K
401(k) Plan
A qualified defined-contribution retirement plan under IRC Section 401(k) that allows employees to defer a portion of pre-tax compensation into an investment account. Elective deferrals reduce federal and most state income tax withholding but remain subject to FICA taxes.
A
ACH (Automated Clearing House)
An electronic funds-transfer network used by employers and payroll providers to transmit tax deposits, direct-deposit payroll payments, and refunds between financial institutions. The IRS requires most federal tax deposits to be made via EFTPS, which settles through ACH.
Additional Medicare Tax
A 0.9% surtax imposed on employee wages, compensation, and self-employment income exceeding $200,000 for single filers ($250,000 for married filing jointly). Unlike regular Medicare tax, there is no employer match. Employers must begin withholding when wages exceed $200,000 in a calendar year, regardless of filing status.
Advance Earned Income Credit (AEIC)
A now-discontinued provision that allowed eligible employees to receive a portion of the Earned Income Credit in their paychecks rather than waiting for a tax refund. Repealed effective January 1, 2011.
Affordable Care Act (ACA) Reporting
Employer obligations under IRC Sections 6055 and 6056 to file Forms 1094-C and 1095-C reporting offers of minimum essential coverage to full-time employees. Applicable Large Employers (ALEs) with 50 or more FTEs are subject to these requirements.
Aggregate Withholding Method
A method of calculating federal income tax withholding on supplemental wages by combining the supplemental payment with the employee's regular wages for the pay period and applying the standard withholding formula to the total, then subtracting the tax already withheld on the regular wages alone.
Alien Taxation
The set of rules governing federal and state tax withholding obligations for wages paid to nonresident aliens and resident aliens. Residency status under the Substantial Presence Test or green-card test determines eligibility for treaty benefits and the applicable withholding method.
Amended Return
A corrected filing submitted to a tax agency to revise previously reported wages, taxes, or other data. Common amended payroll forms include Form 941-X (adjusted or corrected federal quarterly return) and Form W-2c (corrected wage and tax statement).
Applicable Large Employer (ALE)
An employer with 50 or more full-time equivalent employees (FTEs) in the prior calendar year, subject to the Affordable Care Act's employer shared responsibility provisions (IRC Section 4980H) and annual ACA reporting requirements on Forms 1094-C and 1095-C.
ASO (Administrative Services Organization)
A service arrangement in which a third-party firm handles payroll administration, benefits enrollment, and HR functions on behalf of a client employer, but does not assume legal employer status. Unlike a PEO, the client retains its own FEIN and files under its own accounts.
B
Back Pay
Compensation awarded to an employee for wages that should have been paid in prior periods, whether due to employer error, arbitration award, or legal settlement. Back pay is taxable and subject to all applicable employment taxes in the year paid. Special allocation rules under Rev. Rul. 2014-18 may apply for Social Security wage base purposes.
Backup Withholding
A flat-rate federal income tax withholding (currently 24%) applied to certain non-employee payments—such as interest, dividends, and independent contractor compensation—when the payee fails to furnish a correct Taxpayer Identification Number (TIN) or is subject to IRS notification.
Bi-Weekly Pay Frequency
A payroll schedule in which employees are paid every two weeks, resulting in 26 pay periods per year (or 27 in certain leap-year configurations). Distinguished from semi-monthly pay, which yields exactly 24 pay periods.
C
Cafeteria Plan (Section 125 Plan)
An employer-sponsored benefit plan under IRC Section 125 that allows employees to choose between taxable cash compensation and qualified non-taxable benefits such as health insurance premiums, FSAs, and HSA contributions. Qualifying elections reduce gross income for federal income tax and FICA purposes.
Certified Payroll Professional (CPP)
A professional designation administered by PayrollOrg (formerly the American Payroll Association) for payroll practitioners who demonstrate mastery of payroll concepts, compliance, taxation, and operations through a comprehensive examination. The CPP credential requires ongoing recertification credits (RCHs).
Circular E
See "Publication 15 (Circular E)." The IRS's annually updated employer tax guide covering withholding tables, FICA calculations, deposit schedules, and general payroll tax compliance obligations.
COBRA (Consolidated Omnibus Budget Reconciliation Act)
A federal law requiring employers with 20 or more employees to offer continuation of group health plan coverage to employees and their dependents after qualifying events such as termination, reduction in hours, or divorce. While not a payroll tax, COBRA administration is closely tied to payroll and benefits systems.
Common Law Employee
A worker classified as an employee based on the degree of behavioral control, financial control, and relationship-type factors as defined by IRS guidelines. The employer directs what work is done and how it is accomplished, triggering full employment tax obligations.
Common Paymaster
An arrangement under IRC Section 3121(s) where one entity in a group of related corporations disburses wages and remits employment taxes on behalf of all entities in the group. This prevents duplicate application of the Social Security and FUTA wage bases when an employee works concurrently for multiple related entities.
Compliance Calendar
A schedule of filing deadlines, deposit due dates, and reporting requirements that payroll professionals follow to avoid penalties. Key dates include quarterly 941 deadlines, annual W-2/W-3 due dates, and state-specific filing calendars.
Corrected W-2 (Form W-2c)
The IRS form used to correct errors on previously filed Forms W-2. A corresponding Form W-3c (Transmittal of Corrected Wage and Tax Statements) must accompany submissions to the Social Security Administration.
Cost of Living Adjustment (COLA)
An annual adjustment applied to tax thresholds, benefit amounts, and contribution limits to account for inflation. The Social Security wage base, HSA contribution limits, retirement plan contribution limits, and standard deduction amounts are all subject to COLA increases.
Credit Reduction State
A state that has an outstanding loan balance from the Federal Unemployment Trust Fund for two or more consecutive years on November 10, triggering a reduction in the FUTA credit rate available to employers in that state. Affected employers owe additional FUTA tax per employee.
D
De Minimis Fringe Benefit
A benefit provided to employees that is so small in value that accounting for it would be unreasonable or administratively impractical. Under IRC Section 132(e), de minimis fringe benefits are excluded from gross income and are not subject to employment tax withholding.
De Minimis Rule (Multistate)
A threshold established by some states under which an employer is not required to withhold state income tax for employees who work in the state for a minimal number of days or earn below a specified dollar amount. Rules vary by state and reciprocity agreements may also apply.
DE-9 (Quarterly Contribution Return and Report of Wages)
The quarterly filing required by the California Employment Development Department (EDD) to report wages paid and taxes owed for Unemployment Insurance (UI), Employment Training Tax (ETT), State Disability Insurance (SDI), and Personal Income Tax (PIT) withholding.
Dependent Care FSA
A benefit account under a Section 125 cafeteria plan that allows employees to set aside up to $5,000 per year ($2,500 if married filing separately) in pre-tax dollars for eligible dependent care expenses, including daycare and after-school programs for children under 13. Reduces income and FICA taxes.
Deposit Schedule (Federal)
The IRS-assigned schedule—monthly or semi-weekly—that determines when an employer must deposit withheld federal income tax and FICA taxes. The schedule is based on the employer's lookback-period tax liability. Employers accumulating $100,000 or more on any day must deposit by the next business day.
Direct Deposit
An electronic payment method where an employer transmits net pay directly to an employee's bank account via the ACH network, eliminating the need for paper checks. Most states permit mandatory direct deposit with certain employee protections.
DOL (U.S. Department of Labor)
The federal agency responsible for administering and enforcing the Fair Labor Standards Act (FLSA), the Family and Medical Leave Act (FMLA), ERISA, OSHA, and other worker-protection statutes that affect payroll calculations including overtime, minimum wage, and child labor rules.
E
Earned Income Tax (EIT)
A local income tax levied on earned compensation (wages, salaries, commissions, and net profits) by municipalities and school districts, most commonly in Pennsylvania. EIT rates and collection are governed by the Tax Reform Code and, in PA, administered under Act 32.
EFTPS (Electronic Federal Tax Payment System)
The U.S. Treasury's free online system used by employers to make federal tax deposits, including withheld income tax, FICA taxes, and FUTA tax. Employers must enroll and use EFTPS; failure to deposit electronically may result in a 10% penalty.
Electronic Filing (E-Filing)
The submission of tax returns, wage reports, and information returns to federal and state agencies through approved electronic channels. The IRS mandates e-filing for employers filing 10 or more information returns (W-2, 1099, etc.) per year.
Electronic W-2 Consent
The employee authorization required under IRS regulations before an employer may furnish Form W-2 electronically rather than in paper format. The employee must affirmatively consent after receiving a disclosure statement about access requirements and the right to withdraw consent.
Employee Retention Credit (ERC)
A refundable payroll tax credit available to eligible employers that retained employees during COVID-19-related government shutdowns or experienced significant declines in gross receipts. Originally established under the CARES Act (2020) and expanded under subsequent legislation. The credit is claimed on Form 941-X for eligible quarters.
Employee vs. Independent Contractor
The classification determination that establishes whether a worker is an employee (subject to income tax withholding, FICA, and FUTA) or an independent contractor (responsible for self-employment taxes, reported on Form 1099-NEC). Misclassification can result in penalties, back taxes, and interest.
Employer Identification Number (EIN / FEIN)
A unique nine-digit number (XX-XXXXXXX) assigned by the IRS to identify a business entity for tax filing and reporting purposes. Required for all employers to file payroll tax returns, issue W-2s, and make federal tax deposits.
Employer Shared Responsibility Payment (ESRP)
The penalty assessment under IRC Section 4980H imposed on Applicable Large Employers that either fail to offer minimum essential coverage to substantially all full-time employees (Section 4980H(a)) or offer coverage that is not affordable or does not provide minimum value (Section 4980H(b)).
EOR (Employer of Record)
A third-party organization that serves as the legal employer for tax, insurance, and compliance purposes while the client company directs the worker's day-to-day activities. The EOR handles payroll, tax filings, benefits, and statutory obligations across jurisdictions.
Expatriate Taxation
The tax rules governing U.S. citizens and resident aliens working abroad, including the Foreign Earned Income Exclusion (IRC Section 911), foreign tax credits, and totalization agreements that prevent dual Social Security taxation for employees working in countries with bilateral agreements with the United States.
Experience Rating
The method used by state unemployment agencies to assign employer SUI/SUTA tax rates based on the employer's history of unemployment claims filed by former employees. A lower claims history generally results in a lower tax rate. New employers are typically assigned a standard "new employer" rate.
F
Fair Labor Standards Act (FLSA)
The federal law establishing minimum wage, overtime pay requirements (time-and-a-half for hours over 40 in a workweek), recordkeeping obligations, and child labor standards. Administered by the DOL Wage and Hour Division.
Federal Income Tax Withholding (FIT)
The amount of federal income tax an employer is required to withhold from each employee's wages based on the employee's Form W-4 elections, filing status, and the IRS withholding tables or computational bridge. Deposited to the U.S. Treasury via EFTPS.
Federal Tax Deposit Penalty
A penalty assessed by the IRS when employers fail to deposit employment taxes on time, deposit the wrong amount, or use an incorrect deposit method. Penalties range from 2% (1-5 days late) to 15% (more than 10 days past the due date or not deposited within 10 days of an IRS notice).
FICA (Federal Insurance Contributions Act)
The federal payroll tax that funds Social Security (OASDI) and Medicare (HI). The combined employee rate is 7.65% (6.2% Social Security + 1.45% Medicare), matched by the employer for a total of 15.3%. Social Security tax applies up to the annual wage base; Medicare has no wage cap.
Flexible Spending Account (FSA)
An employer-sponsored benefit account under a Section 125 cafeteria plan that allows employees to set aside pre-tax dollars for qualified medical expenses (Health FSA) or dependent care expenses (Dependent Care FSA). Contributions reduce taxable wages for income tax and FICA purposes.
Form 1099-MISC (Miscellaneous Information)
An IRS information return used to report certain types of miscellaneous income, including rents, royalties, prizes, and medical/health care payments of $600 or more. Since 2020, non-employee compensation is reported on Form 1099-NEC rather than 1099-MISC.
Form 1099-NEC (Nonemployee Compensation)
The IRS information return used to report payments of $600 or more to independent contractors and other non-employees for services performed in the course of a trade or business. Reintroduced for tax year 2020, replacing Box 7 of the former 1099-MISC for this purpose. Due to payees and the IRS by January 31.
Form 8850 (Pre-Screening Notice and Certification Request for WOTC)
The IRS form submitted by employers to the designated State Workforce Agency (SWA) to request certification of a new hire as a member of a Work Opportunity Tax Credit (WOTC) target group. Must be submitted within 28 days of the employee's start date.
Form 940 (Employer's Annual Federal Unemployment Tax Return)
The annual IRS form used to report and pay Federal Unemployment Tax (FUTA). Employers compute the 6.0% gross FUTA tax on the first $7,000 of each employee's wages, apply the state credit reduction (up to 5.4%), and remit any balance due. Due by January 31 of the following year.
Form 941 (Employer's Quarterly Federal Tax Return)
The quarterly IRS form on which employers report total wages paid, federal income tax withheld, and both the employer and employee shares of Social Security and Medicare taxes. Due by the last day of the month following the quarter's end.
Form 941-X (Adjusted Employer's Quarterly Federal Tax Return)
The IRS form used to correct errors on previously filed Forms 941, including adjustments for overreported or underreported taxes, claiming retroactive credits (such as the Employee Retention Credit), and correcting wage and tax data.
Form 943 (Employer's Annual Federal Tax Return for Agricultural Employees)
The annual IRS return filed by employers of agricultural (farm) workers to report wages paid, federal income tax withheld, and FICA taxes. Form 943 replaces quarterly Form 941 filing for agricultural employers. Due by January 31 of the following year.
Form 944 (Employer's Annual Federal Tax Return)
An annual filing alternative to Form 941 that was historically available to very small employers (annual tax liability of $1,000 or less) to report income tax withholding and FICA taxes once per year instead of quarterly. Note: Form 944 is considered obsolete beginning in the 2026 tax year.
Form 945 (Annual Return of Withheld Federal Income Tax)
The annual IRS form used to report federal income tax withheld from non-payroll payments, including pensions, annuities, gambling winnings, military retirement, and backup withholding on 1099-type payments. Due by January 31.
Form I-9 (Employment Eligibility Verification)
The U.S. Citizenship and Immigration Services (USCIS) form that employers must complete for every employee hired to verify identity and employment authorization. While not a tax form, I-9 compliance is a fundamental payroll onboarding requirement with significant penalties for noncompliance.
Form IT-2104 (Employee's Withholding Allowance Certificate — New York)
The New York State equivalent of the federal W-4. Employees use this form to claim withholding allowances and request additional amounts be withheld for New York State, New York City, and Yonkers personal income taxes.
Form SS-8 (Determination of Worker Status)
An IRS form filed by a worker or business to request a determination of whether a worker should be classified as an employee or independent contractor for federal employment tax purposes. The IRS evaluates the relationship based on behavioral control, financial control, and relationship-type factors.
Form W-2 (Wage and Tax Statement)
The annual IRS form issued by employers to each employee by January 31, reporting total compensation paid, federal and state income tax withheld, Social Security and Medicare wages and taxes, and certain benefit information. Copies are filed with SSA (with Form W-3) and furnished to the employee.
Form W-3 (Transmittal of Wage and Tax Statements)
The summary transmittal form that accompanies copies of Forms W-2 submitted to the Social Security Administration. It reports aggregate totals of wages, tips, and taxes for all employees. Due to SSA by January 31.
Form W-4 (Employee's Withholding Certificate)
The IRS form completed by employees to communicate their federal income tax withholding preferences—filing status, multiple-job adjustments, dependents, additional income, deductions, and extra withholding—to their employer. Redesigned in 2020 to eliminate personal allowances.
FPC (Fundamental Payroll Certification)
An entry-level payroll credential administered by PayrollOrg (formerly the American Payroll Association) for payroll professionals who demonstrate foundational knowledge of payroll practices, compliance requirements, and employment tax principles. The FPC requires ongoing recertification credits (RCHs).
Fringe Benefits
Non-cash compensation provided to employees in addition to regular wages, including health insurance, life insurance, company vehicles, meals, and education assistance. The taxability of fringe benefits depends on their type and whether they qualify for exclusion under specific IRC sections.
FUTA (Federal Unemployment Tax Act)
The federal payroll tax that funds the federal-state unemployment insurance system. The gross FUTA tax rate is 6.0% on the first $7,000 of each employee's annual wages. Employers in states that meet federal requirements receive a credit of up to 5.4%, reducing the effective rate to 0.6%.
G
Garnishment
A court order or agency directive requiring an employer to withhold a portion of an employee's disposable earnings and remit the funds to a creditor or government agency. Common types include child support, defaulted student loans, tax levies, and consumer-debt judgments. Federal and state laws limit the maximum percentage that may be garnished.
Gross Pay
The total compensation earned by an employee before any deductions, including regular wages, overtime, bonuses, commissions, tips, and other taxable compensation. Gross pay is the starting point for calculating income tax withholding and employment taxes.
Gross-Up
A payroll calculation method in which the employer increases a payment amount to cover the taxes owed on that payment, so the employee receives the intended net amount. Common for relocation reimbursements, bonuses, and executive compensation. The gross-up formula accounts for federal, state, and FICA taxes iteratively.
Group-Term Life Insurance (Excess)
Employer-provided group-term life insurance coverage exceeding $50,000 that generates imputed income to the employee under IRC Section 79. The cost of coverage over $50,000, determined using IRS Table I rates, is added to taxable wages for FICA and federal income tax purposes.
H
HCM (Human Capital Management)
An integrated approach to managing the employee lifecycle—recruiting, onboarding, payroll, benefits, talent management, and compliance—often supported by enterprise software platforms. HCM systems centralize workforce data and automate employment tax calculations across jurisdictions.
Health Reimbursement Arrangement (HRA)
An employer-funded benefit plan that reimburses employees for qualified medical expenses and, in some cases, individual health insurance premiums. HRA contributions are excludable from the employee's gross income and are not subject to FICA. Types include Qualified Small Employer HRAs (QSEHRAs) and Individual Coverage HRAs (ICHRAs).
Health Savings Account (HSA)
A tax-advantaged savings account available to employees enrolled in a High Deductible Health Plan (HDHP). Employee contributions are pre-tax (reducing income and FICA taxes), employer contributions are excluded from income, and qualified medical distributions are tax-free. Annual contribution limits are set by the IRS.
HRIS (Human Resources Information System)
A software system used to manage employee data, benefits administration, compliance tracking, and basic payroll functions. An HRIS typically integrates with or is a component of a broader HCM or payroll platform.
I
Imputed Income
The fair market value of non-cash compensation or benefits provided to an employee that must be included in taxable wages for income and employment tax purposes. Common examples include personal use of a company vehicle, group-term life insurance over $50,000, and domestic partner benefits.
Independent Contractor
A self-employed individual who provides services to a business under a contract but is not classified as an employee. The hiring entity does not withhold income taxes or pay employer-share FICA/FUTA. Payments of $600 or more are reported on Form 1099-NEC. Classification is determined by the IRS common-law test examining behavioral control, financial control, and relationship type.
IRS (Internal Revenue Service)
The federal agency within the U.S. Department of the Treasury responsible for administering and enforcing the Internal Revenue Code, including employment tax provisions. The IRS publishes withholding tables (Publication 15), processes payroll tax returns (Forms 941, 940, 943), and conducts employment tax audits.
J
Joint Employment
A situation in which two or more employers simultaneously share responsibility for an employee's wages and working conditions. Under DOL guidelines, all joint employers are individually and jointly liable for compliance with the FLSA, including overtime and minimum wage obligations.
K
K-1 (Schedule K-1)
An IRS form used to report a partner's, shareholder's, or beneficiary's share of income, deductions, and credits from pass-through entities (partnerships, S-corporations, trusts). Guaranteed payments to partners reported on Schedule K-1 are subject to self-employment tax rather than employment tax withholding.
L
Levy (Tax Levy)
A legal seizure of an employee's wages or property by a government tax agency (IRS, state, or local) to satisfy unpaid tax debt. An IRS levy on wages is continuous until the debt is satisfied or released. Employers must honor a levy and withhold the specified amount from each paycheck, calculated using the employee's filing status and exemptions.
Local Services Tax (LST)
A flat-rate annual tax levied by Pennsylvania municipalities and school districts on individuals employed within the taxing jurisdiction. Collected through payroll withholding, typically prorated across pay periods. Formerly known as the Emergency and Municipal Services Tax (EMST). Employees earning below a low-income threshold may be exempt.
Lookback Period
The 12-month period (July 1 through June 30 of the preceding fiscal year) used by the IRS to determine whether an employer is a monthly or semi-weekly depositor for federal employment taxes in the current calendar year. Employers with $50,000 or less in total tax liability during the lookback period are monthly depositors; those above are semi-weekly.
M
Major Tax Code
In payroll tax administration, a tax classification that is reported on its own dedicated return or form. For example, federal income tax, Social Security, Medicare, and FUTA are each major tax codes. Paid Family and Medical Leave (PFML) is also a major tax code because it is reported on its own form. Major taxes serve as parent categories under which minor (subordinate) tax codes may be grouped.
MasterTax™
A Fortune 500 enterprise-grade payroll tax compliance platform used by large employers and service bureaus to manage tax calculations, filings, payments, amendments, and reconciliations across all federal, state, and local jurisdictions. MasterTax™ automates complex multistate tax withholding, rate updates, and agency correspondence.
Medicare Tax
The Hospital Insurance (HI) component of FICA, imposed at a combined rate of 2.9% (1.45% employee, 1.45% employer) on all covered wages with no annual wage cap. High-income employees are also subject to the Additional Medicare Tax of 0.9% on wages exceeding $200,000.
Minimum Wage
The lowest hourly rate of pay an employer may legally pay to non-exempt employees, established by the Fair Labor Standards Act at the federal level and by individual states and localities at higher rates. Employers must pay the highest applicable minimum wage. Tip credits may reduce the cash wage for tipped employees in many jurisdictions.
Minor Tax Code
A subordinate tax classification that reports under or rolls into a major (parent) tax code's form. For instance, certain local add-on taxes may be collected alongside and reported on the same return as the parent state tax. The major-minor hierarchy is based on reporting structure, not geographic scope.
Moving Expenses Reimbursement
Employer payments to cover or reimburse an employee's relocation costs. Under the Tax Cuts and Jobs Act (2018–2025), qualified moving expense reimbursements are excluded from income only for active-duty members of the Armed Forces. For all other employees, moving reimbursements are taxable compensation subject to income tax withholding and FICA.
Multi-Entity Employer
A business operating through multiple legal entities (subsidiaries, divisions, or affiliated companies) that must manage separate federal and state employment tax accounts, wage bases, and experience ratings for each entity, unless a common paymaster arrangement under IRC Section 3121(s) applies.
Multistate Withholding
The rules and processes governing state income tax withholding when an employee works in multiple states or resides in a state different from the work state. Employers must evaluate each state's withholding requirements, reciprocity agreements, and de minimis thresholds to determine proper withholding.
N
NAICS Code (North American Industry Classification System)
A standardized six-digit code used to classify business establishments by industry sector. State unemployment agencies use NAICS codes to assign industry-specific SUI/SUTA tax rates and experience-rating categories.
Net Pay
The amount of compensation an employee receives after all deductions—federal and state income taxes, FICA, benefit premiums, retirement contributions, garnishments, and other withholdings—are subtracted from gross pay. Also referred to as "take-home pay."
New Hire Reporting
A federal and state requirement under the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) that employers report newly hired and rehired employees to the designated state agency, typically within 20 days of hire. Information is used to enforce child support orders and detect fraud.
Nexus (Employment Tax Nexus)
The minimum level of connection—physical presence, employee activity, or economic activity—between an employer and a taxing jurisdiction that creates an obligation to register, withhold, and remit employment taxes in that jurisdiction. Remote work has significantly expanded nexus considerations.
Noncash Compensation
Any form of remuneration other than cash wages, including stock options, company vehicles for personal use, housing, meals, merchandise, and other tangible property. Noncash compensation must be valued at fair market value and reported as taxable wages unless a specific IRC exclusion applies.
Nonresident Alien Withholding
Special federal income tax withholding rules that apply to wages paid to nonresident aliens. Nonresident aliens generally cannot claim "married" filing status on Form W-4 and may only claim one withholding allowance (for residents of Canada, Mexico, South Korea, India, or U.S. nationals). Tax treaty exemptions may apply.
O
Occupational Privilege Tax (OPT)
A flat annual tax imposed by certain local jurisdictions on the privilege of engaging in an occupation or profession within the municipality. Similar in function to the Local Services Tax (LST) in Pennsylvania. Some jurisdictions impose both an employee and employer component.
Overtime
Compensation paid at a premium rate (typically 1.5 times the regular rate of pay under the FLSA) for hours worked beyond 40 in a workweek by non-exempt employees. Some states impose daily overtime thresholds or double-time requirements. Overtime is fully subject to all employment taxes.
P
PA Act 32
Pennsylvania legislation (Act 32 of 2008) that consolidated the collection of local earned income taxes (EIT) under designated Tax Collection Districts (TCDs). Act 32 standardized withholding and remittance procedures, created uniform tax registers, and established the requirement for employers to use PSD (Political Subdivision) codes to determine the correct municipal and school district EIT rates.
Pay Frequency
The schedule on which an employer processes payroll and compensates employees. Common frequencies are weekly (52 pay periods), bi-weekly (26), semi-monthly (24), and monthly (12). State laws may mandate minimum pay frequencies for certain employee types.
Payroll Register
A detailed report generated each pay period listing all employees, hours worked, gross pay, itemized deductions, tax withholdings, employer-paid taxes, and net pay. The payroll register serves as the official record of each payroll run for reconciliation and audit purposes.
Payroll Software
Technology solutions used by employers to automate wage calculations, tax withholding, direct deposits, tax filings, and regulatory reporting. Enterprise platforms such as MasterTax™ handle complex multistate and multi-jurisdiction compliance requirements at scale.
Payroll Tax Deposit Rules
Federal and state regulations that specify when employers must remit withheld taxes. Federal deposits follow monthly or semi-weekly schedules based on the lookback period, with a next-day deposit rule for liabilities reaching $100,000. State deposit frequencies vary by jurisdiction and employer size.
Penalty Abatement
A request to the IRS or a state tax agency to waive or reduce a penalty for late filing, late deposit, or underpayment of employment taxes. Reasonable cause (e.g., natural disaster, serious illness, reliance on professional advice) must be demonstrated. First-time penalty abatement (FTA) is available for certain federal penalties if the employer has a clean compliance history.
PEO (Professional Employer Organization)
A co-employment arrangement in which the PEO becomes the employer of record for tax purposes, assuming responsibility for payroll processing, employment tax filings, workers' compensation, and benefit administration. The client company retains control over day-to-day work direction. IRS-certified PEOs (CPEOs) provide additional protections under IRC Section 3511.
PFML (Paid Family and Medical Leave)
A state-mandated insurance program that provides wage replacement to employees taking leave for qualifying family or medical reasons. PFML is classified as a major tax code because contributions are reported on a dedicated state form. States with PFML programs include Massachusetts, Washington, Connecticut, Colorado, Oregon, and others. In Hawaii and New York, paid family leave premiums are remitted to private insurance carriers rather than a government agency.
Political Subdivision (PSD) Code
A six-digit code used in Pennsylvania to identify the specific municipality and school district in which an employee resides or works, enabling accurate determination of local earned income tax (EIT) rates under Act 32. Employers must obtain each employee's resident and work-location PSD codes.
Post-Tax Deduction
An amount withheld from an employee's pay after federal income tax, state income tax, and FICA taxes have been calculated. Examples include Roth 401(k) contributions, union dues, charitable contributions, and garnishments. Post-tax deductions reduce net pay but do not reduce taxable wages.
Power of Attorney (Form 2848)
The IRS form that authorizes a designated individual (CPA, attorney, enrolled agent, or other representative) to represent an employer before the IRS regarding specific tax matters, including employment tax audits, penalty abatement requests, and installment agreements.
Pre-Tax Deduction
An amount withheld from an employee's gross pay before the calculation of income taxes and, in many cases, FICA taxes. Qualifying pre-tax deductions include Section 125 cafeteria plan elections (health premiums, FSA contributions), HSA contributions, and traditional 401(k) elective deferrals. Pre-tax deductions reduce taxable wages and the employee's current tax liability.
Protective Claim
A preliminary refund claim filed with the IRS or a state agency to preserve an employer's right to a refund while a related legal or regulatory issue is pending resolution. Protective claims prevent the statute of limitations from expiring on potential refund rights.
Publication 15 (Circular E)
The IRS's primary reference guide for employers, containing federal income tax withholding tables, FICA rates, deposit rules, and employer tax responsibilities. Updated annually and supplemented by Publication 15-A (Employer's Supplemental Tax Guide) and Publication 15-T (Federal Income Tax Withholding Methods).
Q
Qualified Transportation Fringe Benefit
An employer-provided benefit under IRC Section 132(f) that allows employees to exclude from gross income certain commuting costs for transit passes, vanpooling, and qualified parking, up to monthly limits set annually by the IRS. Employer-provided amounts are not subject to income or FICA taxes.
Quarter (Tax Quarter)
One of four three-month periods (Q1: Jan–Mar, Q2: Apr–Jun, Q3: Jul–Sep, Q4: Oct–Dec) used as the standard reporting period for federal and state payroll tax returns. Form 941 is filed quarterly; most state unemployment returns are also filed quarterly.
Quarterly Filing
The submission of payroll tax returns and wage reports to federal and state agencies on a quarterly basis. Key federal quarterly filings include Form 941. State quarterly filings typically include SUI/SUTA wage detail reports. Due dates vary by agency.
R
Recertification Credit Hour (RCH)
A unit of continuing education credit required by PayrollOrg to maintain the CPP (Certified Payroll Professional) and FPC (Fundamental Payroll Certification) designations. Credentialed professionals must earn a specified number of RCHs within each recertification cycle.
Reciprocity Agreement
A compact between two or more states under which residents working across state lines are taxed only by their state of residence, not the state where they perform services. Reciprocity agreements simplify multistate withholding. The employee must typically file a certificate of nonresidence (e.g., Form WH-47 in Indiana) with the employer.
Resident vs. Work State
The distinction between the state where an employee lives (resident state) and the state where the employee performs work (work state). When these differ and no reciprocity agreement exists, the employer may be required to withhold taxes for both states, with the employee receiving a credit for taxes paid to the non-resident state.
Responsible Party (Trust Fund Recovery)
An individual (officer, director, employee, or third party) with the authority or duty to collect, account for, and remit withheld payroll taxes who willfully fails to do so. The IRS may assess the Trust Fund Recovery Penalty (100% of unpaid trust fund taxes) against responsible parties personally under IRC Section 6672.
Retroactive Pay
A lump-sum payment covering a wage increase that applies retroactively to prior pay periods, often resulting from contract negotiations, reclassification, or corrective action. Retroactive pay is subject to all employment taxes in the period paid and may require adjustments to prior-period wage records for SUI wage base purposes.
S
Safe Harbor (Withholding)
A threshold or methodology that, if followed, protects an employer from penalties even if the actual tax liability differs from the amount withheld or deposited. In employment tax, safe harbor rules apply to deposit schedules, estimated tax payments, and certain withholding calculation methods.
School District Tax
A local income tax levied by school districts on residents' earned income, most commonly in Pennsylvania and Ohio. In Pennsylvania, the school district earned income tax is collected alongside the municipal EIT under the Act 32 framework using PSD codes.
SDI (State Disability Insurance)
A state-mandated insurance program that provides partial wage replacement to employees unable to work due to non-work-related illness, injury, or pregnancy. Currently mandated in California, Hawaii, New Jersey, New York, Rhode Island, and Puerto Rico. Funding mechanisms vary by state—some are employee-paid, some include employer contributions.
Section 125 Plan
See "Cafeteria Plan (Section 125 Plan)." An employer benefit plan under IRC Section 125 allowing employees to choose between cash and qualified pre-tax benefits including health insurance premiums, FSAs, HSA contributions, and adoption assistance.
Self-Employment Tax
The Social Security and Medicare taxes paid by self-employed individuals on net self-employment earnings. The self-employment tax rate is 15.3% (12.4% Social Security + 2.9% Medicare), equivalent to both the employer and employee shares of FICA. Calculated on 92.35% of net self-employment income. Half of self-employment tax is deductible as an adjustment to gross income.
Semi-Monthly Pay Frequency
A payroll schedule in which employees are paid twice per month—typically on the 15th and last day—yielding exactly 24 pay periods per year. Distinguished from bi-weekly pay, which results in 26 pay periods.
Severance Pay
Compensation paid to an employee upon termination of employment, often based on years of service. Severance is classified as supplemental wages and is subject to federal income tax withholding (at the flat supplemental rate or aggregate method), FICA taxes, and FUTA. State treatment varies.
SIT (State Income Tax)
Income tax imposed by individual states on wages, salaries, and other compensation earned within their borders. Most states use graduated rate structures; some impose a flat rate. As of 2026, Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming do not levy a broad-based state income tax on wages.
Social Security Administration (SSA)
The federal agency that administers the Social Security retirement, disability, and survivors' benefit programs. SSA receives Forms W-2 and W-3 from employers, maintains individual earnings records, and issues Social Security Numbers (SSNs) used for employment tax reporting.
Social Security Tax
The Old-Age, Survivors, and Disability Insurance (OASDI) component of FICA, imposed at a combined rate of 12.4% (6.2% employee, 6.2% employer) on covered wages up to the annual Social Security wage base. The wage base is adjusted annually for inflation by the SSA.
Social Security Wage Base
The maximum amount of an employee's earnings subject to Social Security tax in a calendar year. The wage base is adjusted annually by the SSA based on the national average wage index. Once an employee's cumulative wages reach the wage base, no further Social Security tax is withheld for the remainder of the year.
State Workforce Agency (SWA)
The state-level government agency responsible for administering unemployment insurance, job placement services, labor market information, and certain tax credit certifications (e.g., WOTC). Each state's SWA operates under federal guidelines from the U.S. Department of Labor.
Statutory Employee
A worker who is treated as an employee for FICA tax purposes but as an independent contractor for federal income tax withholding purposes, under IRC Section 3121(d)(3). Categories include full-time life insurance salespersons, certain agent-drivers, traveling salespersons, and certain home workers. Statutory employees have Box 13 "Statutory employee" checked on their W-2 and report income on Schedule C.
Successor Employer
An employer that acquires substantially all of the assets or workforce of a predecessor employer through purchase, merger, or reorganization. Under IRC Section 3121(a)(1), a qualifying successor may count wages paid by the predecessor toward the annual Social Security and FUTA wage bases, preventing employees from being double-taxed. State rules for SUI wage base succession vary.
SUI/SUTA (State Unemployment Insurance / State Unemployment Tax Act)
State-level payroll taxes that fund unemployment benefits for eligible workers who lose their jobs through no fault of their own. Tax rates are assigned to each employer based on experience rating, industry classification (NAICS code), and the state's taxable wage base. Most states impose the tax on the employer only; a few states also require employee contributions.
Supplemental Wages
Compensation paid to an employee in addition to regular wages, including bonuses, commissions, overtime pay, severance pay, back pay, and certain fringe benefits. Employers may withhold federal income tax on supplemental wages using a flat rate method (currently 22% for payments up to $1 million; 37% above $1 million) or the aggregate method.
T
Tax Engine
The calculation component within payroll software that applies current federal, state, and local tax rules—rates, wage bases, withholding formulas, reciprocity agreements, and filing thresholds—to compute accurate tax withholding for each employee in each jurisdiction. Enterprise platforms such as MasterTax™ maintain continuously updated tax engines.
Tax Rate (Employment)
The percentage applied to taxable wages to determine the amount of tax owed. Employment tax rates may be statutory (e.g., 6.2% Social Security) or variable (e.g., experience-rated SUI/SUTA). Employers must track applicable rates for every jurisdiction in which they have tax obligations.
Taxable Wage Base
The maximum amount of an employee's earnings subject to a specific employment tax in a calendar year. Examples include the Social Security wage base (set annually by SSA) and the FUTA wage base ($7,000). State unemployment taxable wage bases vary significantly by state and are set by each state's legislature or agency.
Taxable Wages
The portion of an employee's gross compensation subject to a particular tax after accounting for pre-tax deductions, exclusions, and exemptions. Taxable wages may differ for federal income tax, Social Security, Medicare, FUTA, and state purposes due to varying wage bases and exclusion rules.
TDI (Temporary Disability Insurance)
A state-mandated insurance program providing wage replacement benefits to employees who are temporarily unable to work due to non-occupational illness or injury. TDI is functionally similar to SDI and is mandated in states including New Jersey, New York, Hawaii, Rhode Island, California, and Puerto Rico.
Third-Party Sick Pay
Disability payments made to an employee by a third-party insurer (rather than the employer) during a period of illness or injury. Third-party sick pay may be subject to FICA, FUTA, and income tax withholding depending on the timing of payments, the plan's funding structure, and whether the employee contributed to premiums with after-tax dollars.
Tips (Tip Income)
Cash and non-cash gratuities received by employees, which are subject to income tax withholding, FICA, and FUTA. Employees must report cash tips of $20 or more per month to their employer. Employers must withhold and match FICA on reported tips and may claim the FICA Tip Tax Credit under IRC Section 45B for tips above minimum wage.
Totalization Agreement
A bilateral agreement between the United States and another country that coordinates Social Security coverage to prevent dual taxation and ensure benefit eligibility for workers who split their careers between the two countries. The U.S. currently has totalization agreements with over 30 countries.
Trust Fund Recovery Penalty (TFRP)
A penalty equal to 100% of unpaid trust fund taxes (withheld income tax and employee-share FICA) assessed against responsible persons who willfully fail to collect, account for, and remit these taxes. Assessed under IRC Section 6672, the TFRP is a personal liability that cannot be discharged in bankruptcy.
Trust Fund Taxes
Amounts withheld from employees' wages (federal income tax, Social Security tax, and Medicare tax) that the employer holds in trust for the U.S. government. Trust fund taxes must be deposited timely; failure to do so can result in personal liability for responsible persons under the Trust Fund Recovery Penalty (IRC Section 6672).
U
Uncollected Social Security and Medicare Tax
FICA taxes on non-cash compensation (such as group-term life insurance over $50,000 or third-party sick pay) that the employer was unable to withhold from the employee's wages due to insufficient cash payments. Reported in Box 12 of Form W-2 (Codes A and B) and the employee is responsible for paying the tax on their individual return.
Unemployment Insurance (UI)
A joint federal-state program that provides temporary income benefits to eligible workers who lose employment through no fault of their own. Funded by employer-paid FUTA and SUI/SUTA taxes. Benefits are calculated based on prior earnings and paid for a limited duration set by each state.
V
Voluntary Contribution
An optional payment made by an employer to a state unemployment fund before the annual rate computation date in order to reduce the employer's SUI/SUTA experience rating and receive a lower tax rate for the upcoming year. Not all states permit voluntary contributions, and cost-benefit analysis is essential.
Voluntary Plan (VP)
A private insurance arrangement approved by a state agency that allows an employer to self-insure or privately insure state-mandated disability (SDI/TDI) or paid family leave benefits instead of participating in the state-administered program. Voluntary plans must provide benefits at least as favorable as the state plan.
Voluntary Withholding
Tax withholding that an employee elects but is not required by law, such as additional federal or state income tax withholding requested on a W-4 or state equivalent. May also refer to voluntary withholding on certain payments like unemployment compensation or Social Security benefits.
W
W-2 Electronic Filing Threshold
The IRS-mandated threshold above which employers must file Forms W-2 electronically with the Social Security Administration. The threshold has been significantly lowered in recent years; employers filing 10 or more W-2s must now use electronic submission.
Wage Attachment
See "Garnishment." A generic term for any legal process by which a portion of an employee's earnings is withheld by the employer and directed to a third party, including garnishments, levies, and support orders.
Wage Base
See "Taxable Wage Base." The maximum earnings amount subject to a specific employment tax within a calendar year. Separate wage bases apply to Social Security, FUTA, and state unemployment taxes.
Wage Theft
The illegal practice of not paying workers for all hours worked, paying below minimum wage, failing to pay overtime, stealing tips, or making illegal deductions. Many states have enacted wage theft prevention laws requiring employers to provide written wage notices at hire and with each pay statement.
Work Opportunity Tax Credit (WOTC)
A federal tax credit available to employers who hire individuals from specified target groups facing barriers to employment, including veterans, ex-felons, long-term unemployed, and recipients of certain public assistance. Employers must obtain certification (Form 8850) and claim the credit on their income tax return.
Workers' Compensation Insurance
Employer-funded insurance required by state law that provides medical benefits and wage replacement to employees injured or made ill in the course of employment. Premiums are based on payroll, industry classification, and claims experience. Not technically a payroll tax, but directly tied to payroll data and often administered through payroll systems.
Y
Year-End Reconciliation
The process of verifying that total wages, tax withholdings, and employer tax liabilities reported on quarterly returns (Forms 941) reconcile with annual filings (Forms W-2/W-3, Form 940, and state equivalents). Discrepancies must be resolved before year-end filing deadlines to avoid penalties and SSA earnings record errors.
Z
Zero-Filing (Nil Return)
A payroll tax return filed with zero wages and zero tax liability for a quarter or period in which the employer had no payroll. Many federal and state agencies require employers to file zero returns to maintain active account status and avoid delinquency notices or estimated assessments.
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