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A payroll is a company's list of its employees, but the term is commonly used to refer to:
- the total amount of money that a company pays to its employees
- a company's records of its employees' salaries and wages, bonuses, and withheld taxes
- the company's department that calculates funds and pays these.
In the sense of treasury management, payroll plays a major role in a company for several reasons. From an accounting perspective, payroll and payroll taxes are subject to laws and regulations and can considerably affect the net income of most companies. For example, payroll in the United States is subject to federal, state, and local regulations. From a human resources viewpoint, employees are sensitive to payroll errors and irregularities, such as late paychecks. As such, maintaining good employee morale requires payroll to be paid timely and accurately. The primary mission of the payroll department is to ensure that all employees are paid accurately and timely with the correct withholdings and deductions, and that the withholdings and deductions are remitted in a timely manner. This includes salary payments, tax withholdings, and deductions from paychecks.
Government agencies at various levels require employers to withhold income taxes from employees' wages.
In the United States, "payroll taxes" are separate from income taxes, although they are levied on employers in proportion to salary; the programs they fund include Social Security and Medicare. U.S. income and payroll taxes collected through deductions are considered to be trust fund taxes, because the employer holds the deducted money in trust for later remittance.
Payroll taxes in the United States
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Net Pay is critical in the consideration of payroll taxes. An employee's gross pay (pay rate times number of hours worked, including any overtime) minus payroll tax deductions, minus voluntary payroll deductions, is equal to Net Pay. Payroll tax deductions play a critical role and because they are provided by law they are known as statutory payroll tax deductions.
By law, employers must withhold payroll taxes from employees' checks and transfer them to several tax agencies. Payroll taxes include the following:
- Federal income tax withholding, based on withholding tables in "Publication 15, Employer's Tax Guide" by the Internal Revenue Service – IRS;
- Social Security tax withholding. The employee pays 6.2 percent of the salary or wage, up to $118,500 (as of 2015–2016).
- The employer also pays 6.2 percent in Social Security taxes. If you are self-employed, you pay the combined employee and employer amount of 12.4 percent in Social Security taxes on your net earnings;
- Medicare tax. The employee pays 1.45 percent in Medicare taxes on the entire salary or wage. 0.9% is added for the salary portion bigger than $200,000 (only for the employee portion). The employer also pays 1.45 percent in Medicare taxes (regardless if the amount is bigger than $200,000). If you are self-employed, you pay the combined employee and employer amount of 2.9 percent (3.8% for the portion bigger than $200,000) in Medicare taxes on your net earnings;
- State income tax withholding;
- Various local tax withholding, such as city taxes, county taxes, school taxes, state disability, and unemployment insurance.
References include the following publications:
- Publication 15, (Circular E), Employer's Tax Guide. This publication explains employer's tax responsibilities. It explains the requirements for withholding, depositing, reporting, paying, and correcting employment taxes. It explains the forms any employer must give to its employees, those employees must give to the employer, and those employers must send to the IRS and SSA (Social Security Administration). This guide also has tax tables needed to figure the taxes to withhold from each employee;
- Publication 15 – A, Employer's Supplemental Tax Guide. This publication supplements Publication 15 (Circular E), Employer's Tax Guide. It contains specialized and detailed employment tax information supplementing the basic information provided in Publication 15 (Circular E);
- Publication 15-B. Employer's Tax Guide to Fringe Benefits. This publication supplements Publication 15 (Circular E), Employer's Tax Guide, and Publication 15 – A, Employer's Supplemental Tax Guide. This publication contains information about the employment tax treatment of various types of noncash compensation.
In the earlier part we have considered payroll taxes related to employee's side. Now it's the moment to talk about the Employer Payroll Taxes Employers are responsible for paying their portion of payroll taxes. These payroll taxes are an expense over and above the expense of an employee's gross pay. The employer-portion of payroll taxes include the following:
- Social Security taxes (6.2% up to the annual maximum);
- Medicare taxes (1.45% of wages);
- Federal unemployment taxes (FUTA);
- State unemployment taxes (SUTA).
The Federal Insurance Contributions Act (FICA) and the FICA tax consist of both Social Security and Medicare taxes. As we explained earlier both parties pay half of these taxes. Employees pay half, and employers pay the other half. Social Security and Medicare taxes are paid both by the employees and the employers. In summary together both halves of the FICA taxes add up to 15.3 percent.
Any employer is responsible for paying the employer's share of payroll taxes, for depositing tax withheld from the employees' paychecks, preparing various reconciliation reports, accounting for the payroll expense through their financial reporting, and filing payroll tax returns.
Companies typically generate their payrolls at regular intervals, for the benefit of regular income to their employees. The regularity of the intervals varies from company to company, and sometimes between job grades within a given company. Common payroll frequencies include: daily, weekly, bi-weekly/fortnightly (once every two weeks), semi-monthly (twice per month), and monthly. Less common payroll 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 (yearly).
Businesses may decide to outsource their payroll functions to an outsourcing service like a Payroll service bureau or a fully managed payroll service. These can normally reduce the costs involved in having payroll trained employees in-house as well as the costs of systems and software needed to process a payroll. Where this may reduce the cost for some companies many will foot a bigger bill to outsource their payroll if they have a special designed payroll program or payouts for their employees. In many countries, business payrolls are complicated in that taxes must be filed consistently and accurately to applicable regulatory agencies. For example, restaurant payrolls which typically include tip calculations, deductions, garnishments and other variables, can be difficult to manage especially for new or small business owners.
In the UK, payroll bureaus will deal with all HM Revenue & Customs inquiries and deal with employee's queries. Payroll bureaus also produce reports for the businesses' account department and payslips for the employees and can also make the payments to the employees if required. As of 6 April 2016, umbrella companies are no longer able to offset travel and subsistence expenses and if they do, they will be deemed liable to reimburse to HMRC any tax relief obtained. Furthermore, recruitment companies and clients may be potentially liable for the unpaid tax.
Another reason many businesses outsource is because of the ever-increasing complexity of payroll legislation. Annual changes in tax codes, Pay as you earn (PAYE) and National Insurance bands as well as statutory payments and deductions having to go through the payroll often mean there is a lot to keep abreast of in order to maintain compliance with the current legislation.
On the other hand, businesses may also decide to utilize payroll software to supplement the efforts of a payroll accountant or office instead of hiring more payroll specialists and outsourcing a payroll company. Payroll software base its calculation on entered rate, approved data obtained from other integrated tools like the electronic Bundy clock, and other essential digital HR tools. Payroll is widely used in the United States of America
- Bragg, Steven M. (2003). Essentials of Payroll: Management and Accounting. John Wiley & Sons. ISBN 0471456144. Retrieved 4 November 2017.
- Pomerleau, Kyle (19 June 2014). "A Comparison of the Tax Burden on Labor in the OECD". Tax Foundation. Retrieved 4 November 2017.
- "Employment Taxes and the Trust Fund Recovery Penalty (TFRP)". IRS. Internal Revenue Service. Retrieved 4 November 2017.
- "IRS Publication 15, (Circular E), Employer's Tax Guide" (PDF). Internal Revenue Service. Retrieved 4 November 2017.
- "SSA Publication No. 05-10003, Update 2017" (PDF). SocialSecurity.gov. Social Security Administration. Retrieved 4 November 2017.
- "How frequently do private businesses pay workers?". Bureau of Labor Statistics. U.S. Department of Labor. Retrieved 4 November 2017.
- Payne, Charlie (September 5, 2014). "Payroll Matters". StaffOne.com. Staff One. Retrieved October 27, 2015.
- "All change for Umbrella Companies from April 2016". FCSA. The Freelancer & Contractor Services Association. Retrieved 4 November 2017.
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