Payroll comes with its own vocabulary, and if you're running payroll for the first time, you may encounter unfamiliar terms throughout the process.
This guide introduces some of the most common payroll terms you'll see in payroll software, reports, and pay statements. Understanding these definitions can help you feel more confident as you learn the payroll process.
This page is intended as a general reference and explains common payroll concepts in plain language.
Payroll Basics
Payroll
Payroll is the process of calculating team member earnings, preparing team member payments, and maintaining records related to compensation. Payroll is typically completed on a recurring schedule, such as weekly, biweekly, semi-monthly, or monthly.
Employer
An employer is the business or organization that hires and pays workers for the services they perform.
Employee
An employee is an individual who performs work under the hiring party's direction and control and, unlike an independent contractor, is generally entitled to wages, employee benefits, and legal protections under applicable employment laws.
Independent Contractor
An independent contractor is a self-employed individual who provides services under a contract and, unlike a team member, controls how the work is performed and is not subject to the hiring party's day-to-day direction or entitled to team member benefits.
Pay Cycle Terms
Pay Period
A pay period is the span of time during which team members earn wages before they are paid.
For example, a weekly pay period covers one week of work, while a biweekly pay period covers two weeks.
Payday
Payday is the date team members receive their pay for work completed during a pay period.
Many businesses establish recurring paydays so team members know when to expect payment.
Pay Schedule
A pay schedule determines how often payroll is processed and how frequently team members are paid.
Common pay schedules include weekly, biweekly, semi-monthly, and monthly.
Earnings Terms
Gross Pay
Gross pay is a team member's total earnings before deductions are applied.
Depending on the team member's compensation, gross pay may include regular wages, overtime, bonuses, commissions, or other earnings.
Net Pay
Net pay is the amount a team member receives after payroll has accounted for applicable deductions.
Net pay is sometimes referred to as a team member's "take-home pay."
Salary
Salary is a fixed amount of compensation that is generally paid consistently regardless of the number of hours worked during a pay period.
Hourly Pay
Hourly pay is compensation based on the number of hours a team member works during a pay period.
Overtime
Overtime generally refers to additional compensation that may apply when eligible team members work beyond certain work hours.
Payroll systems calculate overtime separately from regular earnings.
Bonus
A bonus is additional compensation that an employer may provide in addition to a team member's regular earnings.
Bonuses may be awarded for performance, company milestones, or other reasons.
Commission
A commission is compensation that is typically based on sales or other measurable performance.
Some team members receive commissions in addition to regular wages or salary.
Payroll Taxes
Employer Taxes
Taxes paid by the employer based on employee wages, in addition to the employee’s pay. Common examples include the employer’s share of Social Security and Medicare taxes, plus federal and state unemployment taxes.
Employee Taxes
Taxes withheld from an employee’s wages. Common examples include federal income tax, Social Security, Medicare, and applicable state and local taxes
Payroll Adjustments
Deduction
An amount subtracted from a team member's gross pay during payroll. Deductions can include taxes, benefits, retirement contributions, and other payroll items, and together they determine the team member's net pay.
Deductions are either:
- Pre-tax: Taken out before taxes are calculated, which lowers the team member's taxable income. Examples include health insurance premiums and traditional 401(k) contributions.
- Post-tax: Taken out after taxes are calculated. Examples include wage garnishments and Roth 401(k) contributions.
Benefits Deduction
An amount taken from a team member's pay for the benefits they've enrolled in, such as health insurance or a retirement plan. Benefits deductions can be pre-tax or post-tax, depending on the benefit, and appear on the team member's pay statement.
Reimbursement
A reimbursement repays a team member for an approved business expense, separate from their regular earnings. Because a reimbursement isn't wages, it isn't taxed.
In Mercury, expense reimbursements are handled in Mercury banking* rather than through payroll.
Payment Terms
Direct Deposit
Direct deposit is an electronic method of delivering team member pay directly into a designated bank account.
Many employers choose direct deposit because it provides a convenient way to distribute team member payments.
Pay Stub
A pay stub is a summary that shows a team member's earnings, deductions, and payment information for a specific pay period.
Team members often use their pay stub to review how their pay was calculated.
Payroll Records
Payroll Journal
A payroll journal summarizes payroll information for a payroll cycle.
Reports can provide an overview of team member earnings, deductions, and other payroll activity. In the absence of an accounting integration, your accountant can use a payroll journal to get the same information about payrolls.
Mercury Payroll helps businesses manage payroll and related administrative tasks. Mercury does not provide legal, tax, accounting, or investment advice and does not act as your employer, professional employer organization (PEO), employer of record (EOR), or plan fiduciary. You remain responsible for your legal and regulatory obligations, including worker classification, wage-and-hour requirements, tax withholding and reporting, and benefits eligibility.
*Mercury is a fintech company, not an FDIC-insured bank. Banking services provided through Choice Financial Group and Column N.A., Members FDIC.