Payroll Glossary

Earned Income Credit

The EIC is a tax credit available to low-income employees. The credit reduces taxes owed and is intended to offset living expenses and Social Security taxes paid. An eligible employee may either claim the whole credit on his or her federal income tax return, in which case it will be paid out in a lump sum by the federal government, or in certain cases, he or she may choose to receive the credit incrementally with each paycheck. In the 2010 tax year, an employee can receive as much as $1,830 in advance earned income credit (AEIC) payments. An employee who chooses the advance payments option must file Form W-5 (Earned Income Credit Advance Payment Certificate) with his or her employer. Provided the certificate is valid, the employer is required to make AEIC payments to the employee.

Earnings Test

A person who reaches full retirement age (FRA) can earn any amount of money or work any number of hours and still receive full Social Security benefits. Prior to 2000, retirees aged 65 to 69 who were also Social Security beneficiaries would lose $1 of benefits for each $3 of earned income over a set earnings limit. The Senior Citizens' Freedom to Work Act of 2000 eliminated the retirement earnings test for beneficiaries aged 65 and over. These beneficiaries may now receive all of their Social Security benefits regardless of how much they earn, but all such earnings are still subject to FICA taxes. Social Security beneficiaries who are under FRA for at least part of the year, however, remain subject to an earnings test. The year an individual reaches FRA, a monthly earnings test is used in the first year of retirement to determine the amount of wages the beneficiary can earn in any month without loss of benefits. For amounts earned above the monthly limit, prior to the month the individual attains FRA, the beneficiary loses $1 of benefits for every $3 earned. Beginning with the month in which FRA is attained, there is no limit on the amount the beneficiary can earn.

Electronic Federal Tax Payment System

The EFTPS is essentially a communications network that facilitates the direct transfer of funds to the Treasury Department. It is the system by which mandated employers deposit their payroll and other federal taxes electronically via the ACH system.

Electronic Funds Transfer

EFT refers to the electronic movement of funds from one bank account to another. Direct deposit of employees' paychecks is an example of EFT.

Electronic Tax Application

An ETA is a same-day settlement procedure under which tax deposits are initiated and settled on the same day.

Employee

An employee is an individual who performs services for another individual or an organization in return for compensation. This worker classification carries with it a variety of tax obligations for the employer. See also independent contractor.

Employee Coverage

The Fair Labor Standards Act contains a provision under which employees of companies not meeting the enterprise coverage test may be individually covered if they are engaged in activities related to interstate commerce.

Employee's Withholding Allowance Certificate

An employer must have each new employee fill out a Form W-4 (Employee's Withholding Allowance Certificate). On this form, the employee shows his or her tax filing status (married or single) and the number of withholding allowances claimed. The employer uses the information provided on the form to calculate the amount of federal income tax to be withheld from the employee's wages. An employee's Form W-4 should go into effect with the first payment of wages to the employee. If the employee will not complete a Form W-4, the employer should withhold from the employee's wages as if he or she had filled out the form as a single person claiming no allowances.

Employer Identification Number

The EIN is a 9-digit identifier issued by the IRS to withholding employers and is required to be shown on all materials sent to the IRS or SSA (Social Security Administration).

Enterprise Coverage Test

The Fair Labor Standards Act contains a provision under which all employees of an employer are covered if that employer is engaged in interstate commerce and has an annual sales volume of at least $500,000.

Equal Pay Act

The EPA is an amendment to the original Fair Labor Standards Act that prohibits wage discrimination on the basis of gender.

Escheat

This is defined as the reversion of unclaimed wages to the state after a given period of time.

Excise Tax

This is a tax imposed on a specific transaction.

Exempt

If an employee claims exempt on his or her Form W-4, the employer does not have to withhold federal income tax from the employee's wages.

Exempt Employees

This generally refers to employees who are exempt from the minimum wage and overtime provisions of the Fair Labor Standards Act, although provisions of other payroll laws and regulations may provide for exemptions from other requirements, such as federal income tax withholding or FICA and FUTA.

Expense Account

This shows the costs of goods and services consumed by the company during the accounting period.

Experience Rating System

This is a method used by states to allocate unemployment taxes on the basis of benefit costs. An employer with a low employee turnover generally has a low tax rate; a high employee turnover means a higher tax rate.

Extended Benefits

Extended benefits are unemployment compensation benefits paid during periods of high unemployment. Benefits are 50% federally funded and payable up to 13 additional weeks after an eligible unemployed individual has exhausted his or her regular state benefits.