by each person’s federal and state W-4 forms. Social Security is withheld at a rate of 6.2 percent, and Medicare is 1.45 percent. Learn more about how to calculate payroll taxes.
8. Gross pay
Gross pay is the total amount paid to a worker each pay period. For salaried staff members, you can determine their gross amount by dividing their annual salary by the number of pay periods in the year. For hourly team members, calculate their gross pay by multiplying their hourly rate by the number of hours worked during the pay period, including any overtime.
9. Net pay
Net pay is the amount an employee receives after withholdings and deductions. In other words, it’s the amount the worker will see on their paycheck.
