The Essential Payroll Glossary for HR, Finance & Founders

Payroll Basics

Gross Pay

Gross pay refers to an employee’s total earnings before any deductions, including taxes, benefits, and garnishments. It includes base salary, overtime, bonuses, and commissions. Employers use gross pay as the foundation for calculating withholdings and net pay.

💡 Tip: A 2023 survey by PayrollOrg found that over 87% of employees have instant access to their pay and benefits information through online self-service portals; highlighting the importance of accurate payroll data for trust and employee satisfaction.

Net Pay

Net pay is an employee’s take-home pay after deductions such as taxes, health insurance, and retirement contributions. It represents the actual amount deposited into an employee’s bank account. Clearly communicating net pay components to employees reduces payroll disputes and confusion.

Base Pay

Base pay is the fixed salary or hourly wage an employee receives before additional earnings like overtime or bonuses. It forms the backbone of total compensation and plays a key role in salary negotiations.

Pay Period

A pay period is the recurring schedule that determines when employees receive their wages; common structures include weekly, biweekly, and monthly. According to the Bureau of Labor Statistics, 43% of U.S. businesses use biweekly pay cycles, while 33% opt for weekly payroll.

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Payroll Deductions & Taxes

Deduction

A deduction is an amount subtracted from an employee’s gross pay to cover taxes, benefits, or garnishments. Deductions can be pre-tax (reducing taxable income) or after-tax (affecting take-home pay but not taxable earnings).

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After-Tax Deductions

After-tax deductions do not reduce an employee’s taxable income but affect net pay. Common examples include Roth 401(k) contributions and wage garnishments.

Withholding

Withholding is the portion of an employee’s wages that employers deduct for federal, state, and local taxes. Employers must ensure accurate withholding to prevent tax liabilities or employee penalties.

Payroll Taxes

​Payroll taxes are mandatory contributions withheld from employees' wages by employers to fund government programs. For example, in the U.S., payroll taxes fund Social Security, Medicare, and unemployment insurance. Employers are responsible for withholding these taxes from employee wages and matching certain contributions. In 2024, payroll tax contributions accounted for 36% of total U.S. federal revenue.

FICA (Federal Insurance Contributions Act)

In the U.S., FICA taxes fund Social Security and Medicare. Employers and employees each contribute 6.2% for Social Security and 1.45% for Medicare, with self-employed individuals paying the full 15.3% through self-employment tax.

💡 Tip: Failure to properly withhold and remit FICA taxes can result in IRS penalties of up to 15% of the unpaid amount.

EFTPS (Electronic Federal Tax Payment System)

The EFTPS is a U.S. government system that allows businesses to deposit payroll taxes electronically, ensuring timely and secure tax payments. Late tax payments can result in fines ranging from 2% to 15% of unpaid payroll taxes.

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Earnings, Compensation & Adjustments

Bonus

A bonus is additional compensation awarded to employees, often tied to performance, company profits, or incentives. In the U.S., bonuses are subject to supplemental tax rates, typically 22% for federal tax withholding.

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Compensation

Compensation includes all forms of employee earnings, including salary, bonuses, commissions, and benefits. A well-structured compensation package improves retention; companies with competitive compensation structures see 50% lower turnover rates.

Back Pay

Back pay refers to wages owed to employees for past work due to errors, disputes, or legal claims. Employers must issue back pay promptly to avoid compliance risks and potential penalties.

Overtime

Overtime is additional pay required for non-exempt employees who work beyond their standard hours, typically at 1.5 times the regular hourly rate. Miscalculating overtime is one of the most common payroll errors, leading to thousands of labor law violations annually.

💡 Tip: In 2023, U.S. companies paid over $1.4 billion in wage theft settlements. Accurately tracking overtime is critical to remain compliant.

Disposable Earnings

Disposable earnings are wages left after legally required deductions (such as taxes) but before voluntary deductions. This figure determines how much can be garnished for debts like child support or student loans.

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Legal & Compliance Terms

Garnishment

A garnishment is a legal order requiring an employer to withhold a portion of an employee’s wages to cover debts, such as child support, unpaid taxes, or court judgments. In the U.S., federal law limits garnishments to 25% of disposable earnings or the amount exceeding 30 times the minimum wage, whichever is less.

Exempt

In the U.S., an exempt employee is not entitled to overtime pay under the Fair Labor Standards Act (FLSA) due to their salary level and job duties. Employers must classify workers correctly to avoid misclassification lawsuits.

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Taxable Income

Taxable income includes all earnings subject to income tax, including wages, bonuses, and commissions. U.S. employers must report taxable income accurately on Form W-2 for employees and Form 1099 for contractors.

ACH (Automated Clearing House)

ACH is an electronic system for processing payroll direct deposits, ensuring fast and secure payments. 93% of U.S. employees receive wages via direct deposit, reducing payroll costs and check-processing errors.

💡 Tip: ACH transfers process faster than paper checks, reducing payroll fraud risks and helping employees receive payments on time.

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Financial & Payroll Reporting

Accounts Payable (AP)

Accounts Payable refers to a company's outstanding debts to vendors, suppliers, and other creditors. It represents short-term liabilities that must be paid within a specific period, typically 30 to 90 days. Proper AP management sets up smooth cash flow for your business and prevents late payment penalties.

Accounts Receivable (AR)

Accounts Receivable is the money owed to a business by customers for goods or services delivered but not yet paid for. AR is considered an asset on the balance sheet and plays a crucial role in cash flow management. Businesses track AR closely to minimize late payments and improve liquidity.

Cost of Labor

The cost of labor includes all expenses related to employee wages, benefits, taxes, and insurance. It is a critical metric for businesses, as labor costs typically account for 20-35% of total operating expenses in most industries. Managing labor costs effectively helps maintain profitability.

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Employee Compensation & Benefits

Fringe Benefits

Fringe benefits are additional perks or compensation offered to employees beyond their base salary. Examples include health insurance, stock options, tuition reimbursement, and company cars. In the U.S., many fringe benefits are taxable, while others qualify for tax-exempt status under IRS rules.

Total Compensation

Total compensation includes an employee’s base salary plus all additional earnings and benefits, such as bonuses, commissions, retirement contributions, and paid time off. Employers use total compensation packages to attract and retain talent in competitive job markets.

Equity Compensation

Equity compensation is a form of non-cash payment where employees receive company stock or stock options as part of their earnings. This aligns employee incentives with company performance, making it popular among startups and high-growth companies.

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Taxation & Compliance

Employer Payroll Contributions

Employer payroll contributions are additional payments businesses must make on behalf of employees. In the U.S. this includes Social Security, Medicare (FICA taxes), unemployment insurance (FUTA/SUTA), and workers' compensation. These contributions are required by law and vary by country and jurisdiction.

Tax Compliance

Tax compliance refers to the process of ensuring all payroll taxes, deductions, and filings adhere to federal, state, and local regulations. Failing to comply with tax laws can result in significant penalties; the IRS collected over $13 billion in payroll tax penalties in 2023 alone.

💡 Tip: Regular payroll audits help businesses identify and correct compliance risks before they become costly mistakes.

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Payroll Processing & Banking

Payroll Journal Entry

A payroll journal entry is an accounting record that tracks payroll-related expenses, including wages paid, payroll taxes, and deductions. It ensures that financial statements accurately reflect payroll costs and liabilities.

Direct Deposit

Direct deposit is an electronic payroll payment method that transfers employee wages directly into their bank accounts via ACH (Automated Clearing House) transactions. It’s the most common payroll payment method, with 93% of U.S. employees receiving direct deposits.

💡 Tip: Offering direct deposit can boost payroll efficiency and reduces processing costs compared to issuing paper checks.

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Pay Employees Globally With Speed and Security

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Take Control of Your Payroll Process with Playroll

Managing payroll accurately and efficiently is fundamental to build trust with your employees and maintain compliance with complex regulations. By understanding key payroll terms and best practices, HR managers, finance leaders, and business owners can minimize costly mistakes and optimize their payroll processes. 

Whether you're handling gross pay calculations, navigating tax deductions, or ensuring compliance with FLSA regulations, staying informed is the first step toward confident payroll management.

At Playroll, we're here to simplify global payroll with reliable solutions that don’t displace your systems and workflows, so you can focus on growing your business without disruption.