The world of payroll management is full of specialized jargon and easily confused abbreviations.

A reciprocal agreement prevents double taxation for employees who cross state lines for work.

Here, we’ll demystify 26 tricky payroll and HR terms you’re likely to encounter as a small-business owner:

1. Commission
   A percentage of sales or revenue earned by an employee as a form of compensation. It is often used in sales-based roles to incentivize employees to sell more.
2. Direct Deposit
   A method of payment in which an employee’s net pay is deposited directly into their bank account on payday, rather than receiving a physical check.
3. FLSA (Fair Labor Standards Act)
   The federal law that sets minimum wage, overtime pay, recordkeeping, and child labor standards for employees in the private and public sectors.
4. 401(k) Plan
   A retirement savings plan offered by an employer that allows employees to contribute a portion of their salary on a pre-tax basis. Employers may also choose to match a portion of the employee’s contribution.
5. Fringe Benefits
   Non-wage compensation provided by an employer to an employee. These can include health insurance, retirement plans, paid time off, and other perks such as tuition reimbursement or gym memberships.
6. Garnishment
   A legal process that allows a creditor to collect a debt owed by an employee by withholding a portion of their wages. This can be used for things like child support, back taxes, or unpaid court judgments.
7. Gross-Up
   A method of increasing an employee’s salary or wages to account for the taxes that will be deducted from their paycheck. This is often used in situations in which an employee is receiving a taxable benefit or bonus.
8. Health Savings Account (HSA)
   A tax-advantaged savings account that can be used to pay for qualified medical expenses. It is typically offered alongside a high-deductible health plan and can be funded by both the employee and the employer.
9. Imputed Income
   Non-cash compensation that is considered taxable income. This can include things like employer-provided life insurance or the personal use of a company car.
10. Independent Contractor
    A worker who is not considered an employee and is paid on a per-project or per-hour basis. Independent contractors are responsible for paying their own taxes and do not receive benefits or other employee perks.
11. Net Pay/Gross Pay
    Net pay is the amount of money an employee receives on their paycheck after all deductions, including taxes and other withholdings, have been taken out. Gross pay is the total amount of money an employee earns before any deductions
12. Overtime
    Additional pay that employees receive for working more than their regular work hours, as mandated by federal or state laws.
13. Paid Time Off (PTO)
    A type of preapproved leave from work that an employer provides to their employees, and it is compensated as part of their regular salary or wages. This time off can be used for vacation, sick leave, personal time, or other reasons.
14. Pay Period
    The length of time over which an employee’s wages are calculated and paid. This can be weekly, biweekly, monthly, or another interval determined by the employer.
15. Payroll Reconciliation
    The process of verifying and adjusting payroll records to ensure that they are accurate and complete. This includes reconciling payroll transactions, verifying tax withholdings, and ensuring that all payments have been made correctly.
16. Payroll Software
    Computer-based software that automates payroll processes, such as calculating employee pay, taxes, and deductions, generating pay stubs, and handling tax filings and reporting.
17. Piece-Rate
    A method of paying employees based on the number of units they produce or services they perform. This is commonly used in manufacturing, agriculture, and other industries where work can be quantified in units.
18. Reciprocal Agreement
    A legal agreement between two or more states that allows employees who work in one state and live in another to only pay income taxes in their state of residence. This prevents double taxation for employees who cross state lines for work.
19. Severance Pay
    A lump sum payment made to employees who are terminated from their job, often due to layoffs or restructuring. This payment is intended to provide financial support during the period of unemployment.
20. Shift Differential
    An additional amount of pay that is added to an employee’s base wage for working a shift that is outside of normal business hours. This can include night shifts, weekends, or holidays.
21. Time and Attendance
    A system used to track employee attendance and hours worked, including regular time, overtime, and absences.
22. Tip
    Additional income that employees in the service industry receive from customers as a gratuity for good service, which is subject to federal and state tax laws.
23. Tip Credit
    A provision in the Fair Labor Standards Act that allows employers to pay tipped employees a lower minimum wage, as long as their tips bring their hourly pay up to the full minimum wage.
24. Unlimited Vacation
    A flexible vacation policy in which employees can take as much paid time off as they want, provided they have prior approval from their employer.
25. Withholding
    The money that is reserved from an employee’s paycheck to cover taxes, including 401(k) contributions, federal income tax, Social Security, and Medicare.
26. Zero-Hour Contract
    A type of employment contract in which the employer does not guarantee any minimum number of hours of work per week. Employees are paid only for the hours they actually work, and their work schedule can vary from week to week.

Defining Success

If you’re ready to put your knowledge into action, consult your financial institution.