GLOSSARY

Titles

Employer - Someone who hires and pays wages, thereby providing a livelihood to individuals who perform work. The employment relationship authorizes the employer to decide what to pay workers and what benefits to provide.

Employee - Person who performs services for another person or entity in return for compensation. The relationship must be legal as defined under common law.

Exempt Employee - Worker such as an executive, administrative, or professional employee who is exempt from the minimum wage and overtime pay provisions of the FLSA if certain tests regarding duties and salaries are satisfied.

Tipped Employee - Under the federal Wage-Hour Law, an employee engaged in an occupation in which the employee customarily and regularly receives more than $30 a month in tips ($20 in IL).

Sole Proprietor - A type of business where all of the assets and liabilities of the company are the assets and liabilities of the owner. The individual owner is not considered an employee of the company.

Check Features

Workweek - A fixed and regularly recurring period of 168 hours - 7 consecutive 24 hour periods, as defined by the FLSA.

Pay Period - The time duration within which the amount a worker has earned is determined so that the worker can be paid properly. (Period Begin through-Period End.)

Check Date - Each check generated has a date printed on it. It is that date which validates the check for cashing and thereby makes our client liable for the taxes.

Constructive Receipt - Occurs when wages are made available to an employee, not when the wages were earned.

Backdate - To process payroll with a check date that falls before today's date.

Disposable Earnings - The part of an employee's earnings remaining after lawful deductions are withheld.

MICR - Used to encode the client's bank account number on the bottom of each check. A check must be encoded with a MICR number to be negotiable.

Pay Frequencies

Pay Frequency - Refers to the regularity of pay for use by the system in determining the amount of payroll taxes to be withheld. Weekly, bi-weekly, semi-monthly, monthly, quarterly, semi-annually, and annually are possible pay frequencies.

Bi-Weekly - Pay frequency whereby employees are paid alternating weeks on the same day of the week. There are 26 pay periods per year. Ten months of the year there are two pay periods per month, with the remaining two months containing three pay periods.

Semi-Monthly - Pay frequency having two pay periods a month and 24 pay periods per year.

Finance

Direct Deposit - The electronic clearing of credits and debits as opposed to transferring funds via paper. Direct Deposit information is copied to magnetic tape. The tapes are forwarded to the client's bank, which electronically transfers the funds into the employee's account.

Automated Clearing House (ACH) - A Federal Reserve Bank or private financial institution acting on behalf of an association operating a facility that serves as a clearinghouse for direct deposit or other payment transactions ; entries are received and transmitted by the ACH under the rules of the association.

Prenote (Prenotification) - A verification process for magnetic tape reporting. Paylocity sends a test file to an employee's bank on behalf of an employee who authorizes direct deposit to begin. The bank verifies that accuracy of the information and has up to 10 banking days to reject the information and notify Paylocity of an error.

General Ledger - Ledger containing all of the transactions in the debit and credit accounts of a business.

Wages

Minimum Wage - The lowest allowable hourly wage permitted by the government or a union contract for an employee performing a particular job.

Bonus or Supplemental Wages - Supplemental wages are compensation paid to an employee in addition to regular wages and include, but are not limited to, bonuses, commissions, overtime pay, accumulated sick leave, severance pay, awards and prizes, back pay, retroactive wage increases, and payments for nondeductible moving expenses. Supplemental wage payments under 1MM are subject to a Federal Income Tax rate of 25%. See IRS Publication 15- Employer's Tax Guide for special rules when supplemental payments exceed 1MM. State Income Tax Agencies each set supplemental wage rates by statute. The State of Illinois has set the supplemental wage rate at 3.0%. Consult your tax advisor for the rate in other states.

Gross Income - The compensation for services, including fees, commissions, fringe benefits, and similar items.

Other Compensation - Amounts added to an employee's wages for tax purposes. Often these amounts are values of fringe benefits or compensation earned outside of salary or hourly pay. This is a component of gross pay.

Earned Income - Tax term describing income, specialty wages and salaries, generated by providing goods or services.

Salary - A fixed compensation paid to an employee for services.

Straight Time - The standard time or number of work hours established for a particular work period. (For hourly employees.)

Overtime - Time worked in excess of an agreed upon time for normal working hours by an employee in Illinois. Hourly or non-exempt employees must be compensated at the rate of one and one-half their normal hourly rate for overtime work beyond 40 hours in one workweek.

Overtime Premium - Amount equal to one-half of an employee's regular rate of pay times all overtime hours.

Double Time - Twice the regularly hourly pay rate for overtime. Illinois does not have a double time law.

Shift Differential - Extra compensation paid as an inducement to accept shift work. Those employees willing to work evening and midnight hours usually receive a shift differential.

Net Pay - Money remaining after subtracting taxes and adding or subtracting deductions from Adjusted gross. Amount of money for which the check is written, i.e. take home pay.

Per Diem - A daily allowance, usually for travel, entertainment, employee compensation or miscellaneous out-of-pocket expenses while conducting business. The sum of money is always calculated on a daily basis and may be paid in advance or after the expense is incurred.

Tips- An employee who receives cash tips of $30 or more in a month must report them to his employer by the 10 th day of the following month. Employers are subject to FICA taxes on the reported tip income.

If a tipped employee also earns regular wages, the amount to withhold on tips should be figured as if the tips were a supplemental wage payment. If income tax was withheld from regular wages you may withhold on the tips at a flat 25% rate or you may add them to the regular wages and withhold as if the total were a single wage payment. If income tax was not withheld from regular wages, the 25% supplemental rate may not be used.

Taxability of Wages

Compensation Not Subject to Withholding (Blocked) - Compensation reported as taxable on tax returns, however, no tax is withheld because it would likely be returned to the employee upon completion of their personal income tax forms.

Wage Base Limit - The threshold above which a tax is no longer required. Social Security, FUTA, SUI and select local taxes are calculated on taxable wages up to a specific amount.

Excess Wages - Wages over and above the taxable wage base limit.

Exempt Wages - Compensation not considered subject or taxable for a particular tax. (ex: S125)

Taxable Wages - Wages, up to a limit, reported as taxable on tax returns. It is the amount on which tax is calculated.

Benefits

Fringe Benefit - Benefits provided to employees above and beyond salary or earned wages. Many are fully taxable and are added to the employee's taxable wages. Examples are medical insurance, life insurance, retirement benefits, profit sharing, bonus plans, etc.

De Minimis Fringe Benefit - An item provided infrequently by an employer to an employee that is of small value. De minimis fringe benefits are never cash or cash equivalents.

Cash Fringe Benefits - Money given to obtain benefits not directly provided by the company. (ex: company giving employee money to purchase health insurance.)

Non-Cash Fringe Benefits - Benefits provided to employees in some form other than cash (e.g., company car, health an life insurance, parking facility, etc.), which may be taxable or nontaxable.

Benefit Accruals - The earning and use of time off granted as an employee, e.g., Sick, Vacation, PTO. Often tracked during payroll.

Deductions

Deduction - An amount that is or may be subtracted from an employee's paycheck. They can be taken pre-tax or after tax depending on the type of deduction. The employee must agree to have deductions withheld from their paycheck.

Cafeteria Plan - Cafeteria Plans, or flexible plans, are employee benefit plans, authorized by Internal Revenue Code Section 125, under which employees may choose from among two or more benefits (consisting of cash and qualified benefits) offered by an employer. Employee deductions to fund the benefits are exempt from federal income tax, FICA, and, in some states, state income tax, withholding.

Benefits that may be offered under a cafeteria plan include accident and health insurance, dependent care assistance, group legal services, group term life insurance, and additional vacation days.

S125 - See Cafeteria Plan.

Garnishments - A garnishment is a court action initiated by a creditor in an effort to obtain a part of an employee's earnings before the earnings are turned over to the employee.

Levy - The seizure of wages, bank accounts or other property or rights through lawful process or by force.

Retirement Plans

Deferred Compensation Plan (401K) -

Deferred compensation plans are employee benefit plans, under which employees may contribute a percentage of wages to tax deferred savings plans rather than receive the amounts as current compensation. The most commonly used deferred compensation plan is the 401(k) plan.

Employee contributions to 401(k) plans are exempt from federal income tax and, in some states, state income tax withholding but are not exempt from FICA withholding. Employer contributions, made on behalf of the employee, are also exempt from federal income tax withholding. Contributions and earnings thereon accumulate tax free until distributed to the employee at retirement.

The maximum amount that an employee can elect to defer for 2008 under a 401(k) plan in which the employee participates is $15,500 and $20,500 for employees who are age 50 or older. The limit is adjusted annually for inflation. The amount that an employee may actually defer, however, is usually lower as typical plan terms limit contributions to the lower of a specified percentage of current wages or the statutory maximum. 403(b) Plan - Tax-sheltered annuity of tax-exempt organizations. Same taxability applies as 401 (k).

403(b) Plan - Tax-sheltered annuity of tax-exempt organizations. Same taxability applies as 401 (k).

Employer Match - Employer contributions to an employee's retirement account. Appears on the check and on reports as an earning, but does not calculate or figure into the check.

Nonqualified Deferred Comp Plan - In the context of employee benefits, an employer plan that does not meet IRS qualification requirements.

Individual Retirement Arrangement (IRA) - A tax deferred personal retirement savings account that meets the requirements of IRC S405.

SEP IRA - Simplified Employee Pension. An IRA distinguished by requirements covering employee participation, nondiscrimination, withdrawals, and a formula for employer contributions. For sole proprietorships. An owner can elect a certain percentage of his/her adjusted gross but must then give the same percentage to the employees as an employer contribution. Employees do not contribute. Although SEP's must meet the general defined contributions plan standards, they are subject to much less burdensome reporting requirements.

Employee Programs

Fair Labor Standards Act (FLSA) - AKA Federal Wage and Hour Law. Designed to protect employee's rights. Passed in 1932. Excerpts from the law:

• Establishes federal minimum wage. Effective July 24, 2008, the rate is $5.85. If a state has a higher rate, then employers must use the higher rate.
• Establishes regulation on overtime pay.
• Establishes regulations on equal pay for equal work regardless of sex and specifies guidelines for children in the workforce.
• Establishes laws governing tips and tipped employees.
• Establishes regulations on handling of meals, lodging and uniform maintenance.
• For example, the amount of uniform purchase and maintenance costs can be deducted from employee pay, but the cost deduction cannot reduce the employee's income below minimum wage.
• Family establishments are not subject to FLSA if the only regular employees are the owner, spouse, children, parents or other immediate family members.

Family and Medical Leave Act (FMLA) - Law guaranteeing 12 weeks unpaid leave to most employees to care for newborn or newly adopted children, or to deal with a serious illness or injury suffered by the employee or an ailing child, spouse, or parent of the employee.

Flexible Spending Account (FSA) - Enables an employee to have a specific pretax deduction from his/her payroll check each pay period for specific qualified expenses not covered by his/her benefits. The total amount of the annual deduction is lost if unused at the end of the calendar year.

Dependent Care Assistance - The value of employer-provided child care assistance allowing the employee to work. An employee can have up to $5000 withheld pretax. Type of Flexible Spending Account which is under the S125 heading.

Educational Assistance - Employer reimbursements for employee's expenses relating to specific learning programs. The taxability options vary depending upon whether the program is job-related or non-job-related, and whether it is a graduate level program. (S127 )

Disability - Covers injuries or illnesses to an employee that are not job-related. Disability is mandated in some states. Disability may be an employer tax, an employee tax, or both.

Third-Party Sick Pay - Money paid by a third party, usually an insurance company, to an employee that is under a plan in which the employer takes part. 3PSP is paid instead of wages for a period of temporary absence due to a non-job related sickness, injury (Disability). The taxability of the benefit is proportional to the percent of the premium for which the employer is responsible.

Worker's Compensation - Cash benefits to employees for sickness or personal injury incurred in the course of their employment.

Taxes, Misc.

Filing or Marital Status (Form w-4)-Filing status' are single, married filing jointly, married filing separately, head of household, or exempt.

Employees must indicate their status. The employer must withhold according to the correct employee table.

Allowances or Exemptions - Personal exemptions reduce the employee's taxable income on the employee's Form 1040 (US Individual Income Tax Return). Withholding allowances free approximately the same amount of wages from income tax withholding and therefore approximate the employee's tax liability at the end of the year. Exemptions and allowances may be used synonymously.

An employee is entitled to federal withholding allowances for himself, his spouse, and his dependents. The value of a personal exemption for 2008 for federal income tax purposes is $3,400. The value of the exemption used by upper income persons is reduced and phased out when adjusted gross income reaches specified levels.

Exemptions are determined by the Federal W-4 Form that you must file with your employer annually.

BNA - Payroll and tax law guide published by the Bureau of National Affairs.

Circular E - Employer's tax guide published by the IRS which explains how to withhold, deposit, report, and pay federal taxes.

501 (c) Plan - Section of the Internal Revenue Code defining tax-exempt organizations.

Dependent -A person who is claimed as a dependent must:

• Be a child of the employee who is either under 19 or a full time student under 24, or
• Be a child of the employee who is a full time student over 24 who is reasonably expected to receive less than $3,400 of income during the 2008 tax year, or
• Be reasonably expected to receive less than $3,400 of income during the 2008 tax year, or
• Be permanently and totally disabled and receive income for services performed at a sheltered workshop operated by a charity or government.
• Receive more than half his support from the employee
• Be a citizen, national, or resident of the United States, or a resident of Canada or Mexico, or an alien child adopted by and living with a United States citizen abroad
• And be either:
• A child, grandchild, stepchild, parent, grandparent, stepparent, brother, sister, stepbrother, stepsister, in law, aunt, uncle, nephew, or niece of the employee, or
• A member of the employee's household for the taxable year and have the employee's home as his principal place of abode and not file a joint return.

See IRS Publication 17 "Your Federal Income Tax" for specific details.

Payroll and Withholding Taxes

Withholding Taxes - Taxes withheld from an employee's check. Also known as Employee Taxes.

Payroll Taxes - Tax es that are the responsibility of the employer.

Employer and Employee Taxes:

Federal Insurance Contributions Act (FICA) - The taxes imposed under this law fund social security. The employer is required to match the 6.2% social security tax rate imposed on the employee's the first $97,500 during tax year 2008 ($102,000 in 2008) of taxable wages as well as the 1.45% Medicare tax rate imposed on all of the employee's taxable wages in the 2008 Tax Year. No credits or withholding exemptions are permitted for the calculation of FICA taxes. When there is more than one employer, each must withhold FICA tax from the employee up to the taxable wage base.

Federal Insurance Contributions Act (FICA) - Medicare

• Employee: 1.45% on all wages.
• Employer: 1.45% on all wages.
• Self Employed: 2.9% on net earnings

Federal Insurance Contributions Act (FICA) - Old Age, Survivors, and Disability Insurance (OASDI)

• Employee: 6.2% on first $97,500 of wages.
• Employer: 6.2% on first $97,500 of wages.
• Self Employed: 12.4% on first $97,500 of net earnings.

Employer Taxes:

Unemployment Insurance - A federal-state program that provides economic security for workers during periods of involuntary unemployment.

State Unemployment Insurance (SUI) - Requires employers to pay a certain percentage of their employee's wages (up to the state's wage base limit) as a payroll tax to help fund unemployment compensation benefits for separated employees.

Experience Rating System - The process each State Unemployment Agency uses in determining every employer's annual tax rate. This is a percentage based on previous contributions made by the employer and benefits paid to eligible claimants. SUI tax is based on this system.

Federal Unemployment Tax Act (FUTA) - Requires employers to pay a certain percentage of their employee's wages (up to $7000) as a payroll tax to help fund unemployment compensation benefits for separated employees.

Withholding or Employee Taxes:

State Income Tax Withholding (SITW) - Income tax for the state withheld from employees.

Reciprocal Agreement - Arrangement entered into by two or more states whereby the resident of one state working in another state is not subject to the withholding income taxes by the state in which the person is employed.

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 martial status.

Supplemental Tax Rates - The standard tax rates on which the tax withholding tables are built. As of July 2003, the rates are 25% (FITW) and 3% (IL SITW). Often used for Bonus checks.

Earned Income Credit (EIC) - Cash credit provided by the IRS to taxpayers who earn less than a specified amount of income during the calendar year. Can be claimed on the employee's 1040 at the end of the year or can be paid by the employer throughout the year. The latter case requires the employee to complete a W-5.

Tax Payments

Power of Attorney - Authorization by a client for Paylocity to act as attorney-in-fact for representation and submission of taxes and returns with respect to payroll.

Federal Identification Number - The 9-digit identifying number assigned to each employer upon his/her registration with the IRS for employment tax records. It is commonly referred to as a federal ID number or Employer Identification Number. (EIN/FEIN)

ACH Credit Entry - A transaction in which a taxpayer instructs its financial institution to originate a federal tax deposit through the ACH system and have it apply to the client's appropriate Treasury account. Paylocity uses this method of electronic tax payment and sends the money with the file.

ACH Debit Entry - A transaction in which a file containing a specified deposit amount is sent to the IRS on behalf of an employer. After receiving the file, the IRS will debit the appropriate bank account via ACH for the amount of the federal deposit. No money is sent with this file.

Electronic Funds Transfer - 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) - Allows employers to make federal tax deposits electronically through the ACH network.

Look back Period - The 12 month period running from July 1 of the second preceding calendar year through June 30 of the preceding calendar year; the employer's payroll tax liability during this period determines its depositor status for the current year. The look back period for 2008 is the third and fourth quarter of 2005 and the first and second quarter of 2006.

Monthly Tax Depositor - Payroll tax liability is due the 15 th of the month following the month in which the check date resides. An employer is required to be a monthly tax depositor if they have less than or equal to $50,000 in tax liability for the look back period.

Semi-Weekly Tax Depositor - Payroll tax liability due date is determined by the check date. Saturday, Sunday, Monday, and Tuesday check date require and employer to deposit on Friday. Wednesday, Thursday, and Friday check dates require an employer to deposit on the following Wednesday. An employer is required to be a semi-weekly tax depositor if they have greater than $50,000 in tax liability for the look back period.

One-Day Deposit Rule - If an employer's accumulated employment tax liability reaches $100,000 on any day during a monthly or semiweekly deposit period, the taxes must be deposited by the close of the next banking day.

Tax Forms

Amended Tax Return - A corrected tax return of a return previously filed with a governmental agency. An amended tax return may require the payment of additional tax, possibly with interest and penalty, or it may be accompanied by a claim or refund.

Form 940 Employer's Annual Federal Unemployment Tax Return - Provides the IRS with a report of each employer's total taxable wages for federal unemployment and reconciles quarterly FUTA tax payments.

Form 941 Employer's Quarterly Federal Tax Return - Provides the IRS with a report of each employer's total taxable wages paid and federal payroll tax liability. (Social Security, Medicare, Federal Withholding, EIC).

Form 941c Statement to Correct Information - A form used to make adjustments to Form 941 when taxes have been under withheld or over withheld; explains the nature of the adjustment and shows the erroneous and corrected amounts of tax withheld.

Form 943 Employer's Annual Tax Return for Agricultural Employees - Used for reporting FICA and federal income taxes due on wages paid.

Form 945 Employer's Annual Return of Withheld Federal Income Tax - Filed by employers who withhold from non-wage payments, backup withholding, pensions, annuities, and gambling winnings.

Form W-2 Wage and Tax Statement - Employers must file a Form W-2 to report the total amount of wages paid and taxes withheld for each employee in a calendar year.

Form W-2C Statement of Corrected Income and Tax Amounts - Form that must be completed by an employer if an incorrect copy of a W-2 has been sent to the SSA.

Social Security Administration (SSA) - The federal government agency that administers social security. SSA receives copies of W2's filed by the ER.

Form W-3 Transmittal of Income and Tax Statements - Form that an employer must also file when filing paper Forms W-2 (Copy A) with the SSA; contains totals of these amounts reported on the employer's W-2 (Copy A) with the SSA; contains totals of these amounts reported on the employer's W-2 Forms, acting as "reconciliation" of these forms.

Form W-3c Transmittal of Corrected Income and Tax Statements - Form that accompanies From W-2c in most situations when it is sent to the SSA that totals the information from all the W-2c forms being submitted.

Form W-4 Employee's Withholding Allowance Certificate - The W-4 tells the employer how many withholding allowances the employee is claiming along with the employee's marital status; it also tells the employer if the employee claims exemption from withholding.

Form W-5 Earned Income Credit Advance Payment Certificate - Must be filed by employees who want to take advantage of advance EIC payments and attests to their eligibility for the advance payments.

"1099"

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.

1099-MISC - Statement given to each independent contractor who was paid at least $600 in fees, commissions, or any other form of compensation for services rendered when there is no employer-employee relationship. There are no income taxes withheld on payments made.

1096 - Return used to transmit to the IRS the information contained on all 1099 forms. This return is not required when filing 1099 M's electronically.

1099-R - Issued at the end of the year for disbursements from pension plans and the like.

Termination

Severance Pay - A payment made by an employer to terminated employees (usually those who are terminated through no fault of their own) that is designed to tide them over until new employment is secured.

COBRA - (Consolidated Omnibus Budget Reconciliation Act of 1985) Allows for medical and dental coverage to employees separated from their company in good standing.