Tax Management Glossary
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125 Plan: Also known as "Cafeteria Plan" or "Flex Plan". Out-of-pocket costs an employee pays for certain benefit plans. If this is available to the employee, premium payments can be taken on a before-tax basis, reducing the employee's federal, social security, Medicare and most state taxes.
401(k) Plan: A cash or deferred arrangement that allows employees to authorize their employer to place pretax dollars in a retirement plan that invests the money. The contributions (including those matched by the employer) and any earnings on them are not subject to federal income tax (and most state income taxes) until they are withdrawn.
403(b) Annuity: An annuity or mutual fund that provides retirement income for employees of public schools and certain tax exempt organizations.
Accelerated Deposit Rule: This rule requires employers who accumulate a tax liability of $100,000 or more during a deposit period to deposit withheld taxes within one banking day of the day the liability was incurred. This is also known as the one-day or $100,000 rule.
Accrual: The recognition of assets, expenses, liabilities or revenues after the cash value has been determined, but before it is transferred.
Advance Earned Income Credit (AEIC): Payments of earned income credit during the year to employees who expect to be eligible for the credit. Employers make the payments out of federal income, Social Security and Medicate taxes withheld from the employees wages.
After-Tax Deduction: A deduction from an employees pay that does not reduce the employees taxable wages. It is taken out only after all applicable taxes and other deductions have been withheld (e.g., union dues, garnishments, charitable contributions).
Alien: A citizen of a country other than the U.S. or one of its territories or possessions.
Annual Wage Reporting (AWR): The Social Security Administrations system of recording wages reported annually by employers on Forms W-2.
Automated Clearing House (ACH): A Federal Reserve Bank or private financial institution acting as a clearinghouse for direct deposit transactions. Entries are received and transmitted by the ACH under the rules of the association.
Backup Withholding: Income tax withholding required from non-employee compensation when the payee fails to furnish the payer with a taxpayer identification number (TIN) or the payer is notified by the IRS that the payees TIN is incorrect.
Base Period: As it relates to unemployment compensation, it generally consists of 52 weeks or four of the last five quarters, immediately preceding the claimants benefit year.
Base Period Wages: Wages earned during the base period. The amount is generally one of several criteria used in determining a claimants eligibility for unemployment compensation.
Cafeteria Plan: A plan that offers flexible benefits under the Internal Revenue Code 125. Employees choose their benefits from a "menu" of cash and benefits, some of which can be paid with pretax deductions from wages.
Child Support Withholding: The process of withholding amounts from an employees compensation to satisfy a child support order from a court or state child welfare administrative agency. The employer is responsible for withholding the amounts and paying them over to the party named in the withholding order.
Circular E: IRS Publication 15, Employers Tax Guide. This publication contains the basic rules, guidelines, and instructions for withholding, depositing, reporting, and paying federal employment taxes.
Compensation: All cash and non-cash remuneration given to an employee for services performed for the employer.
Compensatory Time: Paid time off granted to an employee for working extra hours. The Federal Wage-Hour Law places severe restrictions on the use of compensatory time to avoid paying overtime, although special exemptions are allowed for certain public sector employees (e.g., police officers and firefighters).
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA): Federal law that requires employers with group health care coverage to offer continued coverage to separated employees and other qualifying beneficiaries. The person seeking coverage may be required to pay up to 102% of the premium for the coverage. COBRA also requires public sector employers to withhold and pay Medicare tax on the wages of all employees hired after 3-31-86 if the employer is not covered by a 218 agreement.
Credit: An accounting entry that increases liabilities and revenues and decreases assets and expenses.
Debit: An accounting entry that increases assets and expenses and decreases liabilities and revenues.
Deduction: An amount subtracted from an employees gross pay to reach net pay, or an amount allowed to taxpayers as an offset against income.
Deferred Compensation: In general, the postponement of a wage payment to a future date. Usually describes a portion of wages set aside by an employer for an employee and put into a retirement plan on a pretax basis.
Direct Deposit: The electronic transfer of an employees net pay directly into financial institution accounts designated by the employee, thus avoiding the need to receive a "live" paycheck.
Earned Income Credit (EIC): A tax credit that is available to low-income employees with one or more qualifying children. It may be taken when the employee files his or her individual tax return, or partially paid in advance by the employer during the year.
Electronic Funds Transfer (EFT): The transfer of money electronically from an account in one financial institution to an account in another financial institution.
Electronic Federal Tax Payment System (EFTPS): System that allows employers to make federal tax deposits electronically through the ACH network.
Electronic Filing: The process of filing tax and information returns directly from one computer to another.
Employee: An individual who performs services for another individual or an organization in return for compensation.
Employees Withholding Allowance Certificate: The federal Form W-4 or an equivalent state or local form on which the employee states their marital status and the number of withholding allowances he or she claims. The form is used by the employer to determine the amount of federal, state, and local income taxes to withhold from the employee's compensation.
Employer: An individual or organization that hires individuals to perform services in return for compensation, and that has the authority to control and direct the work of those individuals as part of the employer-employee relationship.
Employer Identification Number (EIN): The employers account number with the Internal Revenue Service, consisting of nine (9) digits (00-0000000).
Exempt: See White Collar Employees.
Experience Rating: In the context of unemployment compensation, it is the employers past record of unemployment claims activity. This record is used to determine the employers unemployment tax rate (i.e., a high unemployment rate results in a higher tax rate).
Fair Labor Standards Act (FLSA): The Fair Labor Standards Act (1938) regulates minimum wage, overtime pay, and child labor laws for employers and employees covered by the law.
Family Medical Leave Act of 1993: Law guaranteeing 12 weeks of unpaid leave to most employees to care for newborn or newly adopted children, or to deal with a serious injury or illness suffered by an employee or an ailing child, spouse, or parent of the employee.
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 Insurance Contributions Act (FICA): Combined tax levies for Social Security and Medicare.
Federal Unemployment Tax Act (FUTA): It requires employers to pay a certain percentage of their employees' wages (up to a maximum wage limit) as a payroll tax to help fund unemployment compensation benefits for separated employees.
Federal Employer Identification Number (FEIN): A number assigned to taxpayers and businesses by the federal government. This number is used for all tax transactions. Also referred to as EIN.
Fringe Benefit: Compensation other than wages provided to an employee such as health and life insurance, vacation, employer-provided vehicles, public transportation subsidies, etc., that may be taxable or non-taxable.
Garnishee: In a payroll context, an employer that receives an order requiring withholding from an employees wages to satisfy a debt.
Garnishment: A legal proceeding authorizing an involuntary transfer of an employees wages to a creditor to satisfy a debt.
Gross-Up: An IRS-approved formula that employers can use to determine the taxable gross payment when the employer wishes to pay the employees share of the tax.
Group-Term Life Insurance (GTL): Term life insurance that is provided to employees, with the cost being borne by the employer, the employee, or both.
Guaranteed Annual Wage: A plan guaranteeing employees their annual income (regardless of the work available) or that they will be kept on the payroll (although possibly at a lower wage).
Immigration Reform and Control Act of 1986 (IRCA): Law enacted in 1986 that prohibits employers from hiring persons who are not authorized to work in the US and from discriminating against those who are because of national origin or citizenship.
Impute: The addition of the value of cash/non-cash compensation to an employees taxable wages in order to properly withhold income and employment taxes from the wages.
Independent Contractor: A non-employee contracted by a business to perform services. Although the business specifies the result of the work to be performed, it has no right to control the details of when, how or who will ultimately perform the work.
Information Return: A return sent to the IRS (i.e., 1099 series) or Social Security Administration (i.e., W-2, Copy A), that indicates information relevant to tax liability.
Information Statement: A statement sent to a payee (i.e., 1099) or an employee (i.e., W-2) that indicates payments made and taxes withheld by the party issuing the statement.
Immigration and Naturalization Service (INS): Federal agency charged with enforcement of United States Immigration laws.
Internal Revenue Code (IRC): Federal tax laws.
Internal Revenue Service (IRS): Federal Agency charged with enforcement of United States tax laws and collection of taxes.
Leased Employees: Employees of a leasing (personnel) agency who are hired and trained for the client firm through the agency. Withholding, depositing, and reporting responsibilities remain with the leasing agency.
Levy: An attachment to satisfy a tax debt or a court judgment.
Liabilities: Debits of a business that have yet to be paid.
Lookback Period: A 12-month period beginning on July 1 and ending on June 30 of the previous calendar year. The amount of payroll taxes (Federal Withholding, Social Security, and Medicare without being reduced by any AEIC payments) in the lookback period determines the employer's deposit schedule of the payroll taxes for the current calendar year. These payroll taxes are located on quarterly Forms 941 (line 11).
Magnetic Media Reporting: Use of a computerized method of filing information with government agencies, such as magnetic tape, diskette, cartridge, or electronic filing from one computer to another.
Medicare: A federal hospital insurance program for individuals 65 or older and some disabled persons. It is funded through the hospital insurance component of FICA. Employer and employee pay matching amounts; no annual wage limit.
Minimum Wage: The lowest hourly amount an employer can pay employees under federal or state law.
New Hire Reporting: The reporting of newly hired/rehired employees to state agencies to assist in collecting child support and/or uncover abuse of the states unemployment compensation, workers compensation or public assistance programs.
Net Pay: That part of an employees wages that remains after all deductions have been subtracted (taxes, health insurance, benefits, etc.)
Non-cash Fringe Benefits: Benefits provided to employees in some form other than cash (i.e., company care, health or life insurance, parking) which may be taxable or nontaxable.
Nonexempt Employee: Employees who are covered by the minimum wage and overtime provisions of the Fair Labor Standards Act. The may be paid on an hourly or salary basis.
Nonqualified Plan: In the context of employee benefits, an employer plan that does not meet IRS qualification requirements.
Nonresident Alien: An individual from a foreign country working in the US who does not pass either the "green card" or "substantial presence" residency test, but is subject to federal income tax on US source income.
Originating Depository Financial Institution (ODFI): A financial institution that is qualified to initiate deposit entries submitted by an employer as part of the direct deposit process.
Other Compensation: Compensation other than wages that an employer must report on an employees W-2.
Overtime: Hours worked in excess of maximum set by federal or state law that must be compensated.
Participating Depository Financial Institution: A financial institution that can accept direct deposits and transmit or receive entries.
Payroll Period: The period of service for which an employer pays wages to its employees.
Payroll Tax: Any tax levied by a government agency on employees wages, tips and other compensation.
Pretax Deduction: A deduction taken from gross pay that reduces taxable wages.
Pre-Notification: The process financial institutions require for individuals who are trying to establish electronic direct deposit services.
Qualified Plan: A benefit plan that meets IRS qualification requirements for tax-favored treatment (i.e., nondiscrimination).
Receiving Depository Financial Institution (RDFI): A financial institution that qualifies to receive direct deposit entries from an Automated Clearing House.
Resident Alien: In the context of payroll, an individual who passes either the "green card" or "substantial presence" test for determining resident status in the US. Resident aliens are generally subject to federal income tax withholding and Social Security and Medicare taxes on the same basis as US citizens.
Resident Income Tax (RIT): Taxes an individual pays related to their state of residence. These taxes are separate from taxes related to the state in which an individual works.
Shift Differential: Extra pay received by employees for working a less-than desirable shift (i.e., late nights, evenings).
Simplified Employee Pension (SEP): An Individual Retirement Arrangement (IRA) with special participation requirements that is available to certain small employers.
State Income Tax (SIT): State taxes paid by individuals to the state in which they work.
Social Security: The Old Age, Survivors, and Disability Insurance (OASDI) component of FICA.
Social Security Administration (SSA): The federal government agency that administers Social Security. It is part of the Department of Health and Human Services.
Social Security Number (SSN): An individuals taxpayer identification number, consisting of nine (9) digits (xxx-xx-xxxx).
State Unemployment Insurance (SUI): A quarterly tax paid to a state unemployment agency.
Statutory Employees: Special groups of employees identified by law (i.e., full-time life insurance salespeople, certain homeworkers) whose wages are not subject to FITW, but are subject to FICA and FUTA.
Straight Time: The standard number of work hours during a workweek for which an employees regular rate of pay will be paid.
Supplemental Wages: Compensation received by employees other than their regular pay, such as bonuses, commissions, and severance pay. Income tax may be withheld from such payments at a flat rate under certain circumstances.
Table I: Refers to IRS Uniform Premium Table I, which is used to calculate the value of group-term life insurance over $50,000.
Taxable Wage Base: The maximum amount of employee compensation subject to Social Security, FUTA, and state unemployment insurance taxes.
Taxpayer Identification Number (TIN): A Social Security number of employer identification number that serves as the taxpayer's account number with the IRS Taxpayer Identification Number (TIN): A Social Security number or employer identification number that serves as the taxpayer's account number with IRS and Social Security.
Third-Country National: In the context of US payroll, someone who is a non-US citizen working in a country other than the US.
Third (3rd) Party Sick Pay: Payments made by a third party, such as a state or private insurer, to employees because of non job-related illness or injury.
Tip Credit: A reduction in the minimum wage allowed for tipped employees earning at least $30 per month in tips.
Tipped Employee: An employee who works in an occupation in which the employee regularly receives $30 or more a month in tips.
Wage Attachment: An involuntary transfer of an employees wage payment to satisfy a debt.
Wage Continuation Sheet: A periodic report (i.e., quarterly) from an employer to the state unemployment agency containing employee information and unemployment taxable wages.
White Collar Employees: In the contest of the Federal Wage-Hour Law, these are executive, administrative, professional (including computer-related professionals), or outside sales employees who are exempt from the laws minimum wage, overtime pay, and certain record keeping requirements.
Withholding: Subtracting amounts from an employees wages for taxes, garnishments or levies, and other deductions (i.e., medical insurance premiums, union dues). These amounts are then paid over to the government agency or other party to whom they are owed.
Work Week: The basis for determining an employees regular rate of pay and overtime pay due under the Federal Wage-Hour Law. It can be any consecutive 7-day (168-hour) period chosen by the employer (i.e., Saturday to Friday, Wednesday to Tuesday).
Published - October 2010