From Wikipedia, the free encyclopedia Payroll
Payroll
be trust fund taxes, because the employer holds the de-
ducted money in trust for later remittance.
Payroll taxes in U.S.
Before considering the payroll taxes we need to talk
about the Basic Formula for the Net Pay. Basically from
gross pay is subtracted one or more deductions to arrive
at the Net Pay. In fact Employee’s gross pay (pay rate
times number of hours worked, including any over time)
minus payroll tax deductions, minus voluntary payroll
deductions, is equal to Net Pay. As you can see payroll tax
deductions play a critical role and just because they are
provided by law we can call them Statutory payroll tax
deductions.
The employer must withhold payroll taxes from an
employee’s check and hand them over to several tax
Handling payroll typically involves sending out payslips to em- agencies by law. Payroll taxes include:
ployees. 1. Federal income tax withholding, based on
withholding tables in "Publication 15, Employer’s
In a company, payroll is the sum of all financial Tax Guide"[2] by Internal Revenue Service - IRS;
records of salaries for an employee, wages, bonuses and 2. Social Security tax withholding.[3] The employee
deductions. In accounting, payroll refers to the amount pays 6.2 percent of the salary or wage, up to 106,800.
paid to employees for services they provided during a The employer also pays 6.2 percent in Social Security
certain period of time. Payroll plays a major role in a taxes. If you are self-employed, you pay the
company for several reasons. From an accounting per- combined employee and employer amount of 12.4
spective, payroll is crucial because payroll and payroll percent in Social Security taxes on your net
taxes considerably affect the net income of most com- earnings;
panies and they are subject to laws and regulations (e.g. 3. Medicare tax.[4] The employee pays 1.45 percent in
in the US payroll is subject to federal and state regula- Medicare taxes on the entire salary or wage. The
tions). From an ethics in business viewpoint payroll is a employer also pays 1.45 percent in Medicare taxes. If
critical department as employees are responsive to pay- you are self-employed, you pay the combined
roll errors and irregularities: good employee morale re- employee and employer amount of 2.9 percent in
quires payroll to be paid timely and accurately. The pri- Medicare taxes on your net earnings;
mary mission of the payroll department is to ensure that 4. State income tax withholding;
all employees are paid accurately and timely with the 5. various local tax withholding, such as city taxes,
correct withholdings and deductions, and to ensure the county taxes, school taxes, state disability, and
withholdings and deductions are remitted in a timely unemployment insurance.
manner. This includes salary payments, tax withholdin- As for the sources considered as references we can men-
gs, and deductions from a paycheck. tion the following publications:
• Publication 15, (Circular E), Employer’s Tax Guide.
This publication explains employer’s tax
Payroll taxes responsibilities. It explains the requirements for
Government agencies at various levels require employers withholding, depositing, reporting, paying, and
to withhold income taxes from employees’ wages.[1] correcting employment taxes. It explains the forms
In the United States, "payroll taxes" are separate any employer must give to its employees, those
from income taxes, although they are levied on employ- employees must give to the employer, and those
ers in proportion to salary; the programs they fund in- employer must send to the IRS and SSA (Social
clude Social Security, and Medicare. U.S. income and pay- Security Administration). This guide also has tax
roll taxes collected through deductions are considered to tables needed to figure the taxes to withhold from
each employee;
1
From Wikipedia, the free encyclopedia Payroll
• Publication 15 - A, Employer’s Supplemental Tax
Guide. This publication supplements Publication 15
Outsourcing
(Circular E), Employer’s Tax Guide. It contains Businesses may decide to outsource their payroll func-
specialized and detailed employment tax tions to an outsourcing service like a Payroll service bu-
information supplementing the basic information reau or a fully managed payroll service. These can nor-
provided in Publication 15 (Circular E); mally reduce the costs involved in having payroll trained
• Publication 15-B. Employer’s Tax Guide to Fringe employees in-house as well as the costs of systems and
Benefits. This publication supplements Publication software needed to process a payroll. In many countries,
15 (Circular E), Employer’s Tax Guide, and business payrolls are complicated in that taxes must be
Publication 15 - A, Employer’s Supplemental Tax filed consistently and accurately to applicable regulatory
Guide. This publication contains information about agencies. Restaurant payrolls which typically include tip
the employment tax treatment of various types of calculations, deductions, garnishments and other vari-
noncash compensation. ables, can be difficult to manage especially for new or
In the earlier part we have considered payroll taxes re- small business owners.
lated to employee’s side. Now it’s the moment to talk In the UK, payroll bureaus will deal with all HM Rev-
about the Employer Payroll Taxes Employers are respon- enue & Customs inquiries and deal with employee’s
sible for paying their portion of payroll taxes. These pay- queries. Payroll bureaus also produce reports for the
roll taxes are an expense over and above the expense of businesses’ account department and payslips for the em-
an employee’s gross pay. The employer-portion of pay- ployees and can also make the payments to the employ-
roll taxes include the following: ees if required.
1. Social Security taxes (6.2% up to the annual Another reason many businesses outsource is be-
maximum); cause of the ever increasing complexity of payroll legisla-
2. Medicare taxes (1.45% of wages); tion. Annual changes in tax codes, Pay as you earn (PAYE)
3. Federal unemployment taxes (FUTA); and National Insurance bands as well as statutory pay-
4. State unemployment taxes (SUTA). ments and deductions having to go through the payroll
Very often you can hear people using FICA in their termi- often mean there is a lot to keep abreast of in order to
nology. FICA stands for the Federal Insurance Contribu- maintain compliance with the current legislation.
tions Act and the FICA tax consists of both Social Security
and Medicare taxes. As we explained earlier both parties
pay half of these taxes. Employees pay half, and employ-
See also
ers pay the other half. Social Security and Medicare tax-
es are paid both by the employees and the employers. In Footnotes
summary together both halves of the FICA taxes add up
[1] "Introduction to Payroll Taxes.".
to 15.3 percent.
http://payroll.intuit.com/payroll_resources/
Any employer is responsible for paying the employ-
payroll_101/index.jsp.
er’s share of payroll taxes, for depositing tax withheld
[2] Publication 15 (2010), (Circular E), Employer’s Tax
from the employees’ paychecks, preparing various rec-
Guide
onciliation reports, accounting for the payroll expense
[3] SSA Publication No. 05-10003, January 2010, ICN
through their financial reporting, and filing payroll tax
451385
returns. As you see this suite of employer payroll tax re-
[4] SSA Publication No. 05-10003, January 2010, ICN
sponsibilities is far above issuing paychecks to employ-
451385
ees.
Frequency References
• Institute of Payroll Professionals official website
Companies typically generate their payrolls on regular
• Glossary of Accounting Terms
intervals, for the benefit of regular income to their em-
• Steven M. Bragg. Essentials of Payroll: Management and
ployees. The regularity of the intervals, though, varies
Accounting. ISBN 0471264962.
from company to company, and sometimes between job
• Independent research, seminars and consulting on
grades within a given company. Common payroll fre-
multi-country payroll
quencies include: daily, weekly, bi-weekly (once every
• Direct Deposit information resource
two weeks), semi-monthly (twice per month), and to
• Publication 15 (2010)(Circular E) Employer’s Tax
somewhat of a lesser extent, monthly. Less common pay-
Guide
roll frequencies include: 4-weekly (13 times per year), bi-
monthly (once every two months), quarterly (once every
13 weeks), semi-annually (twice per year), and annually.
2
From Wikipedia, the free encyclopedia Payroll
Retrieved from "http://en.wikipedia.org/w/index.php?title=Payroll&oldid=467790723"
Categories:
• Expense
• Employment compensation
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