Payroll Glossary

ABC Test

The "ABC" test is the set of three criteria used to determine, under most state unemployment insurance laws, whether a worker is an employee performing covered services. Under the "ABC" test, services are excluded from coverage only if all three of the following conditions are met: (1) the worker is free from control or direction in the performance of work under the contract of service and in fact; (2) service is performed either outside the usual course of the business for which it is performed, or it is performed outside of all places of business of the enterprise for which it is performed; and (3) the individual is customarily engaged in an independent trade, occupation, profession, or business. A few states have simplified the test further by using any two of the three conditions.

Accelerated Deposit Rule

In general, an employer must deposit its combined federal income tax withholding (FITW) and Social Security and Medicare tax (FICA) liabilities in accordance with either monthly or semiweekly schedule rules, depending on how great its total FITW-FICA liability was during the official "lookback" period. The accelerated deposit rule is the requirement that an accrued FICA and FITW liability which totals $100,000 or more on any day must be deposited by the end of the next banking day.

Accountable Plan

An accountable plan is a reimbursement or other expense allowance which meets the requirements of business connection, substantiation, and return of excess amounts. Expense reimbursements made under an accountable plan are excludable from employee income. A plan failing to meet these requirements is a "nonaccountable" plan and payments made under it are taxable income to the employee.

Accounting Period

This is the period covered by an income statement (e.g., month or year), and is also known as the business cycle.

Accrual

Accrual is the recognition of assets, expenses, liabilities, or revenues after the cash value has been determined but before it has been transferred.

ACH Credit Entry

An ACH (Automated Clearing House) credit entry is a transaction in which a taxpayer instructs its financial institution to originate a federal tax deposit through the ACH system to the appropriate Treasury account.

ACH Debit Entry

An ACH (Automated Clearing House) debit entry is a transaction in which an employer's financial agent, after receiving instructions from the employer, instructs the employer's financial institution to withdraw funds from the employer's account for a federal tax deposit and to route the deposit to the appropriate Treasury account through the ACH system.

Actual Deferred Percentage Test

The ADP test is used to ensure that a 401 (k) plan does not unduly discriminate in favor of highly compensated employees. The ADP is the ratio of an employee's total compensation to the amount deferred. For a plan to be nondiscriminatory, the average of the ADPs for highly compensated employees must not inordinately exceed the ADPs for nonhighly compensated employees.

Adoption Assistance

This is a financial benefit provided by an employer to an employee to help with the child adoption process. Within certain limitations, it is excluded from FITW (federal income tax withholding), though not from FICA (Social Security and Medicare taxes).

After-Tax Deduction

Benefit plans that are purchased with after-tax dollars are exempt from FIT (federal income tax), FITW (federal income tax withholding), FICA (Federal Insurance Contributions Act, i.e., Social Security and Medicare taxes), and FUTA (Federal Unemployment Tax Act). However, because the contribution is made on an after-tax basis, the contribution does not reduce the amount of wages subject to FIT, FITW, FICA, and FUTA.

Aggregate Method

The aggregate method is a method of withholding federal income tax from supplemental wages in which the supplemental wage payment is combined with the regular wages paid during the most recent payroll period. After calculating withholding on the total amount using the wage-bracket or percentage method, the amount already withheld from the last wage payment is subtracted to reach the amount that must be withheld from the supplemental wage payment.

Annual Wage Reporting

AWR (annual wage reporting) is the process of annually filing Forms W-2 with the Social Security Administration.

Asset

An asset is a resource acquired by a business that is consumed by the business.

Automated Clearing House

The ACH is an entity which serves as the central agency for processing and transferring funds from one financial institution to another via electronic data transmission. ACHs operate under rules and standards established by the National Automated Clearing House Association (NACHA).