Payroll Glossary

ABC Test

The "ABC" test is the set of three criteria used to determine, under most state unemployment insurance laws, whether a worker is an employee performing covered services. Under the "ABC" test, services are excluded from coverage only if all three of the following conditions are met: (1) the worker is free from control or direction in the performance of work under the contract of service and in fact; (2) service is performed either outside the usual course of the business for which it is performed, or it is performed outside of all places of business of the enterprise for which it is performed; and (3) the individual is customarily engaged in an independent trade, occupation, profession, or business. A few states have simplified the test further by using any two of the three conditions.

Accelerated Deposit Rule

In general, an employer must deposit its combined federal income tax withholding (FITW) and Social Security and Medicare tax (FICA) liabilities in accordance with either monthly or semiweekly schedule rules, depending on how great its total FITW-FICA liability was during the official "lookback" period. The accelerated deposit rule is the requirement that an accrued FICA and FITW liability which totals $100,000 or more on any day must be deposited by the end of the next banking day.

Accountable Plan

An accountable plan is a reimbursement or other expense allowance which meets the requirements of business connection, substantiation, and return of excess amounts. Expense reimbursements made under an accountable plan are excludable from employee income. A plan failing to meet these requirements is a "nonaccountable" plan and payments made under it are taxable income to the employee.

Accounting Period

This is the period covered by an income statement (e.g., month or year), and is also known as the business cycle.

Accrual

Accrual is the recognition of assets, expenses, liabilities, or revenues after the cash value has been determined but before it has been transferred.

ACH Credit Entry

An ACH (Automated Clearing House) credit entry is a transaction in which a taxpayer instructs its financial institution to originate a federal tax deposit through the ACH system to the appropriate Treasury account.

ACH Debit Entry

An ACH (Automated Clearing House) debit entry is a transaction in which an employer's financial agent, after receiving instructions from the employer, instructs the employer's financial institution to withdraw funds from the employer's account for a federal tax deposit and to route the deposit to the appropriate Treasury account through the ACH system.

Actual Deferred Percentage Test

The ADP test is used to ensure that a 401 (k) plan does not unduly discriminate in favor of highly compensated employees. The ADP is the ratio of an employee's total compensation to the amount deferred. For a plan to be nondiscriminatory, the average of the ADPs for highly compensated employees must not inordinately exceed the ADPs for nonhighly compensated employees.

Adoption Assistance

This is a financial benefit provided by an employer to an employee to help with the child adoption process. Within certain limitations, it is excluded from FITW (federal income tax withholding), though not from FICA (Social Security and Medicare taxes).

After-Tax Deduction

Benefit plans that are purchased with after-tax dollars are exempt from FIT (federal income tax), FITW (federal income tax withholding), FICA (Federal Insurance Contributions Act, i.e., Social Security and Medicare taxes), and FUTA (Federal Unemployment Tax Act). However, because the contribution is made on an after-tax basis, the contribution does not reduce the amount of wages subject to FIT, FITW, FICA, and FUTA.

Aggregate Method

The aggregate method is a method of withholding federal income tax from supplemental wages in which the supplemental wage payment is combined with the regular wages paid during the most recent payroll period. After calculating withholding on the total amount using the wage-bracket or percentage method, the amount already withheld from the last wage payment is subtracted to reach the amount that must be withheld from the supplemental wage payment.

Annual Wage Reporting

AWR (annual wage reporting) is the process of annually filing Forms W-2 with the Social Security Administration.

Asset

An asset is a resource acquired by a business that is consumed by the business.

Automated Clearing House

The ACH is an entity which serves as the central agency for processing and transferring funds from one financial institution to another via electronic data transmission. ACHs operate under rules and standards established by the National Automated Clearing House Association (NACHA).

Back-Pay Award

This is a cash award granted to an employee generally to remedy a violation of the minimum wage or overtime provisions of the Fair Labor Standards Act or of such federal employment discrimination laws as the Age Discrimination in Employment Act, the Americans with Disabilities Act, and the Civil Rights Act. The payroll tax rules depend on who must pay the award and whether the award includes amounts for penalties, punitive damages, and legal fees.

Backup Withholding

Backup withholding is a method used to ensure the payment of income tax on certain nonwage payments when the payee fails to provide a taxpayer identification number (TIN) on an information return, or when the IRS notifies the payor that the payee's TIN is incorrect.

Balance Sheet

The balance sheet is a financial statement that presents a business's financial position in terms of its assets, liabilities, and owner's equity as of a certain date (generally the end of the company's fiscal year, but may be issued quarterly as well).

Base Period

This is a 12-month period used to determine against which employer a particular state unemployment insurance claim is to be charged. In most states, the base period consists of the first four of the last five quarters immediately before a claimant's benefit year begins.

Base-Period Wages

These are wages earned during the base period, which are often used to determine the eligibility for and amount of state unemployment insurance benefits.

Benefit Ratio

State unemployment taxes (premiums) are paid according to the amount of benefits charged against an employer's account by its former employees (risk factor). Thus, low employee turnover generally leads to a low tax (premium) rate and high turnover generally means a higher tax rate. In benefit ratio states, the relationship between benefits charged against an employer's account and its taxable payroll is measured. Thus the employer's account is charged with benefits paid to each worker or former worker. At the end of the year, benefits charged are divided by the employer's taxable payroll to compute the benefit ratio, and the employer's tax rate is set by checking the benefit ratio against the state's rate schedules. Generally, the higher the ratio, the higher the tax rate.

Benefit Wage Ratio

Under a benefit wage ratio plan, wages paid to a worker during the base period are used to determine the employer's tax rate. When a worker gets unemployment benefits, base-period wages (or benefit wages) are charged to all of the worker's base-period employers. The state computes the employer's rate by dividing the benefit wages charged against the employer during the relevant period by the employer's total taxable payroll for that period. The resulting benefit wage ratio is then used to determine the employer's actual tax rate.

Benefit Year

This is usually the 52-week period beginning with the first day a valid claim for unemployment insurance benefits is filed.

Bi-weekly

Biweekly means occurring once every two weeks. A biweekly payroll period can be used in the percentage method or the wage-bracket method of withholding.

Bureau of Labor Statistics

The BLS is the division of the U.S. Department of Commerce that is responsible for developing the Consumer Price Index (CPI) and other statistical series.

Cafeteria Plan

A flexible benefit plan (or "flex plan") allows employees to select benefits or level of coverage from a menu of benefits offered by an employer. Employees may choose the benefits they want to receive. A cafeteria plan is a flex plan that satisfies the requirements of Section 125 of the Internal Revenue Code (IRC). These requirements include limited participation, offering both taxable and qualified benefits, no deferral of compensation, and no discrimination in favor of highly compensated employees. Only certain benefits are eligible for inclusion under a cafeteria plan, including medical reimbursement benefits, accident or health insurance, group-term life insurance, dependent care assistance benefits, and vacation days.

Cash or Deferred Arrangement

A CODA is any arrangement under which an employee may choose between making a pretax contribution to a qualified plan, such as a profit-sharing or stock-bonus plan, and receiving cash or another taxable benefit.

Casual Labor

Service not in the course of the employer's business (casual labor) includes labor that is occasional, incidental, or irregular, and that does not promote or advance an employer's trade or business. The treatment of casual labor under the various federal payroll laws depends on the amount of wages paid.

Charging Benefits

This is a method of debiting an employer's unemployment insurance account to reflect the payment of unemployment benefits to its former employee.

Chart of Accounts

This is a listing of each account by name and an identification number. The numbering scheme is designed to identify the type of account.

Circular E

Circular E is the Employer's Tax Guide, an IRS publication that provides explanations and illustrations of an employer's federal tax withholding, depositing, and reporting obligations. Circular E provides information relevant to all employers, while the Employer's Supplemental Tax Guide is intended to provide additional information required by larger employers.

COBRA

The Consolidated Omnibus Budget Reconciliation Act of 1985 guarantees an employee's right to a limited period of continued employer-provided health insurance following termination.

Commission

Commission is a percentage of sales paid to an employee.

Common Paymaster

When an employee works for two or more employers, each employer must pay FICA on wages paid to that employee up to the taxable wage limit, but when two or more related corporations concurrently employ the same individual and pay that individual through a common paymaster, FICA may be figured as though the individual had only one employer - the common paymaster. The wages paid by each corporation are combined for the purposes of the taxable wage limit and FICA is paid based on the combined wages. It must be emphasized that employment must be concurrent. The common paymaster rule no longer applies if the employee leaves one employer to work full time for another. The common paymaster is, therefore, any member of the group of corporations that pays wages to an employee of the related corporations. The common paymaster is responsible for keeping books and payroll records and for filing information and tax returns.

Common-Law Test

This is a test that measures the level of control an employer is authorized to exercise over a worker. The common-law test is used to determine if a company exercises sufficient control over a worker to establish an employer/employee relationship with its attendant tax obligations.

Compensation

Compensation refers to all cash and noncash remunerations given to an employee for services performed for the employer.

Constructive Receipt

Constructive receipt is the doctrine under which wages are considered paid when the employee has access to them, not when they are earned (i.e., when the work has been performed). Payroll tax liability is generally incurred upon constructive receipt of wages.

Consumer Price Index

The CPI is a standard measure of domestic price inflation and is produced monthly by the Bureau of Labor Statistics (BLS). The CPI is used by employers to figure cost-of-living adjustments in collectively bargained contracts, and by the IRS and other government agencies to index various contribution and benefit limits.

Control Employees

Certain highly compensated or key employees whose access to some benefits is restricted or denied are called control employees.

Cumulative Bulletin

The CB is an annual IRS publication that contains all the information printed in the weekly Internal Revenue Bulletin (IRB).

Deduction

A deduction is an amount subtracted from an employee's gross pay to reach net pay, or an amount allowed to taxpayers as an offset against income.

Deemed Substantiation

Deemed substantiation methods include per diems and the standard business mileage rate, and are safe-harbor methods employers may use in place of the substantiation rules for expenses incurred under an accountable reimbursement plan.

Deferred Compensation

This is the postponement of a wage payment and is generally used to describe a portion of wages that an employee sets aside for retirement, usually on a pretax basis.

Defined Benefit Plan

This is a retirement plan that uses a formula based on an employee's salary and length of service to compute the employee's retirement benefits, and is not funded by employee contributions to the plan.

Defined Contribution Plan

This is a retirement plan with benefits determined by the amount in an employee's account at the time of retirement. The account may be funded by contributions from both the employer and the employee.

Direct Deposit

The electronic transfer of an employee's net pay directly into financial institution accounts designated by the employee is called direct deposit.

Discretionary Bonus

A bonus paid for services performed is a discretionary bonus, provided the bonus is not paid in advance.

Disposable Earnings

Disposable earnings are the portion of earnings that remains after deductions required by law have been made. Disposable earnings are used to calculate the maximum amount of an employee's wages subject to a garnishment, attachment, or child support withholding order.

Earned Income Credit

The EIC is a tax credit available to low-income employees. The credit reduces taxes owed and is intended to offset living expenses and Social Security taxes paid. An eligible employee may either claim the whole credit on his or her federal income tax return, in which case it will be paid out in a lump sum by the federal government, or in certain cases, he or she may choose to receive the credit incrementally with each paycheck. In the 2010 tax year, an employee can receive as much as $1,830 in advance earned income credit (AEIC) payments. An employee who chooses the advance payments option must file Form W-5 (Earned Income Credit Advance Payment Certificate) with his or her employer. Provided the certificate is valid, the employer is required to make AEIC payments to the employee.

Earnings Test

A person who reaches full retirement age (FRA) can earn any amount of money or work any number of hours and still receive full Social Security benefits. Prior to 2000, retirees aged 65 to 69 who were also Social Security beneficiaries would lose $1 of benefits for each $3 of earned income over a set earnings limit. The Senior Citizens' Freedom to Work Act of 2000 eliminated the retirement earnings test for beneficiaries aged 65 and over. These beneficiaries may now receive all of their Social Security benefits regardless of how much they earn, but all such earnings are still subject to FICA taxes. Social Security beneficiaries who are under FRA for at least part of the year, however, remain subject to an earnings test. The year an individual reaches FRA, a monthly earnings test is used in the first year of retirement to determine the amount of wages the beneficiary can earn in any month without loss of benefits. For amounts earned above the monthly limit, prior to the month the individual attains FRA, the beneficiary loses $1 of benefits for every $3 earned. Beginning with the month in which FRA is attained, there is no limit on the amount the beneficiary can earn.

Electronic Federal Tax Payment System

The EFTPS is essentially a communications network that facilitates the direct transfer of funds to the Treasury Department. It is the system by which mandated employers deposit their payroll and other federal taxes electronically via the ACH system.

Electronic Funds Transfer

EFT refers to the electronic movement of funds from one bank account to another. Direct deposit of employees' paychecks is an example of EFT.

Electronic Tax Application

An ETA is a same-day settlement procedure under which tax deposits are initiated and settled on the same day.

Employee

An employee is an individual who performs services for another individual or an organization in return for compensation. This worker classification carries with it a variety of tax obligations for the employer. See also independent contractor.

Employee Coverage

The Fair Labor Standards Act contains a provision under which employees of companies not meeting the enterprise coverage test may be individually covered if they are engaged in activities related to interstate commerce.

Employee's Withholding Allowance Certificate

An employer must have each new employee fill out a Form W-4 (Employee's Withholding Allowance Certificate). On this form, the employee shows his or her tax filing status (married or single) and the number of withholding allowances claimed. The employer uses the information provided on the form to calculate the amount of federal income tax to be withheld from the employee's wages. An employee's Form W-4 should go into effect with the first payment of wages to the employee. If the employee will not complete a Form W-4, the employer should withhold from the employee's wages as if he or she had filled out the form as a single person claiming no allowances.

Employer Identification Number

The EIN is a 9-digit identifier issued by the IRS to withholding employers and is required to be shown on all materials sent to the IRS or SSA (Social Security Administration).

Enterprise Coverage Test

The Fair Labor Standards Act contains a provision under which all employees of an employer are covered if that employer is engaged in interstate commerce and has an annual sales volume of at least $500,000.

Equal Pay Act

The EPA is an amendment to the original Fair Labor Standards Act that prohibits wage discrimination on the basis of gender.

Escheat

This is defined as the reversion of unclaimed wages to the state after a given period of time.

Excise Tax

This is a tax imposed on a specific transaction.

Exempt

If an employee claims exempt on his or her Form W-4, the employer does not have to withhold federal income tax from the employee's wages.

Exempt Employees

This generally refers to employees who are exempt from the minimum wage and overtime provisions of the Fair Labor Standards Act, although provisions of other payroll laws and regulations may provide for exemptions from other requirements, such as federal income tax withholding or FICA and FUTA.

Expense Account

This shows the costs of goods and services consumed by the company during the accounting period.

Experience Rating System

This is a method used by states to allocate unemployment taxes on the basis of benefit costs. An employer with a low employee turnover generally has a low tax rate; a high employee turnover means a higher tax rate.

Extended Benefits

Extended benefits are unemployment compensation benefits paid during periods of high unemployment. Benefits are 50% federally funded and payable up to 13 additional weeks after an eligible unemployed individual has exhausted his or her regular state benefits.

Fair Labor Standards Act

The FLSA is a federal wage-hour law enacted in 1938. The FLSA covers minimum wage, overtime, recordkeeping, employment of minors, and equal pay.

Fair Market Value

FMV is used to determine the value of noncash, employer-provided benefits for payroll tax purposes, or the value of facilities provided to employees in lieu of wages.

Family and Medical Leave Act

The FMLA requires employers with at least 50 employees to provide up to 12 weeks of unpaid leave to employees under certain health- or family-related circumstances.

Federal Insurance Contributions Act

FICA imposes employer and employee taxes to fund the federal government's old-age, survivors, and disability insurance (OASDI/Social Security) and health insurance (HI/Medicare) trust funds.

Federal Tax Deposit Coupon

Employers not required to use the EFTPS may make deposits using the traditional paper-coupon method using Form 8109, which is automatically sent to employers by the IRS.

Federal Unemployment Tax Act

FUTA requires employers to pay a certain percentage of their employees' wages (up to a maximum wage limit) as a payroll tax to help fund unemployment compensation benefits for separated employees.

Filing Status

This is the marital status of an employee and is reported for withholding purposes.

Financial Agent

A financial agent is an organization that verifies the accuracy of EFTPS enrollment information, enters it in its enrollment record database, and notifies employers of EFTPS procedures and receives EFTPS transactions.

Flat Rate Method

This is a method of withholding federal income tax on supplemental wages in which the supplemental payment and regular wages are treated separately. The employer withholds 28% of the supplemental wages.

Flexible Spending Account

An FSA is an arrangement established as part of a cafeteria plan under Section 125 of the Internal Revenue Code (IRC). The FSA allows employees to set aside pretax dollars to pay for qualifying expenses, such as deductibles on medical insurance or dependent care assistance.

Garnishment

A garnishment is a legal procedure through which an individual's earnings are required to be withheld for payment of a debt.

General Ledger

This is a ledger containing all of the transactions in the debit and credit accounts of a business.

Golden Parachutes

These are payments made to business executives in excess of their usual compensation in the event the business is sold and the executives are terminated from employment.

Gross Wages

These are the total amount of regular wages and the fair market value of taxable benefits provided to an employee by an employer.

Gross-Up

This is a formula used to determine the total taxable gross when an employer pays an employee's share of tax.

Group-Term Life Insurance

GTLI is term life insurance that is provided to employees, with the cost being borne by the employer, the employee, or both.

High-Low Substantiation Method

This is an IRS-approved safe-harbor method for reimbursing an employee's lodging, meal, and incidental expenses incurred while he or she was traveling away from home overnight on business.

Highly Compensated Employee

This is an individual who by virtue of salary or position within a company has restricted rights to participation in certain benefit plans. Plans found to discriminate in favor of highly compensated employees may be disqualified.

Immigration and Naturalization Service

The INS is the former name of the division of the Department of Justice responsible for enforcing U.S. immigration law. This division is now split into the U.S. Citizenship and Immigration Service (USCIS) and the Immigration and Customs Enforcement (ICE).

Income Statement

This is a financial statement showing a company's results of operations for an accounting period or fiscal year.

Independent Contractor

An independent contractor is a worker not considered an employee and for whom a hiring company therefore has no employment tax liability.

Indexing

Indexing refers to increases in contribution and benefits limits, wage bases, exclusions, and similar values to account for inflation. See also Consumer Price Index.

Information Return

This is a return sent to the IRS or the SSA that indicates information relevant to tax liability.

Internal Revenue Bulletin

The IRB is a weekly compilation of IRS rulings and procedures, Treasury Decisions, and other administrative judgments affecting payroll and other tax areas.

Involuntary Deductions

These are deductions over which employers and employees have no control, such as a levy for unpaid federal or state taxes.

Key Employee

This is an individual who by virtue of position, ownership, and/or compensation has restricted rights of participation in certain benefit plans.

Leased Employees

Leased employees are employees of a leasing agency who are hired and trained for the client firm through the agency. Withholding, depositing, and reporting responsibilities remain with the leasing agency.

Levy

A levy is a garnishment of an employee's wages for nonpayment of taxes.

Liability

A liability is a debt of a business that has yet to be paid.

Long-Term Care Insurance

This is an insurance contract providing for coverage of qualified long-term care services, including diagnostic, preventive, treating, mitigating, and rehabilitative services. The contract is treated as an accident and health insurance contract for payroll tax purposes.

Lookback Period

This is the 12-month period running from July 1 of the second preceding calendar year through June 30 of the preceding calendar year. The employer's payroll tax liability during this period determines its depositor status for the current year.

Medical Savings Account

An MSA is an arrangement through which an employer or an employee (but not both) can put tax-deferred contributions into an account for the payment of health care deductibles under a high deductible health insurance plan.

Medicare

Medicare is a federal health insurance program for people aged 65 or older and certain disabled people, and is financed by the Hospital Insurance portion of FICA.

Megnetic Media Reporting

This is an alternative method to filing paper returns and forms for employers with computerized payroll systems. The information is filed on magnetic tape or diskette.

Minimum Wage

This is the lowest amount that an employer can pay its employees per hour under federal or state law.

Miscellaneous Income

Form 1099-MISC states how much a contractor was paid for services rendered during the previous calendar year.

Multiple Worksite Reporting

All states are required to collect employment and wage data from certain multiple worksite companies on a Bureau of Labor Statistics standardized form called the Multiple Worksite Report.

Negative-Account Employer

A negative-account employer is an employer whose unemployment tax contributions are less than the benefits charged to its account.

Net Pay

Net pay is that part of an employee's wages that remains after all deductions have been subtracted.

Net Worth

This is the amount by which a company's assets exceed liabilities.

Non-Discretionary Bonus

A nondiscretionary bonus is a contractual or agreed-upon bonus or incentive related to production, efficiency, attendance, quality, or some other measure of performance.

Non-Exempt Employees

Nonexempt employees are covered by the minimum wage and overtime provisions of the Fair Labor Standards Act, and may be paid on an hourly or salary basis.

Non-Qualified Plan

In the context of employee benefits, this is an employer plan that does not meet IRS qualification requirements. Nonqualified plans can be discriminatory.

Non-Resident Alien

This is an individual who is neither a U.S. citizen nor qualifies as a resident alien.

Noncash Fringe Benefits

These are benefits paid to employees in a form other than cash, such as health insurance, company-provided vehicles, and group-term life insurance.

Normal Retirement Age

This is the age at which full, unreduced Social Security benefits can be received. The current normal retirement age is 65; it will gradually increase to age 67 by the year 2027.

Obligee

An obligee is a person to whom money is owed.

Obligor

An obligor is a person who owes money to an obligee.

One-Day Deposit Rule

If an employer's accumulated employment tax liability reaches $100,000 on any day during a monthly or semiweekly deposit period, the taxes must be deposited by the close of the next banking day. See also accelerated deposit rule.

Overtime

These are hours worked by nonexempt employees in excess of maximums set by federal or state law that must be compensated at a premium rate of pay. Under the Fair Labor Standards Act, all hours worked over 40 in a workweek must be paid at not less than 150% times the employee's regular rate of pay.

Overtime Premium

This is the amount equal to half of an employee's regular rate of pay times all overtime hours worked.

Paid Time Off

This is payment received for time not worked due to holiday, illness, vacation, jury duty, bereavement, or the failure of the employer to provide sufficient work.

Payroll Expense

A payroll expense is an expense that may be recorded in the payroll expense journal by function or by type of pay.

Payroll Period

A payroll period is a period of service for which an employer pays wages to its employees.

Per Diem

This is a flat daily rate of reimbursement for meals, incidentals, and lodging expenses incurred by employees while traveling away from home overnight on business.

Pieceworker

This is a worker who is paid per unit, or piece, produced.

Positive-Account Employer

This is an employer whose unemployment tax contributions are greater than the benefits charged to its account.

Posting

Posting refers to recording a transaction in a journal entry, or recording a journal entry in the general ledger.

Premium Pay

This is the portion of pay, over and above the regular hourly rate, paid for overtime hours worked. See also overtime premium.

Primary Insurance Amount

The PIA is the base from which Social Security benefits are derived. It is essentially the average of an individual's taxable earnings over his or her working lifetime.

Private Letter Ruling

A PLR is a reply by the IRS to a request from a taxpayer about the tax implications of a particular set of facts. PLRs may not be relied on by other taxpayers or cited as precedent, but are indicative of IRS thinking on the issues involved.

Profit

Profit occurs when income exceeds costs and expenses.

Public Sector Employee

Public sector employers are state or local governments or their political subdivisions, such as public utilities and public school districts.

Qualified Plan

This is a benefit plan that meets IRS qualification requirements for tax-favored treatment (e.g., nondiscrimination).

Quarterly

Quarterly means once every three months or four times per year.

Quarters of Coverage

This is used to measure an individual's insured status and is the length of time an individual has been covered by Social Security.

Reasonable Basis

This is a standard used to determine whether a worker can be treated as an independent contractor whether or not the common law test is met, based on prior court and administrative rulings, IRS audits, or long-standing practice in the industry.

Reconcile

To reconcile means to ensure that amounts withheld, deposited, paid, and reported by employers agree with each other and, if they do not, to determine the reasons and make the necessary corrections.

Regular Rate of Pay

This is the hourly pay rate determined by dividing the total regular pay actually earned for the workweek by the total number of hours worked.

Reimbursed Expense

A reimbursed expense is a payment for business-related expenses incurred by an employee on behalf of, or for the convenience of, the employer.

Remuneration

Remuneration refers to payment for services, including benefits.

Request for Federal Income Tax Withholding From Sick Pay

If an employee receives sick pay from a third party (such as an insurance company) that is not an agent of the employer, federal income tax is withheld only if the employee chooses. The employee must file Form W-4S, Request for Federal Income Tax Withholding From Sick Pay, with the third-party payer, which must then withhold according to the employee's direction.

Resident Alien

A resident alien is a non-U.S. citizen who meets the "green card" or "substantial presence" test. Resident aliens are subject to federal unemployment taxes in the same manner as U.S. citizens.

Retained Earnings

Retained earnings are the amount by which a company's revenue exceeds its expenses, reduced by any amount returned to the owners.

Retroactive Pay

This is pay for time worked in a previous workweek. Retroactive pay must be applied to both regular and overtime hours.

Revenue

Revenue refers to income received for goods and services provided by an organization.

Revenue Account

A revenue account identifies amounts received for goods sold and services rendered during the accounting period.

Revenue Procedures

These are detailed explanations issued by the IRS of actions taxpayers should take to remain in compliance with federal tax law and regulation.

Revenue Rulings

These are IRS regulatory interpretations based on a particular set of facts.

Safe Harbor

A safe-harbor method is an IRS-approved alternative method (usually a short-cut) for complying with IRS rules, regulations, and procedures.

Salary Reduction Agreement

This is an agreement that allows eligible employees to elect to reduce their compensation or forego an increase in compensation in order to have that amount contributed directly to a qualified retirement or other benefit plan.

Self-Employment Tax

This is a tax imposed under the Self-Employment Tax Act on the income of those who work for themselves, so that they can build up Social Security and disability benefits other workers acquire through FICA taxes on their wages.

Semi-Annual

Semiannual refers to something occurring twice per year or once every six months.

Semi-Monthly

Semimonthly refers to something occurring twice per month, and is a type of payroll period.

Severance Pay

This is a payment made by an employer to terminated employees (usually those who are terminated through no fault of their own), and is designed to tide them over until new employment is secured.

Shift Differential

This is extra pay received by employees for working a less-than-desirable shift.

Sick Pay

Sick pay refers to replacement wages paid to an employee who cannot work because of an illness or injury that is not work-related.

Simplified Employment Pension

SEPs are IRAs to which employers can make contributions beyond the IRA limits. These contributions must be made under a written allocation formula that meets participation, nondiscrimination, and other requirements.

Social Security Act

The Social Security Act is the federal law that established the old-age, survivors, and disability insurance (OASDI) programs commonly referred to as "Social Security". The programs are financed by the OASDI portion of FICA.

Statement of Cash Flow

This is a financial statement that shows the sources and uses of cash during the accounting period.

Statement to Correct Information

Form 941c is used to make adjustments and corrections to Form 941 when taxes have been underwithheld or overwithheld. This form explains the nature of the adjustment and shows the erroneous and corrected amounts of tax withheld.

Statutory Employees

These are special groups of employees whose wages are not subject to FITW but are subject to FICA and FUTA. These employees include agent- or commission-drivers, certain homeworkers, full-time life insurance salespeople, and full-time traveling or city salespeople.

Subsidiary Ledger

Summarized entries are posted from subsidiary ledgers directly to the general ledger. Subsidiary ledgers replace journals and arose with the computerization of most companies' accounting systems.

Substantiation

Substantiation refers to the requirement that employees keep records (including receipts) of the amount, time, place, and business purpose of expenses to be reimbursed by the employer.

Supplemental Wages

Supplemental wages refer to compensation paid in addition to an employee's regular wages, such as bonuses, commissions, and overtime pay. Special withholding rules apply to supplemental wages.

Take-Home Pay

In the context of federal tax levies, take-home pay is the amount of an employee's wages that remains after all normal deductions in effect at the time the levy was received.

Tip Credit

This is a reduction in the minimum wage allowed for tipped employees, authorized by the provision in the Fair Labor Standards Act allowing employees to take a credit against their minimum wage obligations for tips received.

Tipped Employee

A tipped employee is one who is engaged in an occupation in which he or she customarily and regularly receives more than $30 per month in tips.

Transmittal of Wage and Tax Statements

Employers submitting W-2s on paper must also file Form W-3, which requires the employer to provide composite information pertaining to the batch of W-2s being filed.

Uniform Interstate Family Support Act

UIFSA is a law that requires employers to honor out-of-state support withholding orders regardless of whether they have been registered with a child support enforcement agency of the receiving state.

Wage and Tax Statement

Form W-2 is used to report wages and payments made to employees and payroll taxes withheld from employees' pay during the calendar year. Although the IRS issues the form, submission is to the SSA.

Wage Assignment

This is a voluntary transfer of wages to secure a loan from a creditor or to pay off a debt.

Wage Attachment

This is an involuntary transfer of wages to satisfy a debt.

Wage Base

The wage base is the wage limit beyond which an employee's wages are not taxed.

Wage Order

A wage order is a written directive ordinarily issued by a labor commission or board establishing the wages and hours of employees in a particular occupation.

Wage-Bracket Withholding Method

This is a procedure for determining the amount of income tax to be withheld from wages directly from tables supplied by the IRS or state departments of revenue.

White Collar Employees

In the context of the Federal Wage-Hour Law, these are executive, administrative, professional, or outside sales employees who are exempt from the law's minimum wage, overtime pay, and certain recordkeeping requirements.

Withholding Allowance

A withholding allowance reduces the amount of wages subject to federal income tax withholding based on exemptions and deductions claimed on federal income tax Form 1040.

Withholding Certificate for Pension or Annuity Payments

Income from annuity, pension, profit-sharing, stock bonus, and some other deferred compensation plans is taxed under regulation by a method and at a rate determined by the nature of the payment (periodic or nonperiodic, eligible for rollover or not). Form W-4P, Withholding Certificate for Pension or Annuity Payments, is used by recipients to have additional income tax withheld above that required by regulation or to claim exemption from withholding.

Work-Sharing Plan

A work-sharing plan reduces an employee's hours on the job so that work can be shared with other employees. Employees working reduced hours receive partial unemployment benefits.