Glossary: The HR and payroll terms every business owner must know

ACA: More often referred to as Obamacare. Signed into law by President Barack Obama in 2010, it includes policies intended to extend health insurance coverage to millions of uninsured Americans through initiatives such as expanding Medicaid eligibility and launching a healthcare marketplace.

ACH: Automated Clearing House, a network that coordinates electronic payments and automated money transfers. ACH is a method for moving money among banks without using cash, a wire transfer, physical check or credit card network.

Americans with Disabilities Act (ADA): The Americans with Disabilities Act of 1990 or ADA is a civil rights law that prohibits discrimination based on disability.

Applicant tracking system: Software that enables electronic handling of hiring needs.

At-will employment: An at-will employee can be fired at any time and for any reason, with a few illegal exceptions. The employer doesn’t need good cause to terminate your job. Federal exceptions are firing an employee for obeying the law, or if oral or written policies imply a certain termination policy or job security.

Background check: Also referred to as pre-employment screening; may comprise screening services like a drug screening, skills assessment and behavioral assessment tools. A background check also verifies factual information about prospective hires, such as their identity, education and work credentials. It may also include a criminal history check, credit history check or driving record check.

Benefits: Benefits are a form of compensation paid by employers to employees over and above the amount of pay specified as a base salary or hourly rate of pay. Benefits are a portion of a total compensation package for employees.

COBRA: Consolidated Omnibus Budget Reconciliation Act of 1985 mandates employers with 20 or more employees that offer health care benefits must offer a continuing coverage option to those who lose their benefits due to a reduction in hours, termination, etc. COBRA compliance violations can cause significant penalties.

Compensation: The monetary benefit given to an employee or worker providing services to an organization. Compensation includes components like salary and benefits.

Deductions: A payroll deduction plan is when an employer withholds money from an employee’s paycheck and may be voluntary or involuntary. An example of an involuntary payroll deduction plan is employers’ requirement by law to withhold money for Social Security and Medicare. An example of a voluntary payroll deduction plan is when employees opt in for certain purposes, such as saving toward their retirement plan.

Department of Labor (DOL): A federal agency established in 1913, responsible for enforcing federal labor standards and occupational safety.

Direct Deposit: An electronic funds transfer that deposits an employee’s wages directly into their bank account.

Employee (vs. independent contractor): An employee is a person employed for wages or salary. An independent contractor is someone who operates under a business name or under their own name and may have their own employees, a separate business checking account, may advertise their services, provide invoices for work completed, have more than one client, their own tools, establish their own hours and keep their own business records. The IRS defines a person as an independent contractor “if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” Independent contractors must pay their own Social Security and Medicare taxes.

Equal Employment Opportunity (EEOC): The U.S. Equal Employment Opportunity Commission is a federal agency established by the Civil Rights Act of 1964 to administer and enforce civil rights laws against workplace discrimination.

Essential job functions: This term refers to the fundamental duties of a position: the things a person holding the job absolutely must be able to do. Essential job functions are used to determine the rights of an employee with a disability under the Americans with Disabilities Act (ADA).

Exempt (and non-exempt) employees: An “exempt employee” refers to a category of employees defined in the Fair Labor Standards Act and applies to employees who don’t receive overtime pay or qualify for minimum wage. When an employee is exempt, it essentially means that they are exempt from receiving overtime pay. Nonexempt employees are those who are entitled to earn the federal minimum wage and qualify for overtime pay.

Exit interview: A survey conducted with an individual who is separating from an organization.

Fair Labor Standards Act (FLSA): A U.S. law meant to protect workers against certain unfair pay practices with regulations pertaining to minimum wages, overtime pay requirements, limitations on child labor and interstate commerce employment.

Family and Medical Leave Act (FMLA): A U.S. labor law enacted in 1993 requiring covered employers to offer employees job-protected and unpaid leave for qualified medical and family reasons.

FICA: The Federal Insurance Contributions Act is a federal law that requires employers to withhold three different types of employment taxes from employees’ paychecks. These comprise Social Security taxes and Medicare taxes.

Form 1099-MISC:

Used to report miscellaneous income, such as rent or payments to an attorney.

Form 1099-NEC: A record that an entity or person that is not your employer paid you money. Freelancers and independent contractors receive a 1099-NEC from clients to reflect payment.

Full-time (and part-time): Generally, part-time employees work fewer hours than full-time employees. Part-time positions may comprise inconsistent hours, fewer responsibilities and limited benefits. However, the Affordable Care Act deems part-time workers as employees who work fewer than 30 hours per week. There is no universal amount of time specified for part-time employment.

FUTA: An acronym for the Federal Unemployment Tax Act, it is one of the taxes employers have to pay as part of payroll taxes. At the time of publication, the tax is 6% on an employee’s first $7,000; any wages above $7,000 are not taxed.

Garnishment: A payroll garnishment happens when a court issues an order requiring an employer to withhold a certain amount from an employee’s paycheck and send it directly to the organization or person owed money, until the debt is fully paid.

Gross pay: This is the amount of money owed to an employee before withholding taxes and other deductions.

Hourly: If an employee receives hourly wages rather than salary, their pay is dependent on how many hours they have worked during that pay period.

Imputed income: The value of non-monetary compensation given to employees in the form of fringe benefits. This income is added to an employee’s gross wages so employment taxes can be withheld.

Income tax: A type of tax governments impose on income generated by businesses and individuals within their jurisdiction. Business income taxes apply to corporations, partnerships, small businesses, and people who are self-employed. Personal income tax is a type of income tax that is levied on an individual’s wages, salaries, and other types of income.

Minimum wage: The federal minimum wage provisions are contained in the Fair Labor Standards Act (FLSA). The federal minimum wage is $7.25 per hour effective July 24, 2009. Many states also have minimum wage laws.

Net pay: An employee’s earnings after all deductions are taken out.

Non-compete agreement: A written legal contract between an employer and employee that establishes terms and conditions about the employee’s ability to work in the same industry and with competitors upon termination of employment.

Nonexempt: Workers who are entitled to earn the federal minimum wage and qualify for overtime pay.

Occupational Safety and Health Administration (OSHA): The federal agency responsible for enforcing workplace safety rules. HR teams often oversee OSHA compliance.

Overtime: Employees who work more than 40 hours a week are entitled to a higher rate of pay for the additional work. This is termed overtime pay. Federal overtime laws require employers to pay certain employees who work more than 40 hours in a week at least time and a half for the extra time.

Pay period: A recurring length of time over which employee time is recorded and paid.

Payroll: Payroll is the function of a business paying its employees. Payroll processing involves calculating total wage earnings, withholding deductions, filing payroll taxes and delivering payment

Performance review: A formal assessment in which a manager evaluates an employee’s work performance, identifies strengths and weaknesses, offers feedback and sets goals for future performance.

Quarterly federal taxes: If the IRS classifies you as self-employed, you are required to file an annual federal income tax return and pay estimated quarterly taxes on Form 1040-ES, Estimated Tax for Individuals. Estimated quarterly taxes are a prepayment of Social Security, Medicare and federal income taxes that self-employed individuals must pay because these workers do not have an employer to withhold taxes from a payroll check. The requirement to pay taxes quarterly ensures that you don’t let your tax obligation get away from you and end up unable to pay your taxes when you file your annual return.

Reimbursements: Money paid back to an employee who made an out-of-pocket expense to achieve company goals.

Taxable Income: The portion of your total income that can be taxed. Generally, it includes some or all items of income and is reduced by expenses and other deductions.

W2: IRS Form W-2 is the annual “wage and tax statement” that reports your taxable income earned from an employer to you and to the Internal Revenue Service (IRS). The form also includes taxes withheld from your pay, as well as Social Security and Medicare payments made on your behalf by both you and your employer.

W4: Employees complete the IRS Form W-4 so employers know how much money to withhold from their paycheck for federal taxes.

Withholding: Payroll tax withholding transpires when employers withhold a portion of an employee’s gross wages for taxes. Payroll withholding is mandatory when you have employees; the amount withheld is based on the employee’s income.

Workers’ compensation: A form of insurance offered to employees when they experience an on-the-job injury. It is mandatory for almost all employers in the U.S.