4 Word Pairs That Will Make You Better at Payroll
Payroll is full of polar opposites. Many of the terms we stick on things like deductions and worker classifications have a match that means the exact opposite. At first, all of those word pairs floating around can make things quite complex. However, there are only a few concepts you need to grasp to continue on your path to payroll awesomeness. In this article, we’ll go over four terms — and their counterparts — that will help you take your payroll knowledge to the next level.
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1. Employees vs. contractors
Figuring out your worker’s classification is one of the most crucial things to do when hiring someone new. Basically, an employee is someone who works for one company, receives training for the job, and does work that’s managed by someone else, also known as you, the employer. A contractor is someone who might work for multiple companies, has total control over where and when they complete their work, and is paid a rate or flat fee that is then invoiced to their employer. Check out this infographic to get a quick overview of where your worker might fall.
Here’s why knowing the difference is so important: As an employer, you have different responsibilities depending on how your worker is classified. These things range from following certain labor laws all the way to offering health benefits. Another important distinction is that you have to withhold and pay taxes for your employees, but not for your contractors. For example, the worst-case situation is if your contractor is truly an employee because you could end up owing the IRS back taxes and other expenses you may not have been prepared to pay.
Need a hand with all of this? You can fill out IRS Form SS-8 to get a final decision on who your worker is in the eyes of the law.
2. Exempt vs. nonexempt
This duo seems to trip up everyone. Under the Fair Labor Standards Act (FLSA), there are two types of employees in the world: exempt and nonexempt. Exempt employees are aptly named — they’re exempt, or excused, from the protections laid out in the FLSA. These folks are salaried, don’t receive overtime pay, and in some cases, are also ineligible for minimum wage. Conversely, nonexempt employees are subject to the FLSA rules, in addition to overtime pay if they work over 40 hours in a week.
Earning overtime is one clear difference between the two employee types. For employers, there are two main points to know when reconciling that extra work time:
- Overtime pay needs to equal at least time and a half of an employee’s normal wage. So if your teammate normally earns $30 an hour, their overtime pay rate would be $45 an hour ($30 x 1.5).
- Your team should receive their overtime in the exact pay period it was earned.
Make your way over to this breakdown from the DOL to get more details on how the two types differ.
3. Hourly vs. salary
Now it’s time to dive into the next definition set. Once your employee is bucketed into an exempt or nonexempt status, you’ll have a clearer understanding of whether they should be hourly or salaried. When you’re an hourly worker, you’re paid a specific rate for every hour you work. Salaried employees also receive a set sum of money, but it’s expressed in a yearly amount.
For instance, if you wanted to pay someone $80,000 over the course of a year, their salary would be $80,000, and their hourly rate for a typical 40-hour work week would be $38 [$80,000 / 2,081 (40 hours a week x 52 weeks in a year)]. At Gusto, we use 260 working days in a year to calculate 2080 hours a year.
Remember the definitions from above? Perfect. In order to be an exempt employee, you need to be paid a salary. In contrast, you can be nonexempt and get paid either a salary or an hourly wage.
4. Pre-tax vs. post-tax
Your paycheck has a bunch of stuff inside. First and foremost, it includes the money you earned for all your hard work. Then, that number shrinks when your pre-tax deductions are taken out, which is before FICA (Social Security and Medicare), and state and federal income taxes are applied. After that, post-tax deductions are applied to the smaller amount. So all in all, pre-tax deductions mean your overall taxes are lower because you’re being taxed on that tinier sum.
Here’s a breakdown of a few common deductions and where they fall:
- Pre-tax: Commuter benefits, 401(k) contributions, health savings accounts (HSAs), flexible savings accounts (FSAs), Section 125 plans, and more.
- Post-tax: Roth 401(k) contributions, wage garnishments, and certain disability, life, and health insurance that doesn’t qualify to be taken out before taxes.
When it comes to upping your payroll proficiency, opposites attract. The good thing about binary terms is that once you know one, you can most likely figure out what the other one means. And with this little dictionary up your sleeve, you’ll already have a giant head start.