Glossary of Payroll Terms

Glossary

401(k) Plan: (Section 401(k) of the Internal Revenue Code.) A plan that allows an employee to contribute pretax earnings to a company pool, which is invested in stocks, bonds, or money market instruments; also known as a Salary Reduction Plan. The contributions, as well as earnings on them, are only taxed when withdrawn. Annual contributions are limited by IRS regulations.

ACA: ACA is an abbreviation for Affordable Care Act, often referred to as Obamacare. Signed into law by President Barack Obama in March 2010, ACA is health reform legislation intended to make affordable health coverage available to millions of uninsured Americans.

ACH: Automated clearing house, or data collection service. A regional entity that electronically processes fund transfers between banks.

ACH Credit: An electronic funds transfer (EFT) initiated by an employer, wherein a credit is issued through the employer’s bank to the designated financial institution for the amount of the tax payment.

ACH Debit: The most popular method of electronic funds transfer (EFT). A state-designated bank, with proper employer authorization, notifies the employer-designated bank to transfer funds.

Adjusted Gross Income: The income on which individuals compute their federal income tax liability. It is determined by subtracting various allowable deductions and payments from gross income. Itemized deductions such as medical expenses, certain interest payments, and real estate taxes are not subtracted to derive adjusted gross income.

Allowances or Exemptions: Personal exemptions reduce the employee’s taxable income on the employee’s Form 1040 (US Individual Income Tax Return). Withholding allowances free approximately the same amount of wages from income tax withholding and therefore approximate the employee’s tax liability at the end of the year. Exemptions and allowances may be used synonymously.

An employee is entitled to federal withholding allowances for himself, his spouse, and his dependents. The value of a personal exemption for 2009 for federal income tax purposes is $3,650. The value of the exemption used by upper income persons is reduced and phased out when adjusted gross income reaches specified levels. Check with your tax professional for definitive advice on allowances/exemptions.

Amended Tax Return: A tax return by which an individual or entity corrects information which was contained in an earlier return. An amended tax return may require the payment of additional tax, possibly with interest and penalty, or it may be accompanied by a claim for refund.

Annual Wage: A fixed salary paid out to an employee over the course of a year.

Annualizing Wages: Plan of determining amount of income taxes to be withheld by multiplying the wages for one payroll by the number of periods in the year, determining the annual amount of withholding required on the total wages, and dividing the annual withholding by the number of payroll periods.

Back Pay: Salary or wages due from a prior payroll period.

Backup Withholding: A procedure used to assure that federal income tax is paid on earnings even though the recipient cannot be identified by a Taxpayer Identification Number. Entities must report non-wage earnings paid on IRS Form 1099. When the entity lacks the Taxpayer Identification Number, it withholds 28% of the interest, dividends, or fees and remits it to the federal government.

Base Pay Rate: An employee’s hourly wage or contractual salary or wage. This should not be confused with the “regular rate of pay” as defined by the Fair Labor Standards Act. See Regular Rate of Pay.

Belo Plan: Named after the Supreme Court case that approved its use, it is a guaranteed wage plan for employees whose jobs require irregular work weeks — sometimes working less than 40 hours, sometimes more.

Benefit Wage Ratio: A type of unemployment insurance experience rating plan using the formula: benefit wage ratio equals the benefit wages divided by the payroll. The result determines the employer’s unemployment tax rate.

Benefit Wages: An amount charged to an employer’s unemployment insurance account after an employee or former employee receives benefits, based on the base-period wages paid by that employer.

Benefit Year: Normally a 52-week period beginning with the first day a valid claim for benefits is filed.

Bonus or Supplemental Wages: Bonus or Supplemental wages are compensation paid to an employee in addition to regular wages and include, but are not limited to, bonuses, commissions, overtime pay, accumulated sick leave, severance pay, awards and prizes, back pay, retroactive wage increases, and payments for nondeductible moving expenses.

Business Expense: Cost of operating a business that is deductible by the employer for federal income tax purposes.

Cafeteria Benefit Plan (CAF): An arrangement under which employees may choose their own employee benefit structure. For example, one employee may wish to emphasize health care and thus would select a more comprehensive health insurance plan for the allocation of the premiums, while another employee may wish to emphasize retirement and thus allocate more of the premiums to the purchase of pension benefits. As defined in Internal Revenue Code, Section 125, such plans are tax-preferred.

CODA: CODA is an abbreviation for Cash or Deferred Arrangement, an employee benefit plan, also known as a 401(k) plan, from Section 401(k) of the Internal Revenue Code. The plan allows eligible private-sector employees to contribute pretax earnings to a company pool, which is invested in stocks, bonds, or money market instruments; also known as a Salary Reduction Plan. The contributions, as well as earnings on them, are only taxed when withdrawn. Annual contributions are limited by IRS regulations.

Commission: A fee paid to an employee or agent for services performed, especially a percentage of a total amount received in a transaction, as distinguished from salary, which is a fixed amount payable periodically.

Common Law Relationship: The state existing when the person for whom services are rendered has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work, but also as to the details and means by which that result is to be accomplished.

Common Paymaster: A member of a group of corporations that pays remuneration to employees of the related corporations. Under the common paymaster concept, related corporations are treated as a single employer, thus they pay no more FICA or FUTA tax than a single employer would pay. To qualify as a common paymaster, the related corporations must satisfy one of four tests prescribed by IRS during a calendar quarter.

Compensatory Time: Time off allowed an employee for overtime, usually on an informal basis and at the discretion of the supervisor. A device often used to avoid having to pay overtime for the time worked; however, caution must be used when applying compensatory time because of strict limitations placed on the use of it by the Fair Labor Standards Act.

Constructive Payment of Wages: Occurs when wages have been credited to or set apart for an employee without substantial limitation or restriction as to the time, manner, or condition upon which payment is to be made, so that the employee can get them at any time.

Consumer Credit Protection Act: Federal law that limits the amount of an employee’s wages that may be withheld for payment of debts, often used with specific reference to Title III of the act.

Contribution Report: Quarterly tax return filed with the state by the employer to provide a summary of the wages paid during the period and to show the computation of the tax or contribution.

Credit: An accounting entry that increases liabilities, revenues, and gains, and decreases assets and expenses.

Data Controller: An individual or organization that gathers and/or process an individual’s personal data. It is the responsibility of data controllers to assure their own compliance with data processing and protection laws such as GDPR.

Data Subject: A living individual to whom personal data relates. Frequently used in the context of data privacy laws such as GDPR.

De Minimis: A state of insufficient significance to warrant judicial attention. A de minimis fringe benefit is a benefit whose value is so small that it would be too costly or immaterial to account for and record.

Debit: An accounting term used for entries made on the left side of a General Ledger. Debits refer to the cost of acquisition of an asset and the amounts of deductible expenses.

Deductions: An amount that is or may be subtracted from an employee’s paycheck. They can be taken pre-tax or after tax depending on the type of deduction. The employee must agree to have deductions withheld from their paycheck.

Deferred Compensation Plan: A means of supplementing an executive’s retirement benefits by deferring a portion of her or his current earnings. Deferring income like this benefits an employer by encouraging the loyalty of its executives. To qualify for a tax advantage, the IRS requires a written agreement between an executive and her or his employer stating the specified period of deferral of income. An election by an executive to defer income must be irrevocable and must be made prior to performing the service for which income deferral is sought.

Dependent: A person who is claimed as a dependent must:

• be a child of the employee who is either under 19 or a full-time student under 24, or

• be a child of the employee who is a full-time student over 24 who is reasonably expected to receive less than $3,000 of income during the taxable year, or

• be reasonably expected to receive less than $3,000 of income during the taxable year, or

• be permanently and totally disabled and receive income for services performed at a sheltered workshop operated by a charity or government

• receive more than half his support from the employee;

• be a citizen, national, or resident of the United States, or a resident of Canada or Mexico, or an alien child adopted by and living with a United States citizen abroad;

• and be either:

  1. a child, grandchild, stepchild, parent, grandparent, stepparent, brother, sister, stepbrother, stepsister, in law, aunt, uncle, nephew, or niece of the employee, or

  2. a member of the employee’s household for the taxable year and have the employee’s home as his principal place of abode; and not file a joint return.

Disposable Earnings: The part of an employee’s earnings remaining after deduction of any amounts required by law to be withheld.

DOL: DOL is an abbreviation for Department of Labor, the agencies on both Federal and State levels responsible for setting and enforcing employment labor standards.

Double Time: Twice the regular hourly pay rate for overtime, Sunday, or holiday work.

Earned Income Credit: A tax refund or credit allowed certain taxpayers who earn low or modest wages. Their earned income and adjusted gross income must be less than a certain threshold indexed annually.

EEO-1: The EEO-1 Report is a compliance survey mandated by federal statute and regulations. The survey requires company employment data to be categorized by race/ethnicity, gender and job category. A sample copy of the EEO-1 form and instructions are available here.

EIC: See Earned Income Credit

Employee: Person who performs services for another person or entity in return for compensation. Any individual is an employee if the relationship between the employee and the person or entity for whom the services are performed is the legal relationship of employer and employee as defined under common law. An Employee may work on a per hour, per diem, or flat salary basis. The Internal Revenue Service, the U.S. Department of Labor, and other governmental organizations each have regulations specifically defining an “employee.”

Employer: Someone who hires and pays wages, thereby providing a livelihood to individuals who perform work. The employment relationship confers authority on the employer who may decide what to pay workers and what benefits to provide.

Employer Identification Number (EIN): A nine-digit account number assigned by the Internal Revenue Service for employment tax records.

Escheat: An assignment of property to the state when there is no verifiable legal owner. Unclaimed wages escheat after a certain duration. Property owned by someone who died without a will and without heirs escheats.

E-verify: An Internet-based system that compares information entered by an employer from an employee’s Form I-9, Employment Eligibility Verification, to records available to the U.S. Department of Homeland Security and the Social Security Administration to confirm the employee’s employment eligibility.

Exempt Employee: Worker such as an executive, administrative, or professional employee who is exempt from the minimum wage and overtime pay provisions of the Fair Labor Standards Act if certain tests regarding duties and salaries are satisfied.

Experience Rating: A rate at which employer contributions to state unemployment insurance programs are paid. This rate is adjusted based on the employer’s record of employment; see EXPERIENCE RATING SYSTEM.

Experience Rating System: A system by which an employer’s unemployment tax rate is determined on the basis of its past record of employment and unemployment. An employer with a low employee turnover generally has a low tax rate; a high employee turnover means a higher tax rate.

Fair Labor Standards Act: A federal law enacted in 1938, setting minimum wages per hour and maximum hours of work. It also provides that employees are paid one and a half times the worker’s regular hourly wage for work beyond 40 hours per week.

Fair Market Value (FMV): Used to determine the value of a non-cash fringe benefit, the fair market value is generally described as the cost an employee would have to pay for a benefit or service if he or she had to purchase it on the open market without benefit of any discounts.

Family & Medical Leave Act: A federal law that requires employers to provide eligible employees with up to 12 weeks of leave for their own serious illness, the birth of a child, or the care of a seriously ill child, spouse or parent.

Federal Form 8821 – Tax Information Authorization: A form that grants authorization to any individual, corporation, firm, organization, or partnership to inspect and/or receive confidential information verbally or in writing for a certain type of tax and certain years or periods. It is also used to delete or revoke prior authorizations.

Federal Form W-2 and W-3: An annual form provided to employees each year by their employer that shows federal wages and taxes withheld over the course of a calendar year. Any employee that has earned more than $600 for services performed must receive a W-2 from their employer. As such, the employer is required to report the W-2 to the Social Security Administration each year. The report shows Federal Income tax, Social Security tax, and/or Medicare tax withheld as well as other information. The Federal form W-3 is the transmittal/cover form that accompanies that shows the totals of all W-2’s being reported to the Social Security Administration each year.

Federal Insurance Contributions Act (FICA): The taxes imposed under this law fund social security. The employer is required to match the 6.2% social security tax rate imposed on the employee’s first $128,400 (2018) of wages as well as the 1.45% Medicare tax rate imposed on all of the employee’s taxable wages. No credits or withholding exemptions are permitted for the calculation of FICA taxes. When there is more than one employer, each must withhold FICA tax from the employee up to the taxable wage base.

Federal Insurance Contributions Act (FICA) – Medicare: 
Employee 6.2% on first $128,400 of wages (2018)

Employer 6.2% on first $128,400 of wages (2018)

Self-employed 2.4% on first $128,400 of net earnings (2018)

Federal Insurance Contributions Act (FICA) – Old Age, Survivors and Disability Insurance (OASDI): 
Employee 6.2% on first $106,800 of wages (2010)

Employer 6.2% on first $106,800 of wages (2010)

Self-employed 2.4% on first $106,800 of net earnings (2010)

Federal Unemployment Tax Act: A federal law that imposes unemployment tax on by employers. The law works in conjunction with state unemployment systems to provide payments of unemployment compensation to workers that have lost their job. Employers pay both Federal and state unemployment tax. The tax is 6.2% on the first $7000 in wages paid to each employee; any wages paid over this amount are not taxed. If an employer pays their state unemployment tax in a timely manner, then the FUTA tax percentage is reduced to 0.8% annually.

About Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return

Federal Withholding Rates (FIT): Amount withheld from an individual’s pay for federal income tax. Typically based on tables produced annually by the IRS. Amount is submitted with employer’s 941 tax deposit.

Fedwire: Usually spelled “FedWire,” it is an alternative wire transfer system provided by the Federal Reserve System, sometimes used by states as a backup to ACH transactions in emergencies.

Filing or Marital Status (Form W-4): Single, Married Filing Jointly, Married Filing Separately, Head of Household and Exempt are acceptable withholding statuses for calculating Federal Income Tax (FIT) on employee wages. Employees must indicate their withholding status on Form W-4, and the employer must withhold according to the correct employee table.

FITW: Federal income tax withholding

FLSA: See Fair Labor Standards Act

FMLA: See Family & Medical Leave Act

Form 8027: Employer’s Annual Information Return of Tip Income and Allocated Tips. Food or beverage establishments that normally employ more than 10 employees on a typical business day must file Form 8027 each year with IRS if tipping is customary at the establishment.

Form 8655: Reporting Agent’s Authorization. Service bureaus or other agents must submit a completed Form 8655 or a letter of application meeting IRS specifications to receive authorization to file Form-940 and -941 -941E returns on magnetic media.

Form 8809: Request For Extension of Time To File Information Returns. This form is filed with IRS to obtain an extension of time in which to file information returns with either IRS or SSA. Employers may receive an initial extension of up to 30 days. If additional time is needed to file, the employer may request an additional 30 days by submitting a letter and attaching a copy of the first approval letter.

Form W-2: Employee’s Wage and Tax Statement.

Form W-3: Transmittal of Income and Tax Statements. An IRS form used by employers to transmit paper forms W-2 to SSA.

Forms 1095-C and 1094-C: The forms used by Applicable Large Employers to report required ACA information to the IRS. Form 1094-C is the summary transmittal form for the employee detailed Form 1095-C. Data from Form 1095-C is also used by the IRS to determine employee eligibility for the premium tax credit.

Fringe Benefits: Indirect compensation provided to employees, usually including health and life insurance, as well as a pension. In the recent past, new items such as personal use of a company-owned vehicle, reimbursement of relocation expenses and other items are included among fringe benefits.

FUTA: Federal Unemployment Tax Act

Garnishment: A court order to an employer to withhold all or part of an employee’s wages and send the money to the court or to a person who has won a lawsuit against the employee. An employee’s wages will be garnished until the court-ordered debt is paid. Garnishing may be used in a divorce settlement or for repayment of creditors.

General Data Protection Regulation (GDPR): An EU personal data and privacy law that gives control of the personal information collected by an organization to the data’s subject and requires that the subject can review, correct, export and delete the data from the organization’s records. GDPR specifies data processing procedures, record keeping requirements and a 72-hour notification requirement in the event of a data breach.

GDPR affects any organization that offers goods or services to, or does business with, individuals located in the EU, regardless of the organization’s physical location or the data subject’s citizenship.

How an agile, cloud-based HRIS helps you comply with evolving privacy regulations.

General Ledger: A formal ledger containing all the financial statement accounts of a business. It contains offsetting debit and credit accounts. Certain accounts in the general ledger, termed control accounts, summarize the details booked on separate subsidiary ledgers.

Golden Parachute: A lucrative contract given to top executives of a company. It provides additional benefits which are triggered in the event a company is taken over by another firm, resulting in the loss of the job. A golden parachute might include generous severance pay, stock options, or a bonus payable when the executive’s employment at the company ends.

Gross Earnings/Gross Pay: Summation of total regular earnings and total overtime earnings and total other compensation, also known as gross pay. This is the amount prior to any deductions for taxes, social security, attachments, assignments or fringe benefit deductions.

Group Life Insurance: The basic employee benefit under which an employer buys a master policy and issues certificates to employees denoting participation in the plan. Group life insurance is also available through unions and associations. It is usually issued as yearly renewable term insurance although some provide permanent insurance. Employers may pay all of the cost or share it with the employees.

I-9: Form I-9 is used for verifying the identity and employment authorization of individuals hired for employment in the United States. All U.S. employers must ensure proper completion of Form I-9 for each individual they hire for employment in the United States. This includes citizens and non-citizens.

Automate Your On-boarding with PayNorthwest

Income Tax: A levy on the earnings of most employees that is deducted from their gross pay since the passage of the Current Tax Payment Act of 1943.

Independent Contractor: A classification of workers hired to do specific jobs over which the person hiring has no right to control the manner in which the work is done. The workers generally have a distinct trade or business that is offered to the public, and are often paid a lump-sum amount for the completed job. An independent contractor is not considered an “employee.”

Individual Retirement Arrangement: A tax-deferred personal retirement-savings account that meets the requirements of Internal Revenue Code Section 408.

Interstate Employee: An individual who works in more than one state.

Involuntary Deductions: Amounts withheld from an employee’s pay under orders of a court or other governmental agency. See Wage Attachment.

IRA: See Individual Retirement Arrangement

Levy: The seizure of wages, bank accounts or other property or rights, through lawful process or by force.

Medicare: A two-part federal insurance program for people 65 or older and certain disabled people. One part, the Basic Hospital Insurance Plan, provides for inpatient hospital services and post- hospital care. The other part, the Supplementary Medical Insurance Plan, pays for medically necessary doctors’ services, outpatient hospital services, and a number of other medical services and supplies not covered by the hospital insurance part of Medicare.

Minimum Wage: The lowest allowable hourly wage permitted by the government or a union contract for an employee performing a particular job

Negative-Balance Employers: Those whose unemployment reserve accounts have been charged for more benefits paid out than contributions paid into the fund.

Net Pay: The total earnings of the employee minus all the deductions from the earnings. Also called Take-Home Pay.

OASDI: Old-Age Survivors Disability Insurance. (See Federal Insurance Contributions Act)

OBC (Official Bank Check): A service where the payroll net is impounded into the service bureau’s account and the service bureau then pays the employees out of their account either via check or direct deposit.

Obligee: A person to whom money is owed

Obligor: A person who owes money

ODFI – Originating Depository Financial Institution: The bank or other financial institution where the employer maintains its payroll account.

Overtime: Time worked in excess of an agreed upon time for normal working hours by an employee. Hourly or non-exempt employees must be compensated at the rate of one and one-half their normal hourly rate for overtime work beyond 40 hours in one workweek. Working on holidays or weekends is sometimes referred to as overtime work.

Pay Period: The time duration, typically a week, half a month, or a month, within which the amount a worker has earned is determined so that the worker can be paid properly.

Payroll Register: Multicolumn form used in assembling and summarizing the data needed at the end of each payroll period. It lists all employees who earned remuneration, the amount of remuneration, the deductions, and the net amount paid.

Payroll Tax: Taxes levied on wages and salaries, such as income tax, FICA, disability tax, or state unemployment tax.

PBJ (CMS): The Payroll-Based Journal (PBJ) is a quarterly staffing and census report required by the Centers for Medicare & Medicaid Services (CMS) to measure the quality of care a Nursing Home is providing to its residents. This reporting impacts the Nursing Home Five Star Quality Rating of the reporting facility. 

Per Diem: (Latin for “day by day”) Daily allowance, usually for travel, entertainment, employee compensation, or miscellaneous out-of-pocket expenses while conducting a business transaction. The sum of money is always calculated on a daily basis and may be paid in advance or after the expense is incurred. Employees are sometimes paid on a per diem basis.

Percentage Method of Withholding: A procedure for calculating the amount of tax withheld using mathematical formulas, usually intended for use by employers with computerized payroll systems. The IRS and jurisdictions that require withholding of income tax may have different computerized methods for withholding.

Positive-Balance Employers: Employers who have built up a balance in their unemployment reserve accounts (contributions paid in less benefits charged).

Premium Pay: A special pay rate given to employees for working weekends, holidays, or late shifts, or for doing hazardous work. Sometimes referred to as penalty pay, it is a premium paid as an incentive to work at either unattractive times or dangerous occupations.

Prenotification (Pre-note): A process to check the accuracy of the bank and account information provided by the employee before the employer actually attempts to transfer any pay to the employee’s account. A special pre-note transaction, intermingled with regular direct deposit transactions, is transmitted across the ACH network. If the pre-note entry cannot be processed by an ACH or RFDI, it generally will be returned to the originating employer within 10 calendar days.

PTO: Also known as Paid Time Off, PTO is an employer policy that combines vacation and sick time into a single pool of hours/days for employees to use at their discretion.

RDFI – Receiving Depository Financial Institution: The employee’s bank or other financial institution. Payroll payments are transferred from an automated clearing house to the RDFIs where employees’ maintain their personal accounts.

Reciprocal Agreement: Arrangement entered into by two or more states whereby the resident of one state working in another state will not be subject to the withholding of income taxes by the state in which the person is employed, as long as that state has entered into a similar agreement with the employee’s resident state.

Reciprocity: The relationship between states or other taxing jurisdictions whereby privileges granted by one are returned by the other under the terms of a reciprocal agreement.

Reserve Ratio: A type of unemployment insurance experience rating plan using the formula: Reserve ratio equals Taxes minus Benefits divided by Payroll. The result determines the employer’s unemployment tax rate.

Reserve-Ratio Formula: A type of unemployment experience rating plan used in most states, based on: Contributions less Benefits Paid divided by Average Payroll.

Shift Differential: Extra compensation paid as an inducement to accept shift work. Those employees willing to work evening and midnight hours usually receive a shift differential.

Sick Leave: Sick Leave is an employee time off policy that banks hours to use as time off with pay when an employee is absent from work due to an illness or qualified care of another. Many cities, including Seattle, Tacoma, Spokane and Portland, have passed mandated policies to ensure employers provide minimum standards of sick and safe leave to employees. As of January 1, 2018, the state of Washington has minimum standards, extending sick and safe leave requirements statewide.

Simplified Employee Pension: A written plan under which an employer may make contributions to employees’ individual retirement arrangements (IRAs). Although SEPs must meet the general defined contributions plan standards of ERISA, they are subject to much less burdensome reporting requirements

Social Security Act: Social Security Act establishes a number of social insurance programs including retirement, survivors and disability insurance that are provided to individuals and families. These programs are administered by the Social Security Administration, a federal agency. Payments under these programs are known as “Social Security benefits” which are paid upon filing an application for benefits after the recipient meets certain eligibility requirements.

SSN: Social Security Number

State Unemployment Tax Act (SUTA): An employer-paid payroll tax that is required by all states. It works in conjunction with FUTA, the federal unemployment insurance program, to provide unemployment compensation to workers who have lost their jobs. The tax rate and wage base limits vary by state, and the tax is generally paid quarterly.

Statutory Employee: An employee whose remuneration is subject to social security withholding, but not to federal income tax withholding.

Take-Home Pay: The amount of wages a worker actually receives after all deductions, including taxes, have been made. Also called Net Pay.

Taxable Wage Base: The maximum amount of wages during a calendar year that is subject to a particular tax, such as FICA.

Third-Party Sick Pay

Sick pay generally means any amount paid under a plan because of an employee’s temporary absence from work due to injury, sickness, or disability. It may be paid by either the employer or a third party, such as an insurance company.

• Case 1 & 2 : Payments made by Employer / Employer’s Agent

  • Sick pay paid directly by an employer generally is treated as ordinary wages, subject to withholding for federal employment taxes. FICA taxes, however, apply to such payments only for the first six months

• Case 3: Payments made by a Third Party who is not an Agent

  • If Sick Pay provided through a 3rd party, such as an insurance company, income tax withholding does not apply unless requested by the employee

  • For purposes of FICA, the third-party payer of sick pay is considered the employer and is responsible for withholding, paying, depositing, and reporting taxes on sick payments UNLESS this responsibility is transferred to the actual employer (this is the case where special reporting in our system is needed)

• Deposits: Third Party Transferring Liability to Employer

  • Employer must pay ER side of FICA / FUTA

  • Third Party must pay any applicable employee WH and EE side of FICA

• Form 941: FICA Liability Transferred to Employer

  • On Line 2, “Wages, tips, and other compensation” include total amount of sick pay paid by third-party

  • On Line 5a, “Taxable social security wages” include total amount of sick pay paid by third-party that is subject to the tax

  • On Line 5c, “Taxable Medicare wages and tips” include total amount of sick pay paid by third-party that is subject to the tax

  • On Line 7b, “Current quarter’s sick pay,” the employer must enter the adjustment for the EE share of FICA taxes that were withheld by the third-party

• Form W-2: FICA Liability Transferred to Employer

  • The sick pay information may be included in the employee’s regular W- 2 from the employer, or sick pay may be reported on a separate Form W-2. This must be done even if the entire amount of sick pay is nontaxable.

  • Box 1 / 2 / 3 / 4 / 5 / 6 of W-2 will include the sick pay wages and employee taxes withheld

  • Box 12 will be marked with a Code J for any amount not included in income

  • Box 13 the “Third-party sick pay” box will be checked as the amounts were paid by a third party.

Tips: An employee who receives cash tips of $30 or more in a month must report them to his employer by the 10th day of the following month.  Employers are subject to FICA taxes on the reported tip income.

If a tipped employee also earns regular wages, the amount to withhold on tips should be figured as if the tips were a supplemental wage payment. If income tax was withheld from regular wages you may withhold on the tips at a flat 25% rate or you may add them to the regular wages and withhold as if the total were a single wage payment. If income tax was not withheld from regular wages, the 25% supplemental rate may not be used.

Trace number: A 14-digit number assigned to a direct deposit entry by the originating bank. The first 8 digits consist of the transit routing number of the originating bank. The last 6-digits are assigned in ascending sequence by the originating bank.

Transit Routing Number: An eight-digit number that identifies the financial institution to which the employee’s pay is to be deposited. The first four digits correspond to a state or city location; the last four digits identify a financial institution. A ninth digit is added to this number as a check digit.

UI: See Unemployment Insurance Taxes

Unemployment Insurance: A federal-state program that provides economic security for workers during periods of involuntary unemployment.

VETS-4212 Report: VEVRAA (Vietnam Era Veteran’s Readjustment Assistance Act) requires Federal contractors and subcontractors covered by the Act’s affirmative action provisions to report annually to the Secretary of Labor the number of employees in their workforces by job category and hiring location who are qualified, covered veterans (38 U.S.C. 4212(d)). VEVRAA also requires Federal contractors and subcontractors to report the number of new hires during the reporting period who are qualified, covered veterans.

The Veterans’ Employment and Training Service (VETS) issued regulations found in 41 CFR part 61-300 to implement the reporting requirements under VEVRAA, which implements the Jobs for Veterans Act (JVA) amendments to the reporting requirements under VEVRAA and requires the annual submission of the Federal Contractor Veterans’ Employment Report VETS-4212.

This VETS-4212 Report is to be completed by all nonexempt Federal contractors and subcontractors with a contract or subcontract in the amount of $100,000 or more with any department or agency of the United States for the procurement of personal property or non-personal services. Services include but are not limited to: utility, construction, transportation, research, insurance and fund depository, irrespective of whether the government is the purchaser or seller. Entering into a covered Federal contract or subcontract during a given calendar year establishes the requirement to file a VETS-4212 Report during the following calendar year.

Voluntary Deductions: Amounts withheld from an employee’s wages upon his or her request or authorization. See Wage Assignment.

Wage Assignment: A voluntary transfer of earned wages to a third party to pay debts, buy savings bonds, pay union dues, or contribute to a pension fund.

Wage Attachment: An involuntary transfer of earned wages to a third party usually to pay debts under a garnishment, child support order or tax levy.

Wage-Bracket Withholding Method: A procedure for determining the amount of income tax to be withheld using wage-bracket tables. These tables are usually classified by payroll periods and the employee’s marital status. To find out how much to withhold, the employer determines the employee’s wages, finds the wage-bracket within which the wages fall for the appropriate payroll period, and reads across the table to the column under the number that reflects the number of withholding allowances claimed by the employee on his or her Form W-4.

Wages: Total compensation paid for services whether in the form of wages, salaries, commissions, or bonuses, including the cash value of remuneration paid in a medium other than cash.

Washington State Paid Family and Medical Leave Act: Signed into law in 2017, Washington State’s Paid Family and Medical Leave Act requires a 0.4% withholding of quarterly gross wages from employees based in Washington State, regardless of where the employer is based. Employers larger than 50 are responsible for 37% of the withholding and may elect to withhold the remaining 63% from employee wages. All employers must report employee hours to Washington State monthly, and all employers must remit quarterly withholdings on their employees’ behalf.

Withholdings fund Washington State’s Paid Family and Medical Leave Program, an insurance program that offers benefits to employees who experience a qualifying event. Withholdings begin January 1, 2019. Benefits available January 1, 2020 to qualifying employees.

Withholding: Portion of an employees wages retained by the employer for the purpose of paying for various taxes, insurance plans, pension plans, union dues, and other deductions.

Withholding Tax: The amount of income taxes that an employer withholds if required to withhold from an employee’s salary when the salary is paid. The amount withheld is a credit against the amount of income taxes the employee must pay on his income earned for the taxable year.

Workweek: A fixed and regularly recurring period of 168 hours— 7 consecutive 24-hour periods, as defined by the Fair Labor Standards Act.