Payroll Terms in Plain English: A Small Business Glossary

The total amount an employee earns in a pay period before any taxes, deductions, or withholdings are applied. For hourly workers: hours worked × hourly rate (plus overtime). For salaried workers: annual salary ÷ number of pay periods. Gross wages are the starting point for every other calculation on the pay stub (IRS Publication 15 2026).

Gross wages minus all withholdings and deductions — taxes, benefits premiums, retirement contributions, garnishments. Net pay is the amount deposited or printed on the check. It is sometimes called "take-home pay."

Gross wages reduced by pre-tax deductions (such as health insurance premiums under a Section 125 plan and traditional 401(k) contributions). Taxable wages are lower than gross wages when pre-tax benefits are in play. The exact taxable amount differs by tax type — for example, health premiums reduce federal income tax wages but may not reduce all state tax bases equally (IRS Publication 15 2026).

Bonuses, commissions, overtime, severance, awards, and similar payments that are separate from an employee's regular rate. The IRS allows employers to withhold federal income tax from supplemental wages at a flat 22% rate (for payments up to $1 million) rather than calculating it against the normal withholding tables (IRS Publication 15 2026).

Under the Fair Labor Standards Act, the regular rate of pay includes base wages plus most non-discretionary bonuses, shift differentials, and commissions, divided by total hours worked. Overtime must be paid at 1.5× this blended rate — not simply 1.5× the base hourly rate. Miscalculating the regular rate is one of the most common FLSA violations (DOL Wage and Hour Division 2023).

The cumulative amount of wages paid, taxes withheld, or deductions taken from the first payroll of the calendar year through the current pay period. YTD figures on pay stubs help employees verify annual totals and alert employers when an employee is approaching a wage base limit (such as the Social Security wage base of $176,100 in 2026).

The amounts deducted from an employee's gross wages each pay period and remitted to federal, state, and local tax authorities. Withholding is not the employer's expense — it is the employee's tax liability, collected in advance. The employer acts as a collection agent and is legally responsible for remitting it correctly and on time (IRS Publication 15 2026).

Federal Insurance Contributions Act taxes, split into two components: Social Security (6.2% employee + 6.2% employer, up to the 2026 wage base of $176,100) and Medicare (1.45% employee + 1.45% employer, no cap). Employees earning over $200,000 are subject to an additional 0.9% Additional Medicare Tax, which the employer must begin withholding once that threshold is reached in the calendar year (SSA 2025; IRS Publication 15 2026).

Calculated per pay period using the employee's W-4 elections and the IRS withholding tables in Publication 15-T. There is no fixed percentage — the amount depends on filing status, pay frequency, and any additional withholding requested. This is the most variable line on any paycheck.

Federal Unemployment Tax Act. An employer-only tax of 6.0% on the first $7,000 of each employee's wages per year. Employers who pay state unemployment tax on time receive a credit of up to 5.4%, making the effective rate 0.6% for most. Reported annually on Form 940. Employees never see this on their pay stub because it is not withheld from their wages (IRS 2026, Form 940 Instructions).

State Unemployment Tax Act. Rates vary by state and by each employer's experience rating — a measure of how many former employees have filed unemployment claims. In Virginia, the 2026 new-employer rate is 2.53% on the first $8,000 of wages per employee. Like FUTA, SUTA is an employer expense and is not withheld from the employee's paycheck (Virginia Employment Commission 2026).

Some payroll taxes only apply up to a certain annual earnings level per employee. The 2026 Social Security wage base is $176,100 — once an employee's YTD wages cross that threshold, Social Security withholding stops for the remainder of the year. FUTA has its own wage base ($7,000); Virginia SUTA has its own ($8,000). Medicare has no wage base cap.

The portion of payroll taxes that were withheld from employees — federal income tax and the employee's share of FICA. The employer holds these funds in trust and must remit them on the IRS deposit schedule. Failure to remit can trigger the Trust Fund Recovery Penalty (TFRP), which makes responsible individuals personally liable for 100% of the unpaid amount — even if the business is an LLC or corporation (IRS 2026, IRC §6672).

Deductions that reduce an employee's taxable income before withholding is calculated. Common examples: health insurance premiums under a Section 125 cafeteria plan, traditional 401(k) or 403(b) contributions, HSA and FSA contributions. Because they lower the taxable wage base, pre-tax deductions reduce federal income tax, Social Security, and Medicare withholding simultaneously (IRS Publication 15 2026).

Deductions applied after withholding is computed. Examples: Roth 401(k) contributions, union dues, supplemental life insurance premiums above the $50,000 employer-paid threshold, garnishments. Roth contributions are post-tax on the way in but tax-free on qualified withdrawals in retirement — the tax timing is simply different, not absent.

An employer who receives a garnishment order is legally required to withhold the specified amount and remit it to the designated party — a court, the IRS, a child support enforcement agency, or a creditor. The Consumer Credit Protection Act limits the amount that can be garnished: generally, the lesser of 25% of disposable earnings or the amount by which disposable earnings exceed 30 times the federal minimum wage per week (DOL 2023). Employers cannot fire an employee solely because of a single garnishment order.

A written benefit plan under IRC §125 that allows employees to choose from a menu of taxable and non-taxable benefits. If structured properly, employee contributions to health, dental, vision, FSA, and dependent care plans made through the cafeteria plan are excluded from federal income tax and FICA. The plan must be in writing and meet specific IRS requirements; informal arrangements do not qualify (IRS Publication 15-B 2026).

Completed by the employee when hired and updated whenever their tax situation changes (new dependent, second job, marriage, divorce). The W-4 was significantly redesigned in 2020; employees who last filed before that date may have withholding that no longer reflects their actual liability. Employers must withhold based on the most recent valid W-4 on file (IRS 2026, Publication 15).

Filed four times per year — by April 30, July 31, October 31, and January 31. Reports total wages paid, federal income tax withheld, Social Security and Medicare taxes (both employee and employer shares), and reconciles those amounts against deposits made during the quarter. Underpayments are paid with the filing; overpayments can be applied to the next quarter or refunded (IRS 2026, Form 941 Instructions).

Filed annually by January 31 for the prior calendar year. Reports total FUTA wages paid, the employer's FUTA tax liability, and any deposits made. If FUTA liability exceeded $500 in any quarter, deposits were required during the year; those are reconciled here. Most employers owe minimal FUTA due to the state unemployment tax credit reducing the effective rate to 0.6% (IRS 2026, Form 940 Instructions).

Issued to each employee and filed with the Social Security Administration by January 31 each year. Reports gross wages, taxable wages (which may differ), federal and state income tax withheld, Social Security and Medicare wages and taxes, and any pre-tax benefit amounts. The W-3 is the transmittal form that accompanies the batch of W-2s sent to the SSA. Errors on W-2s require a corrected W-2c (IRS 2026, General Instructions for Forms W-2 and W-3).

Issued to independent contractors who were paid $600 or more during the tax year for services. Unlike W-2 employees, 1099 recipients are responsible for paying their own self-employment tax (15.3% on net earnings up to the Social Security wage base). The 1099-NEC must be provided to the contractor and filed with the IRS by January 31. Misclassifying an employee as a 1099 contractor to avoid payroll taxes is a serious compliance violation (IRS 2026, Instructions for Forms 1099-NEC).

All federal tax deposits must be made through EFTPS — checks are not accepted for payroll tax remittance. Employers must enroll before their first deposit is due. Deposits can be scheduled in advance, and EFTPS maintains a full payment history. Payments must be initiated at least one business day before the deposit deadline to be considered on time (IRS 2026, EFTPS enrollment at eftps.gov).