A glossary of US payroll terms
Reviewed by Mellow Editorial Team, HR & payroll content team
US payroll comes with a dense set of abbreviations and technical terms. This glossary covers the core vocabulary you need to run payroll confidently — or to follow a conversation with your accountant or payroll provider without getting lost.
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Compensation and earnings
Gross pay — The total amount an employee earns before any deductions. If someone earns $5,000 a month, their gross pay is $5,000.
Net pay — What the employee actually receives after all taxes and deductions are subtracted. Also called take-home pay.
Regular rate of pay — The hourly rate used as the basis for overtime calculations. Under the Fair Labor Standards Act (FLSA), non-exempt employees must receive at least 1.5 times this rate for hours worked over 40 in a workweek.
Exempt vs. non-exempt — FLSA classifications that determine whether overtime rules apply. Exempt employees (typically salaried workers meeting certain duties tests) are not entitled to overtime. Non-exempt employees are.
Draw against commission — An advance on future commission earnings. If the employee's commissions don't cover the draw, how repayment works depends on your state and written agreement.
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Taxes and withholding
FICA — Federal Insurance Contributions Act taxes. Covers two programs: Social Security (6.2% withheld from the employee up to the annual wage base) and Medicare (1.45% withheld with no cap). Employers match both contributions dollar for dollar.
Additional Medicare Tax — A 0.9% surcharge on high-earning employees. Employers are required to withhold it once an employee's wages exceed a threshold in a calendar year, but employers do not match this portion.
Federal income tax withholding — Withheld from each paycheck based on the employee's Form W-4 elections. The federal income tax system is progressive, with brackets ranging from 10% to 37%.
Form W-4 — The form employees complete to tell you how much federal income tax to withhold. Employees can update it at any time; your payroll system should reflect changes promptly.
State income tax — Withheld on top of federal taxes in most states. Some states — including Texas, Florida and Washington — have no state income tax. Always check local rules; some cities and counties impose their own income taxes as well.
FUTA — Federal Unemployment Tax Act tax. Paid by the employer only (not withheld from employees). It funds the federal portion of the unemployment insurance system.
SUTA — State Unemployment Tax Act tax. Also employer-paid in most states, though a few states require a small employee contribution. Rates vary by state and by your company's claims history.
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Deductions and benefits
Pre-tax deduction — A deduction taken from gross pay before taxes are calculated, which reduces the employee's taxable income. Common examples include contributions to a 401(k), health insurance premiums under a Section 125 cafeteria plan, and HSA contributions.
Post-tax deduction — A deduction taken after taxes have been calculated. Roth 401(k) contributions and wage garnishments are common examples.
Wage garnishment — A court or government order requiring you to withhold a portion of an employee's wages and send it to a creditor or agency. Federal law limits how much can be garnished. You are legally required to comply.
Section 125 / Cafeteria plan — An IRS-approved plan that lets employees pay for certain benefits (health insurance, dependent care, FSA contributions) with pre-tax dollars.
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Forms and filing
Form W-2 — The annual wage and tax statement you must provide to each employee and file with the Social Security Administration by January 31.
Form 941 — The quarterly federal payroll tax return. You report wages paid, federal income tax withheld, and FICA taxes for the quarter.
1099-NEC — The form used to report payments of $600 or more to independent contractors. It is not a payroll form — contractors are not employees — but it sits alongside payroll in most accounting workflows. Also due January 31.
EIN — Employer Identification Number. Your business's federal tax ID, required to run payroll and file payroll tax returns.
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Employment classification and status
At-will employment — The default employment relationship in the US. Either party can end the employment at any time, for any lawful reason, without advance notice (unless a contract or state law says otherwise).
Independent contractor — A self-employed worker engaged for a specific scope of work. Contractors are not employees; you do not withhold taxes or pay employer FICA on their behalf, but misclassifying an employee as a contractor carries significant legal and tax risk.
Pay period — The recurring cycle over which wages are earned and calculated. Common options are weekly, biweekly (every two weeks), semimonthly (twice a month) and monthly. Most states set minimum pay frequency rules.
Pay date — The date employees actually receive their wages. Different from the end of the pay period; there is typically a processing gap between the two.
PEO (Professional Employer Organization) — A firm that co-employs your workforce and handles payroll, benefits and HR administration on your behalf. The legal employer of record relationship is shared between you and the PEO. If you work across multiple countries, how Mellow runs payroll across six countries is a related model worth understanding.
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