Important Definitions

Below are definitions that come into play for the services that TLC Employers Services offers. As laws change, definitions could change as well. These are updated on a regular basis, but these definitions are not here for any legal or financial advice.

501 (c) Plan –

A subsection under the United States Internal Revenue Code defining nonprofit organizations exempt from paying federal income tax.

1099 Independent Contractor –

A natural person, business, or corporation that provides goods or services to another entity under terms specified in a contract or within a verbal agreement. Both parties must understand that the agreement falls under the Independent Contractor rules defined by the federal government.

1099-MISC –

A tax form that reports the year-end summary of all non-employee compensation. The 1099-Misc form covers rent, royalties, self-employment and independent contractor income, crop insurance proceeds and several other kinds of miscellaneous income. There are no income taxes withheld.

1096 –

A Return used to transmit to the IRS the information contained on all 1099 forms. This return is not required when filing 1099 M’s electronically.

ACH Credit Entry –

A transaction in which a taxpayer instructs its financial institute to originate a federal tax deposit through the ACH system and have it apply to the client’s appropriate Treasury account.

ACH Debit Entry –

A transaction in which a file containing a specified deposit amount is sent to the IRS on behalf of an employer. After receiving the file, the IRS will debit the appropriate bank account via ACH for the amounts of the federal deposit. No money is sent with this file.

Allowances and 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. Exemptions are determined by the Federal W-4 form that you must file with your employer annually.

Amended Tax Return –

A return filed in order to make corrections to a tax return from a previous year. An amended return may require the payment of additional tax, possibly with interest and penalty, or it may be accompanied by a claim or refund.

Automated Clearing House (ACH) –

A Federal Reserve Bank or private financial institution acting on behalf of an association operating a facility that serves as a clearinghouse for direct deposit or other payment transactions; entries are received and transmitted by the ACH under the rules of the association.

Benefit Accruals –

Coverage earned by an employee based on years of service with an employer. Accrued benefits may include vacation, sick or personal time off, or other related benefits.

Bi-Weekly – (every other week)

Pay period results in 26 paychecks in a year.

Bonus or Supplemental Wages –

All wages including but not limited to, bonuses, commissions, overtime pay, accumulated sick leave, severance pay, awards and prizes, back pay, retroactive wage increase, and payments for nondeductible moving expenses, paid by an employer that are not regular wages.

Bonus or Supplemental Wages –

All wages including but not limited to, bonuses, commissions, overtime pay, accumulated sick leave, severance pay, awards and prizes, back pay, retroactive wage increase, and payments for nondeductible moving expenses, paid by an employer that are not regular wages.

Cafeteria Plan –

A separate written plan maintained by an employer for employees that meet the specific requirements and regulations of section 125 of the Internal Revenue Code (See S125 below). It provides participants an opportunity to receive certain benefits on a pretax basis.

Check Date –

Each check generated has a date printed on it which validates the check for cashing.

Check Features Workweek –

As defined by the IRA, a fixed and regularly recurring period of 168 hours, or seven consecutive 24-hour periods. The workweek does not have to coincide with the calendar week, but instead it may begin on any day of the week and at any hour of the day.

Circular E –

Employer’s tax guide published by the IRS which explains how to withhold, deposit, report, and pay federal taxes.

COBRA (Consolidated Omnibus Budget Reconciliation Act) –

A landmark federal law passed by Congress in 1986 that provides continuing coverage of group health benefits to employees and their families upon the occurrence of certain qualifying events where such coverage would otherwise be terminated.

Deduction –

An amount that is taken away from an employee’s paycheck. They can be taken pre-tax or after tax depending on the type of deduction.

Deferred Compensation Plan (401k) –

Employee benefit plans, under which employees may contribute a percentage of wages to tax deferred savings plans rather than receive the amounts as current compensation. The most commonly used deferred compensation plan is the 401(k) plan.

Employee contributions to 401(k) plans are exempt from federal income tax and, in some states, state income tax withholding but are not exempt from FICA withholding. Employer contributions, made on behalf of the employee, are also exempt from federal income tax withholding. Contributions and earnings thereon accumulate tax free until distributed to the employee at retirement.

The maximum amount that an employee can elect to defer is adjusted annually for inflation.

403(b) Plan – A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Same taxability applies as 401(k).

Deferred Compensation Plan (401k) –

Employee benefit plans, under which employees may contribute a percentage of wages to tax deferred savings plans rather than receive the amounts as current compensation. The most commonly used deferred compensation plan is the 401(k) plan.

Employee contributions to 401(k) plans are exempt from federal income tax and, in some states, state income tax withholding but are not exempt from FICA withholding. Employer contributions, made on behalf of the employee, are also exempt from federal income tax withholding. Contributions and earnings thereon accumulate tax free until distributed to the employee at retirement.

The maximum amount that an employee can elect to defer is adjusted annually for inflation.

403(b) Plan – A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Same taxability applies as 401(k).

Dependent –

Qualifications for claiming a dependent:

  • The child must be your son, daughter, stepchild, eligible foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister, adopted child or an offspring of any of them
  • Must be either under age 19 or a full time student under age 24. There is no age limit if your child is permanently and totally disabled.
  • Dependent cannot have a job that provides more than half of his/her support
  • Must live at your residence all year or be on the list of “relatives who do not like with you” in Publication 501. There are approximately 30 types of relatives on the list.
  • Can only be claimed once.
Dependent Care Assistance –

The value of employer-provided child care assistance allowing the employee to work. A type of Flexible Spending Account which is under the S125 heading.

Direct Deposit –

A way of paying someone so that the money is sent directly into the person’s bank account without the use of checks or cash.

Disability –

Covers injuries or illnesses to an employee that are not job-related. Disability is mandated in some states. Disability may be an employer tax, an employee tax, or both.

Disposable Earnings –

Also known as disposable income, indicates how much money the employee has left over to spend or invest after payment of taxes and other obligations.

Earned Income –

A term used for income accrued from labor or services performed.

Educational Assistance –

An employer sponsored program for providing employees with financial assistance in the pursuit of undergraduate and graduate education. The coursework does not have to be job related and payments can be applied to expenses directly related to education including tuition, fees, books, supplies, and equipment.

Electronic Federal Tax Payment System (EFTPS) –

Is an online federal tax payment system in the United States designed and maintained by the IRS and Financial Management Service (FMS) branches of the United States Department of the Treasury.

Electronic Funds Transfer –

Is the electronic transfer of money from one bank account to another, either within a single financial institution or across multiple institutions, through computer-based systems and without the direct intervention of bank staff.

Employee –

A person who works for another person or a business firm in return for wages. The relationship must be legal as defined under common law.

Employer –

A person or business that employs one or more people for a particular purpose, especially for wages or salary.

Employer and Employee Taxes
Employer Match –

A matching dollar amount contributed by an employer to the retirement account of an employee who makes a similar contribution, usually to a 401(k) plan. Appears on the check and on reports as an earning, but does not calculate or figure into the check.

Federal Insurance Contributions Act (FICA) –

Taxes under the Federal Insurance Contributions Act (FICA) are composed of the old-age, survivors, and disability insurance taxes, also known as Social Security taxes, and the hospital insurance tax, also known as Medicare taxes. Different rates apply for these taxes.

Only the Social Security tax has a wage base limit. The wage base limit is the maximum wage that is subject to the tax for that year.

There is no wage base limit for Medicare tax. All covered wages are subject to Medicare tax. There is no employer match for Additional Employer Taxes.

Federal Income Tax (FIT) –

A withholding tax levied against employees. The amount of withholding varies with the amount of earnings, frequency of pay, number of claimed exemptions, and marital status.

Federal Unemployment Tax Act (FUTA) –

With state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs. Most employers pay both a Federal and a state unemployment tax. Only the employer pays FUTA tax; it is not deducted from the employee’s wages.

Reciprocal Agreement –

Arrangement entered into by two or more states whereby the resident of one state working in another state is not subject to the withholding income taxes by the state in which the person is employed.

State Income Tax Withholding (SITW) –

Income tax for the state withheld from employees.

State Unemployment Insurance –

(SUI) Requires employers to pay a certain percentage of their employee’s wages (up to the state’s wage base limit) as a payroll tax to help fund unemployment compensation benefits for separated employees.

Supplemental Tax Rates –

The standard tax rates on which the tax withholding tables are built. Often used for bonus checks.

Unemployment Insurance –

A federal-state program that provides a source of income for workers who have lost their jobs through no fault of their own.

Exempt Employee –

Worker such as an administrative, executive or professional employee to be exempt from the minimum wage and overtime pay of the FLSA if the employee meets certain tests regarding duties and salaries.

Experience Rating System –

The process each State Unemployment Agency uses in determining every employer’s annual tax rate. This is a percentage based on previous contributions made by the employer and benefits paid to eligible claimants. SUI tax is based on this system.

Fair Labor Standards Act (FLSA) –
  • Establishes federal minimum wage. If a state has a higher rate, then employers must use the higher rate.
  • Establishes regulations on overtime pay
  • Establishes regulations on equal pay for equal work regardless of sex and specifies guidelines for children in the workforce
  • Establishes laws governing tips and tipped employees
  • Establishes regulations on handling of meals, lodging, and uniform maintenance
    • The amount of uniform purchase and maintenance costs can be deducted from the employee pay, but the cost deduction cannot reduce the employee’s income below minimum wage.
  • Family establishments are not subject to FLSA if the only regular employees are the owner, spouse, children, parents or other immediate family members.
Family and Medical Leave Act (FMLA) –

A United States federal law requiring covered employers to provide employees 12 weeks of job-protected and unpaid leave for qualified medical and family reasons. Examples are caring for newborn or newly adopted children, or to deal with serious illness or injury suffered by the employee or an ailing child, spouse, or parent of an employee.

Federal Identification Number –

A unique nine-digit number assigned by the IRS to business entities operating in the United States for the purposes of identification. Also known as federal ID number, Employer Identification Number, or Tax Identification Number. (EIN/FEIN/TIN)

Filing or Marital Status –

Filing status’ are single, married filing jointly, married filing separately, head of household, or exempt. Employees are responsible for indicating their status (form W-4) and employers must withhold accordingly.

Flexible Spending Account (FSA) –

Enables an employee to have a specific pretax deduction from his/her payroll check each pay period for specific qualified expenses not covered by his/her benefits. The total amount of the annual deduction is lost if unused by the end of the calendar year.

Form 940 Employer’s Annual Federal Unemployment Tax Return –

Form to report annual Federal Unemployment Tax Act (FUTA) tax. Together with state unemployment tax systems, the FUTA tax provides funds for paying unemployment compensation to workers who have lost their jobs.

Form 941 Employer’s Quarterly Federal Tax Return –

A form used to report taxes for employers who withhold income taxes, social security tax, or Medicare tax from employee’s paychecks or who must pay the employer’s portion of social security or Medicare tax.

Form 941c Statement to Correct Information –

A form used to make adjustments to Form 941 when taxes have been under withheld or over withheld; explains the nature of the adjustment and shows the erroneous and corrected amounts of tax withheld.

Form 943 Employer’s Annual Tax Return for Agricultural Employees –

Used for reporting FICA and federal income taxes due on wages paid.

Form W-2 Wage and Tax Statement –

Employers must file a Form W-2 to report the total wages paid and taxes withheld for each employee in a calendar year.

Form W-2c Statement of Corrected Income and Tax Amounts –

Form that must be completed by an employer if an incorrect copy of a W-2 has been sent to the SSA.

Form W-3 Transmittal of Income and Tax Statements –

Form that an employer must also file when filing paper Form W-2 (Copy A) with the SSA; contains totals of these amounts reported on the employer’s W-2 (Copy A) with the SSA; contains totals of these amounts reported to employer’s W-2 Forms, acting as “reconciliation” of these forms.

Form W-3c Transmittal of Corrected Income and Tax Statements –

Form that accompanies Form W-2c in most situations when it is sent to the SSA that totals the information from all the W-2c forms being submitted.

Form W-4 Employee’s Withholding Allowance Certificate –

The W-4 tells the employer how many withholding allowances the employee is claiming along with the employee’s marital status; it also tells the employer if the employee claims exemption from withholding.

Form W-5 Earned Income Credit Advance Payment Certificate –

Must be filed by employees who want to take advantage of advance EIC payments and assets to their eligibility for the advance payments.

Fringe Benefit –

An extra benefit supplementing an employee’s salary, for example, a company car, subsidized meals, medical insurance, life insurance, retirement benefits, profit sharing, bonus plans etc. Many are fully taxable and are added to the employee’s taxable wages.

Garnishments –

A court order initiated by a creditor directing that money or property of an employee be seized before the earnings are turned over to the employee.

General Ledger –

A ledger containing all of the transactions in the debit and credit accounts over the life of a company.

Gross Income –

Total revenue received before any taxes deductions or allowances.

Individual Retirement Arrangement (IRA) –

A tax deferred personal retirement savings account that meets the requirements of S405.

Look Back Period –

The timeframe used to determine whether a company is paying employment taxes on the correct depositing schedule. The lookback period begins on July 1 and ends on June 30 of the following year. Based on the total amount of taxes paid during this time period, a company is to determine whether it should pay taxes on a semiweekly or monthly basis.

MICR(Magnetic Ink Character Recognition) –

Used to encode the client’s bank account number on the bottom of each check.

Minimum Wage –

The lowest wage permitted by law.

Monthly Tax Depositor –

An employer is required to be a monthly tax depositor if they have less than or equal to $50,000 in tax liability for the look back period. Payroll tax liability is due the 15th of the month following the month in which the check date resides.

NET Pay –

Gross wages or gross salaries minus withholdings for payroll taxes and other items. Also referred to as “take home pay”.

Non-Cash Fringe Benefits –

A non-cash benefit that is afforded to company employees. These benefits can include such things as a company car, a cellular phone, discounted gym memberships, memberships to a country club, and other material awards. The value of these fringe benefits must be added to the employees’ gross income amount.

Nonqualified Deferred Comp Plan –

In the context of employee benefits, an employer plan that does not meet IRS qualification requirements.

One-Day Tax Depositor –

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

Online Payroll –

One single comprehensive system for your online payroll and human resource needs.

Other Compensation –

Amounts added to an employee’s wages for tax purposes. Often these amounts are values of fringe benefits or compensation earned outside of salary or hourly pay. This is a component of gross pay.

Overtime –

Working time before or after one’s regularly scheduled working hours; extra working time. Hourly or non-exempt employees must be compensated one and one-half their normal hourly rate for overtime worked in a week beyond 40 hours in one workweek.

Pay Frequency –

The choice of making regular payments every week, every other week, twice a month, monthly, quarterly, semi-annually, or annually.

Pay Period –

The time duration within which the amount a worker has earned is determined so that the worker can be paid properly.

Payroll and Withholding Taxes
Payroll Taxes –

Taxes that are the responsibility of the employer.

Withholding Taxes –

Taxes withheld from an employee’s check. Also known as employee taxes.

Per Diem –

A daily allowance, usually for travel, entertainment, employee compensation or miscellaneous out-of-pocket expenses while conducting business.

Power of Attorney –

A legal document giving a business or person authority to act as attorney-in-fact for representation and submission of taxes and returns with respect to payroll.

Prenote (Prenotification) –

A verification process for direct deposit to begin.

S125 –

Under Section 125 of the Internal Revenue Code, employees may choose from among two or more benefits (consisting of cash and qualified benefits) offered by an employer. Employee deductions to fund the benefits are exempt from federal income tax, FICA, and, in some states, state income tax withholding.

Salary –

A fixed compensation periodically paid to a person for regular work or services.

Semi-Monthly – (twice a month)

Pay period results in 24 paychecks in a year.

Semi-Weekly Tax Depositor –

An employer is required to be a semi-weekly tax depositor if they have greater than $50,000 in tax liability for the look back period. Payroll tax liability due date is determined by the by the check date. Saturday, Sunday, Monday, and Tuesday check date require an employer to deposit on Friday. Wednesday, Thursday, and Friday check dates require and employer to deposit on the following Wednesday.

SEP IRA – Simplified Employee Pension –

An IRA distinguished by requirements covering employee participation, nondiscrimination, withdrawals, and a formula for employer contributions. For sole proprietors. An owner can elect a certain percentage of his/her adjusted gross but most then give the same percentage to the employees as an employer contribution. Employees do not contribute. Although SEP’s must meet the general defined contributions plan standards, they are subject to much less burdensome reporting requirements.

Severance Pay –

An amount paid to an employee upon dismissal or discharge from employment.

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.

Social Security Administration (SSA) –

Is an independent agency of the United States federal government that administers Social Security, a social insurance program consisting of retirement, disability, and survivors’ benefits.

Sole Proprietor –

A person who is the exclusive owner of a business, entitled to keep all profits after tax has been paid but liable for all losses. The individual owner is not considered an employee of the company.

Straight Time –

The time or number of hours established as standard for a specific work period in a particular industry. (For hourly employees)

Taxability of Wages
Compensation Not Subject to Withholding –

Compensation reported as taxable on tax returns, however, no tax is withheld because it would likely be returned to the employee upon completion of their personal income tax forms.

Wage Base Limit Excess Wages –

The threshold above which a tax is no longer required. Social Security, FUTA, SUI, and select local taxes are calculated on taxable wages up to a specific amount.

Excess Wages –

Wages over and above the taxable wage base limit.

Exempt Wages –

Compensation not considered subject or taxable for a particular tax.

Taxable Wages –

The sum of all earnings by an employee that are eligible for a particular type of tax. Each tax is different and has different regulations about limits to the amount of wages that can be considered taxable with respect to that tax.

Tipped Employee –

Under the federal Wage-Hour Law, an employee engaged in an occupation in which he or she customarily and regularly receives tips.

Tips –

An employee who receives tips from customers or clients. Employers are subject to FICA taxes on the reported tip income.

Third-Party Sick Pay –

A form of disability insurance that pays a benefit to employees who require a long-term leave of absence due to medical reasons. Benefits are paid by a third party insurance company and may be aligned with a state disability plan. Premiums are paid by employees and may be subsidized by employer contributions.

Workers’ Compensation –

Cash benefits to employees for sickness or personal injury incurred in the course of their employment.