Core Payroll Concepts
Payroll begins with worker classification and compensation design. An employee works under the employer's direction; an independent contractor controls how the work is done. Misclassification is a classic exam trap: the common-law right-to-control test, not the job title or a contract label, governs. Also know exempt vs. nonexempt under the FLSA: exempt employees generally must be paid on a salary basis and meet duties tests; nonexempt employees are entitled to minimum wage and overtime.
Understand gross pay (total compensation before deductions), taxable wages (gross minus qualifying pre-tax deductions), and net pay (take-home). Pre-tax deductions split into two families: those that reduce both income tax and FICA (e.g., Section 125 health premiums, traditional 401(k) deferrals) and those that reduce income tax only. Post-tax deductions reduce net pay but never taxable wages. Pay frequency affects per-period withholding but not annual liability.
Trap: A signing bonus, gift card, or noncash prize is generally taxable wages even if the employee never receives cash. Trap: Gross-up calculations add tax to the payment so the employee nets the intended amount.
Rule of thumb: Gross-to-net follows a sequence-start with gross, subtract pre-tax deductions, compute taxes on taxable wages, subtract post-tax deductions and wage attachments, then arrive at net. Reconcile every run so gross minus deductions equals net.