Understanding the Meaning of Payroll Terminology and Requirements

Knowledge of payroll jargon isn’t guaranteed to make you the life of the next party but it will help you understand what a payroll processing system offers. Payroll has its own terminology, which can be appreciated best by the aficionado of arcana.

To wit: Would your workers rather be paid $2,000 each payday by semimonthly or by biweekly pay periods? (As the perceptive payroll pro, you would recommend they select the latter option, knowing that it adds up to an extra $4,143 a year. If you're not a payroll pro, however, you might be mystified.)

Pay Period and Pay Base

Pay period is the length of time between payroll runs. Monthly, semimonthly (twice per month), biweekly (every other week), and weekly are all popular pay period options. If you require some other pay period, such as daily pay (a common requirement for an itinerant labor force), check to see if your payroll processing solution offers it.

Pay base is the method for calculating the standard pay. Salary and hourly pay are two of the most common methods. However, manufacturing workers may be paid per item made, on a piecework basis. Sales staff may be paid a commission either as a base or in addition to another type of base pay.

Labor Laws

Ah, if only payroll were that simple. (Then again, if it were you probably wouldn’t read this far.) There are many complicating factors, such as a premium for overtime pay (hours worked over a certain limit). Similarly work on a holiday may also garner a premium. Shift workers may receive a shift differential (a premium for working at less desirable times, such as the midnight shift).

There may be all sorts of additional pay in special circumstances, required by local laws, labor contract, or company practice. One jurisdiction requires payment of taxi fare home for employees who finish work late at night. Another requires payment of a meal allowance if the employee works more than 10 hours in a day.

Tax Tables

Nothing’s certain in life except death and taxes, right? Death isn’t going to change but taxes do all the time. So you need some way of keeping up with all the rate revisions.

Some payroll systems make it possible for you to enter your own tax table information, which you can get free from government sources. However in most cases that’s not a wise use of your time. Pay for a subscription to a tax table update service and have the professionals track the changes for you. In most cases, you download the new tax table data over the Internet and your payroll application is updated within seconds.

Other Deductions

Union dues, insurance, and other deductions come off before the bottom line is calculated. Some payroll systems are limited as to the total number of deduction types they can handle, so check to see if that’s significant in your business.

Check or Direct Deposit?

Many businesses and employees prefer to cut out the check paperwork in exchange for a direct deposit payroll system that sends the money electronically to employees' bank accounts. It is particularly welcome for a remote workforce that may not come into the office each day.

A direct deposit service does cost money, which is charged to the employer, not the employee. However the business can save on the cost of printing and distributing pay checks. You'll need to make this trade-off calculation in order to make the best choice for your business.

Tracking Time and Payroll Costs

Some businesses require a way of tracking and allocating payroll costs in a more detailed fashion than charging the weekly gross pay of good old Joe who runs the forklift to warehouse expenses. For example, a law firm will want to charge the time of professionals to the right client matter for billing purposes. Sometimes the billing rate will vary depending upon the type of work performed. A construction firm will want to charge labor costs to the proper construction project.

Doing this right will require a payroll application that integrates tightly with the time billing or job cost application. Typically, you will find this capability within a comprehensive accounting or enterprise resource planning system.