99 things small business owners (and consumers) should know

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Unsure about payroll and other business terminology? This list provides simple definitions of common business words, phrases, and acronyms that every small business owner should know, but that consumers can also find useful.

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1. What is a 401(k) plan?

A 401(k) plan is a defined contribution plan that allows employees to make pretax contributions from their paychecks to a retirement plan. Employee contributions to 401(k) plans are not exempt from FICA withholding. They are exempt from federal income tax withholding and may be exempt from state income tax withholding, depending on the state. See FICA.

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2. What is a 401(k) company match?

Employers that offer 401(k) plans can choose to match employees’ contributions up to a certain percentage. Employer contributions are exempt from federal income tax withholding.

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What are 401(k) limits?

The IRS limits how much an individual can contribute to a 401(k) plan in a year. People age 50 and up can make additional “catch-up” contributions up to a certain limit.

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4. What is a 1099 form?

Form 1099-MISC is a government tax form that businesses use to report payments made to an unincorporated business or to a person who’s not an employee. Employers must complete a Form 1099-Misc for any person the business paid $10 or more in gross royalties or $600 or more in rents or compensation. See Form 1099-MISC.

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5. What is accrual?

Employee benefits calculated on an accrual basis are earned over a period of time. For example, employees may accrue a certain amount of paid time off for each hour worked.

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6. What is the advance earned income credit?

The advance earned income credit is a federal program that allows employers to reimburse low-income employees for part of their federal income tax withholdings. Employers claim the reimbursements as tax credits on their Quarterly Federal Return (Form 941). See Earned Income Tax Credit. See Form 941.

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7. What is an after-tax deduction?

A deduction from an employee’s wages that is taken out after all applicable taxes and pretax deductions have been withheld is called an after-tax deduction. See pretax deduction.

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8. What is an amended rate notice?

Once an employer has established an unemployment history, state unemployment insurance tax rates are calculated annually. An amended rate notice alerts employers of a rate change and the factors involved in calculating the new rate. See SUI tax rate notice.

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9. What is average taxable payroll?

The average of an employer’s taxable payrolls immediately preceding the SUI tax rate computation date for a specified period is used to compute the employer’s SUI tax rate. See SUI taxes. See SUI tax rate notice. See tax rates.

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10. What is back pay?

Pay owed to an employee from a previous payroll period. See retroactive pay.

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11. What is a bankruptcy lien?

If an employee declares bankruptcy, their employer will receive a federal court bankruptcy lien requiring them to garnish all or part of their wages to repay the debt. Bankruptcy liens take priority over most other types of liens. See garnishment.

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12. What are bonus taxes?

Bonus compensation that employees receive above their usual compensation that is taxed differently from normal wages. There are two options: Using the percentage method, withhold a flat 25% of the bonus amount. Using the aggregate method, combine the amount of the bonus with the employee’s paycheck, then treat the whole amount as a larger-than-usual paycheck and withhold taxes at the normal rate.

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13. What is a cafeteria plan?

An employee benefit plan that offers a “menu” of benefits such as health insurance and life insurance, is called a cafeteria plan. Employees choose the options they want and pay for some or all of the chosen benefits using pretax deductions from their wages.

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14. What is a certified payroll report?

Businesses that are fulfilling federal government contracts must submit the certified payroll report (Form WH-347) to the contracting agency each week. Agencies use the form to verify that contractors are paying workers the prevailing wage. Employers must list all the employees who worked on the project, their hours, gross wages, benefits, and tax withholdings. See prevailing wage.

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15. What is a city or local income tax?

Cities or local jurisdictions that have city or local income tax may require employers to withhold this tax from employees’ wages.

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16. What is COBRA?

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) is a federal law requiring employers to offer qualifying former employees and dependents who lose their health insurance or dental insurance the chance to continue their group health insurance for a limited time.

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17. What is a COD (court-ordered deduction)?

This legal notice directs an employer to withhold money from an employee’s wages and remit it to a court or other agency. See garnishment.

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18. What is commission pay?

Compensation calculated based on a percentage or dollar amount of each sale an employee makes is called commission pay.

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19. What is comp time?

Compensatory paid time off (comp time) can be given to employees in return for working extra hours. Comp time cannot be used instead of paying employee overtime.

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20. What is a company car allowance?

An employee who uses their personal vehicle for work may be given a company car allowance to compensate for these vehicle expenses. The allowance is typically added to the employee’s paycheck.

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21. What is a contract worker?

Contract workers are paid a set price for working for a set amount of time. Unlike independent contractors or freelancers, both of whom are self-employed, contract workers are employed by a company (such as a staffing agency or consultancy) that hires them out to other companies.

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22. What are credit reduction states?

These states have taken loans from the federal government to fund state unemployment benefits and have not repaid the loans within the allotted time period. Wages subject to unemployment insurance tax are taxed at higher rates in credit reduction states.

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23. What is the Davis-Bacon Act?

The Davis-Bacon Act is a federal law that requires contractors and subcontractors on federally funded public works contracts worth more than $2,000 to pay all laborers and mechanics involved the prevailing local wagesSee prevailing wages.

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24. What is a deferred compensation plan?

This employee benefit allows employees to contribute a percentage of their wages to a tax-deferred savings plan such as a 401(k) instead of receiving those wages as current compensation.

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25. What is a de minimis fringe benefit?

de minimis fringe benefit is any employee benefit with a dollar value so small that it’s unreasonable to include it as part of the employee’s income. See fringe benefits.

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26. What is direct deposit?

Direct deposit is the use of an Electronic Funds Transfer (EFT) to deposit an employee’s wages directly into a bank account they designate.

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27. What is disability leave?

Disability leave is a paid or unpaid leave of absence taken by a disabled employee as a reasonable accommodation or as part of an employer’s short-term or long-term disability policy. If the illness or injury is work-related, workers’ compensation insurance may pay the employee’s benefits while they’re on disability leave. Most states have laws regulating disability leave. Some states provide (or require employers to provide) short-term disability insurance (SDI) or temporary disability insurance (TDI) to replace part of employee wages lost to an illness or injury unrelated to work.

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28. What is the Earned Income Tax Credit (EITC or EIC)?

This tax credit is available for working people with low to moderate income. See advance earned income credit.

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29. What is an earnings allowance?

An earnings allowance is the maximum amount of compensation that people receiving unemployment benefits can earn per week without losing any of their weekly unemployment benefits. The state sets the earnings allowance.

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30. What is the effective tax rate?

The percentage of an individual’s income that they pay in taxes is their effective tax rate.

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31. What is EFT?

Federal and state agencies may require employers to pay unemployment taxes using electronic funds transfer.

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32. What is EFTPS?

This secure government website allows users to pay federal taxes electronically online (or by phone using the EFTPS® Voice Response System).

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33. What is an EIN?

A unique nine-digit number assigned by the IRS to any company with employees. Similar to a Social Security number for an individual.

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34. What is the Electronic Federal Tax Payment System?

This secure government website allows users to pay federal taxes electronically online (or by phone using the EFTPS® Voice Response System).

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35. What is Electronic Funds Transfer (EFT)?

Federal and state agencies may require employers to pay unemployment taxes using electronic funds transfer.

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36. What are employee benefits?

Employee benefits are indirect, non-cash or cash compensation paid over and above an employee’s regular wages. Health insurance and life insurance are two examples of employee benefits. Employment taxes are also considered employee benefits. See fringe benefits.

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37. What is the Employee Retirement Income Security Act (ERISA)?

This federal law sets minimum standards for retirement plans offered by private employers in order to protect individuals’ rights to their benefits.

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38. What is employee time tracking?

Employee time tracking is the process of keeping count of and recording the hours employees work, for payroll, job costing, and more. Employee time can be tracked on paper, on a spreadsheet, or with a manual punch clock, though automated, cloud-based systems are available.

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39. What is an Employer Tax Identification Number (EIN)?

A unique nine-digit number assigned by the IRS to any company with employees. Similar to a Social Security number for an individual.

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40. What is the Employer’s Annual Federal Unemployment Tax Return?

This government form is used to report the portion of FUTA tax that employers pay for their employees.

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41. What is the Employment Eligibility Form?

This government form is used to verify the identity and employment authorization of every person hired for employment in the United States. U.S. employers must complete a Form I-9 for each person hired, including citizens and non-citizens.

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42. What are employment taxes?

Taxes that employers must legally withhold from employees’ wages, then deposit and report, are considered employment taxes. These include federal income tax, Social Security and Medicare taxes, and the Federal Unemployment Tax (FUTA).See Social Security taxes. See Medicare Taxes. See Federal Unemployment Tax.

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43. What is an employment tax audit?

State or federal tax agencies may audit a company’s payroll taxes to make sure they are making payroll tax deposits on time and filing the correct payroll tax returns. A payroll tax audit is often conducted when the tax authority believes a business has misclassified employees as independent contractors. Payroll tax audits are also called employment tax audits.

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44. What is ERISA?

See Employee Retirement Income Security Act.

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45. What is an exempt employee?

Exempt employees are, under some circumstances, not protected by state or federal wage and hour laws, including minimum wage protections. Exempt employees are usually paid a salary rather than hourly wages, though some are paid by the hour. Exempt employees are not eligible for overtime. See Fair Labor Standards Act. See nonexempt employee. See white collar exemption.

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46. What is the Fair Labor Standards Act (FLSA)?

This federal law establishes the minimum wage, overtime pay eligibility, recordkeeping, and child labor standards for full-time and part-time workers.

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47. What is the Family and Medical Leave Act (FMLA)?

This federal law entitles eligible employees to 12 workweeks of unpaid, job-protected leave for the birth or adoption of a child, to care for a seriously ill family member, or to recover from a serious medical condition. Eligible employees are also entitled to access their group health insurance coverage.

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48. What is the Federal Insurance Contribution Act?

This federal law created a payroll tax to fund the Medicare and Social Security programs. See FICA.

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49. What are Federal Supplemental Benefits (FSB)?

This temporary federal program provides supplemental unemployment benefits to people who have used up their regular unemployment benefits, their state-financed extended benefits, and/or their jointly financed federal/state extended benefits during periods of high unemployment.

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50. What is federal tax withholding?

Employers are legally required to withhold the following federal taxes from employee paychecks: FUTA, FICA, and federal income taxes. See Federal Unemployment Tax Act. See FICA.

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51. What is the Federal Unemployment Tax Act (FUTA)?

FUTA is a federal law that guides the administration of unemployment compensation programs and requires all eligible employers to pay a federal unemployment tax. Funds are used for state and federal unemployment programs and benefits. Some states have additional guidelines regarding unemployment taxes and benefits. See SUI tax. See State Unemployment Tax Act.

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52. What is FICA?

The Federal Insurance Contribution Act (FICA) is a federal law that establishes payroll tax funds to Medicare and Social Security. Both employees and employers pay the FICA tax. Employees have FICA taxes withheld from their paycheck, while employers pay their own contribution.

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53. What is a filing status?

Employees select a filing status on their Form W-4 to help determine the amount of tax withheld from their paychecks. There are three options for filing status: single, married or “married, but withhold at higher Single rate.” See withholding allowance.

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54. What is the difference between fired and laid off?

An employee who is fired is permanently terminated for a cause such as poor performance or misconduct. A laid-off employee is terminated because their job is eliminated. Depending on the reason for firing and the state’s unemployment regulations, fired employees may not be eligible for unemployment benefits.

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55. What is a Flexible Spending Account (FSA)?

This employee benefit allows employees to contribute pretax dollars to a savings account to be used for medical or child care costs.

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56. What is the FLSA?

This federal law establishes the minimum wage, overtime pay eligibility, record keeping, and child labor standards for full-time and part-time workers.

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57. What is the FMLA?

This federal law entitles eligible employees to 12 workweeks of unpaid, job-protected leave for the birth or adoption of a child, to care for a seriously ill family member, or to recover from a serious medical condition. Eligible employees are also entitled to access their group health insurance coverage.

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58. What is Form 940 (Employer’s Annual Federal Unemployment Tax Return)?

This government form is used to report the portion of FUTA tax that employers pay for their employees. See payroll tax forms.

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59. What is Form 941 (Quarterly Federal Tax Return)?

This government form is used to report the payroll taxes withheld from employee paychecks. See payroll tax forms.

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60. What is Form 944 (Employer’s Annual Federal Tax Return)?

This government form is used by employers whose annual liability for Social Security, Medicare, and withheld federal income taxes is $1,000 or less to file and pay these taxes. See payroll tax forms.

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61. What is Form 1099-Misc?

Form 1099-MISC is a government tax form that businesses use to report payments made to an unincorporated business or to a person who’s not an employee. Employers must complete a Form 1099-Misc for any person the business paid $10 or more in gross royalties or $600 or more in rents or compensation.

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62. What is Form I-9 (Employment Eligibility Form)?

This government form is used to verify the identity and employment authorization of every person hired for employment in the United States. U.S. employers must complete a Form I-9 for each person hired, including citizens and noncitizens.

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63. What is Form W-2 (Wage and Tax Statement)?

W-2 is a government form that summarizes an employee’s wages and withholdings for the year. Employers must file a form with the Social Security Administration (SSA) for each employee and issue each employee a copy by January 31 of the following year. Employers are not responsible for issuing W-2s to 1099 contractors, though these workers can receive a 1099-MISC report.

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64. What is Form W-3 (Transmittal of Wage and Tax Statements)?

This government form summarizes the total earnings, Social Security payments, Medicare payments, and federal and state tax withholding for all employees of a company. Use an employees’ W-2 forms to arrive at the totals for the W-3. File it with the Social Security Administration (SSA) by January 31 of the following year.

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65. What is Form W-4 (Employee’s Withholding Allowance Certificate)?

Employees use this government form to tell their employer how many personal exemptions they want to claim on their taxes. See withholding allowance. See wage withholding.

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66. What is Form WH-347?

Businesses that are fulfilling federal government contracts must submit the certified payroll report (Form WH-347) to the contracting agency each week. Agencies use the form to verify that contractors are paying workers the prevailing wage. Employers must list all the employees who worked on the project, their hours, gross wages, benefits, and tax withholdings. See prevailing wage.

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67. What is a fraudulent claim?

A fraudulent claim is a type of unemployment fraud where the claimant lies on an application, hides information, or uses someone else’s Social Security number to make an unfounded claim for unemployment benefits.

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68. What is a freelancer?

An independent contractor is a self-employed person who works for various companies on a project or contract basis. Employers do not withhold taxes from an independent contractor’s wages, pay their Social Security or Medicare taxes, or pay state unemployment taxes for them. See contract worker. See freelancer.

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69. What is a fringe benefit?

Any non-wage compensation provided to an employee is a fringe benefit, which may be taxable or non-taxable. See employee benefits.

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70. What are frozen wage credits?

In some circumstances, state law allows individuals who were injured on the job to use a base year prior to the injury, effectively freezing those wage credits.

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71. What is a FSA?

This employee benefit allows employees to contribute pretax dollars to a savings account to be used for medical or child care costs.

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72. What is an FSB?

This temporary federal program provides supplemental unemployment benefits to people who have used up their regular unemployment benefits, their state-financed extended benefits, and/or their jointly financed federal/state extended benefits during periods of high unemployment.

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73. What is FUTA?

FUTA is a federal law that guides the administration of unemployment compensation programs and requires all eligible employers to pay a federal unemployment tax. Funds are used for state and federal unemployment programs and benefits. Some states have additional guidelines regarding unemployment taxes and benefits. See SUI tax. See State Unemployment Tax Act.

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74. What is garnishment?

If an employer receives a lien on an employee for unpaid debts, they must withhold, or “garnish,” money from the employee’s wages to repay the debt. See bankruptcy lien.

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75. What are gross earnings?

Gross earnings are an employee’s total compensation before taxes and deductions.

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76. What is gross pay?

Gross earnings are an employee’s total compensation before taxes and deductions.

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77. What is group term life insurance?

Group term life insurance coverage is provided and paid for by employers as an employee benefit. Coverage of up to $50,000 is not taxable to the employee; however, if employees purchase additional insurance coverage exceeding $50,000, that portion of the premium is taxable.

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78. What is a Health Savings Account (HSA)?

An HSA is a tax-advantaged savings plan offered by employers along with a high-deductible health insurance plan. Both employers and employees can contribute pretax dollars to the HSA, which allows employees to save money tax-free for deductibles and qualified medical expenses.

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79. What is HIPAA (Health Insurance Portability and Accountability Act of 1996)?

This federal law requires privacy protections for an individual’s’ health information.

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80. What is holiday pay?

Holiday pay is paid time off for federal holidays. The FLSA does not require employers to give employees federal holidays off or to pay them for hours not worked; however, many employers do so.

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81. What is an HSA?

An HSA is short for Health Savings Account. It’s a tax-advantaged savings plan offered by employers along with a high-deductible health insurance plan. Both employers and employees can contribute pretax dollars to the HSA, which allows employees to save money tax-free for deductibles and qualified medical expenses.

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82. What are HSA limits?

The IRS sets HSA limits on how much individuals and employers can contribute to an employee’s HSA annually. See Health Savings Account.

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83. What is imputed income?

Imputed income is a non-cash service or fringe benefit provided to employees. While some non-cash benefits are tax-exempt (such as health insurance), imputed income is subject to employment tax withholding. See employment tax. See fringe benefits.

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84. What is an independent contractor?

An independent contractor is a self-employed person who works for various companies on a project or contract basis. Employers do not withhold taxes from an independent contractor’s wages, pay their Social Security or Medicare taxes, or pay state unemployment taxes for them. See contract worker. See freelancer.

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85. What is an Individual Retirement Account (IRA)?

An IRA is a tax-deferred retirement account that any employed or self-employed person can establish for themselves. Employees can authorize their employer to make payroll deductions and transfer them to the employee’s IRA.

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86. What is a leave of absence (LOA)?

A leave of absence is a period during which an employee has permission to be absent from work without losing their job. Leaves of absence may be paid or unpaid, and they’re generally used in special circumstances such as when an employee has exhausted available paid time off (sick days, personal days, vacation days, and holidays). See disability leaveSee Family and Medical Leave Act. See maternity leave. See paternity leave.

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87. What is long-term disability insurance (LTDI)?

Long-term disability insurance protects employees against loss of income if a non-work-related illness or injury leaves them unable to work for an extended time. Employers sometimes provide long-term disability insurance as an employee benefit.

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88. What is maternity leave?

Maternity leave is an approved absence from work given to a mother after or shortly before the birth of her child. Qualified employees of companies covered under the Family and Medical Leave Act (FMLA) can take up to 12 workweeks of unpaid leave for this purpose. Some states also provide paid disability leave for expecting mothers. Some states require employers to provide paid family leave. See disability leave. See Family and Medical Leave Act. See leave of absence. See paternity leave.

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89. What is the maximum benefits amount?

This refers to the maximum amount of unemployment benefits a claimant can receive during a benefit year or the entire period of unemployment. It is also referred to as “maximum benefits payable.”

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90. What is the maximum benefits payable (MBP)?

Just like maximum benefits amount, this refers to the maximum amount of unemployment benefits a claimant can receive during a benefit year or the entire period of unemployment. It is also referred to as “maximum benefits payable.”

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91. What is the maximum potential benefit amount?

This refers to the maximum unemployment benefit for weeks of total unemployment that a claimant can receive under state or federal unemployment insurance regulations.

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92. What is the maximum potential duration?

This refers to the maximum number of weeks for which a claimant can receive unemployment benefits during a benefit year or the entire duration of unemployment.

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93. What is the maximum weekly benefit amount?

This is the highest weekly amount of unemployment benefits a claimant can receive under state or federal unemployment insurance regulations.

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94. What is the Medicare tax?

Medicare provides medical benefits for individuals age 65 and up and individuals under 65 with certain qualifying health conditions or disabilities. The Medicare tax is funded through FICA taxes paid by both employers and employees. See FICA.

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95. What is mileage reimbursement?

This is money paid to reimburse employees for business use of their personal vehicles, Mileage reimbursement is calculated on a per-mile rate set each year by the IRS. See company car allowance.

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96. What is the minimum wage?

The minimum wage is the lowest amount per hour that employers can legally pay employees. In addition to the federal minimum wage law, some states have their own minimum wage laws. In this situation, employers must pay the higher of the two wages.

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97. What is net pay?

Net pay is the remainder of an employee’s wages after all deductions are subtracted from the gross wages. Net pay is also called take-home pay. Calculate net pay with a paycheck calculatorSee gross earnings.

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98. What is a nonexempt employee?

Nonexempt employees are entitled to overtime pay, under the Fair Labor Standards Act (FLSA). Some states, such as California, have their own overtime regulations. Nonexempt employees are still entitled to overtime pay, even if that time was unauthorized by their employer. See exempt employee.

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99. What is OASDI (Old-Age, Survivors, and Disability Insurance Program)?

Old-Age, Survivors, and Disability Insurance Program is the official name for Social Security. See FICA.

This article was produced by the Quickbooks Resource Center and syndicated by MediaFeed.org.

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