In a company

Company

A company is a form of business organization. It is an association or collection of individual real persons and/or other companies, who each provide some form of capital. This group has a common purpose or focus and an aim of gaining profits. This collection, group or association of persons can be...

, payroll is the sum of all financial

FINANCIAL

FINANCIAL is the weekly English-language newspaper with offices in Tbilisi, Georgia and Kiev, Ukraine. Published by Intelligence Group LLC, FINANCIAL is focused on opinion leaders and top business decision-makers; It's about world’s largest companies, investing, careers, and small business. It is...

 records of salaries

Salary

A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis....

 for an employee, wage

Wage

A wage is a compensation, usually financial, received by workers in exchange for their labor.Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees...

s, bonuses and deduction

Tax deduction

Income tax systems generally allow a tax deduction, i.e., a reduction of the income subject to tax, for various items, especially expenses incurred to produce income. Often these deductions are subject to limitations or conditions...

s. In accounting, payroll refers to the amount paid to employees for services they provided during a certain period of time. Payroll plays a major role in a company for several reasons. From an accounting perspective, payroll is crucial because payroll and payroll taxes considerably affect the net income of most companies and they are subject to laws and regulations (e.g. in the US payroll is subject to federal and state regulations). From an ethics in business viewpoint payroll is a critical department as employees are responsive to payroll errors and irregularities: 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 to ensure the withholdings and deductions are remitted in a timely manner. This includes salary payments, tax withholdings, and deductions from a paycheck

Paycheck

Paycheck can also refer to:* Paycheck , short story by science fiction author Philip K. Dick* Paycheck , film adaptation of the Philip K. Dick short story starring Ben Affleck...

.

Payroll taxes

Government agencies at various levels require employers to withhold income tax

Income tax

An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...

es 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

Social Security (United States)

In the United States, Social Security refers to the federal Old-Age, Survivors, and Disability Insurance program.The original Social Security Act and the current version of the Act, as amended encompass several social welfare and social insurance programs...

, and Medicare

Medicare (United States)

Medicare is a social insurance program administered by the United States government, providing health insurance coverage to people who are aged 65 and over; to those who are under 65 and are permanently physically disabled or who have a congenital physical disability; or to those who meet other...

. 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 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 agencies by law. Payroll taxes include:

1. Federal income tax withholding, based on withholding tables in "Publication 15, Employer's Tax Guide" by Internal Revenue Service - IRS;
2. Social Security tax withholding. The employee pays 6.2 percent of the salary or wage, up to 106,800. 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;
3. Medicare tax. The employee pays 1.45 percent in Medicare taxes on the entire salary or wage. The employer also pays 1.45 percent in Medicare taxes. If you are self-employed, you pay the combined employee and employer amount of 2.9 percent in Medicare taxes on your net earnings;
4. State income tax withholding;
5. various local tax withholding, such as city taxes, county taxes, school taxes, state disability, and unemployment insurance.

As for the sources considered as references we can mention 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 employer 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:

1. Social Security taxes (6.2% up to the annual maximum);
2. Medicare taxes (1.45% of wages);
3. Federal unemployment taxes (FUTA);
4. State unemployment taxes (SUTA).

Very often you can hear people using FICA in their terminology. FICA stands for the Federal Insurance Contributions 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 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. As you see this suite of employer payroll tax responsibilities is far above issuing paychecks to employees.

Frequency

Companies typically generate their payrolls on regular intervals, for the benefit of regular income to their employees. The regularity of the intervals, though, varies from company to company, and sometimes between job grades within a given company.
Common payroll frequencies include: daily, weekly, bi-weekly (once every two weeks), semi-monthly (twice per month), and to somewhat of a lesser extent, 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.

Outsourcing

Businesses may decide to outsource their payroll functions to an outsourcing service like a Payroll service bureau

Payroll service bureau

A payroll service bureau is an accounting business whose main focus is the preparation of payroll for other businesses. Such firms are often run by Certified Public Accountants, though a typical payroll processing company will refer to itself as a service bureau rather than a CPA firm, to...

 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. In many countries, business payrolls are complicated in that taxes

Payroll tax

Payroll tax generally refers to two different kinds of similar taxes. The first kind is a tax that employers are required to withhold from employees' wages, also known as withholding tax, pay-as-you-earn tax , or pay-as-you-go tax...

 must be filed consistently and accurately to applicable regulatory agencies. 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.

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

PAYE

Pay as you earn or PAYE refers to a system of withholding of income tax from payments to employees. Amounts withheld are treated as advance payments of income tax due. They are refundable to the extent they exceed tax as determined on tax returns. PAYE may also refer to withholding of the...

) and National Insurance

National Insurance

National Insurance in the United Kingdom was initially a contributory system of insurance against illness and unemployment, and later also provided retirement pensions and other benefits...

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.