A Glossary of Payroll Terms

A Glossary of Payroll Terms

Regardless of your level of involvement in payroll, there are certain terms that you should know. Click through for a roundup of words that are commonly used in the payroll industry.

A Glossary of Payroll Terms

After-tax deductions

These deductions are subtracted from employees’ wages after pretax deductions and payroll taxes have been taken out. After-tax deductions — such as wage garnishment, Roth 401(k) contributions and charitable donations — do not lower employees’ taxable wages.

Automated clearing house (ACH)

ACH accomplishes the electronic transfer of funds from one bank account to another. From a payroll standpoint, ACH enables employers to pay their employees through direct deposit.


Compensation includes total cash and noncash payments made to an employee in exchange for his or her services rendered. It includes base hourly pay or salary, overtime wages, commissions, bonuses, tips, benefits (e.g., insurances, retirement plan and PTO) and merit pay, plus stock options and other noncash awards.

Disposable earnings

Disposable earnings are an employee’s wages after all legally required deductions — including payroll taxes — have been subtracted from his or her gross wages. Disposable earnings should not be confused with net pay, which is the amount of wages left over after all deductions, including deductions for voluntary benefits, have been taken out of the gross wages. 

Exempt employee

Exempt employees are excluded from the Fair Labor Standards Act’s overtime provisions, meaning these employees do not receive overtime pay when they work more than 40 hours per week. Salaried exempt employees are also excluded from the FLSA’s minimum wage provisions. 

Fair Labor Standards Act (FLSA)

The FLSA sets federal minimum wage, overtime, child labor and recordkeeping standards. In some cases, the FLSA may be superseded by state or local labor laws.

Nonexempt employee

Nonexempt employees are not excluded from FLSA minimum wage or overtime provisions. These employees must be paid no less than the federal minimum wage, along with overtime if they work more than 40 hours in a workweek.

Payroll reporting

This term encompasses all your company’s payroll filing obligations under federal, state and local laws. It might include reporting federal payroll taxes quarterly on IRS Form 941 and federal unemployment tax annually on IRS Form 940. There’s also Form W-2 reporting, state unemployment tax reporting and, for applicable large employers, Affordable Care Act reporting.

Pretax deductions

Pretax deductions are taken out of an employee’s pay before payroll taxes and after-tax deductions are withheld. These deductions — which include benefits offered under a Section 125, or cafeteria plan — decrease employees’ taxable wages.

Retroactive pay

This is the amount owed to an employee because he or she was paid at a lower rate for a previous pay period.

Section 125 plan

This is an employee benefits plan that meets the requirements of Section 125 of the Internal Revenue Code. Also called a cafeteria plan, a Section 125 plan lets employees pay for their benefits — such as health insurance, flexible spending accounts and traditional 401(k) plans — with pretax money.

Supplemental wages

Supplemental wages are payments made to an employee in addition to his or her regular wages — such as bonuses, commissions, severance pay, overtime pay, back pay and retroactive wage increases. Supplemental wages may be subject to different tax rules than regular wages are.

Tax withholding

Tax withholding is the process of deducting applicable federal, state and local employment taxes from employees’ wages.

Wage Garnishment

This is a legal proceeding requiring a person’s employer to withhold a portion of that person’s wages in order to satisfy a debt he or she owes — such as for credit card or medical bills, student loans, back taxes, child support or alimony.

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