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Article Series: Accounting
Home & Small Business Accounting
Business
Payroll Accounting:
Deductions, Social Security & Federal
Income Taxes
One of the largest expenses that most businesses
incur on a regular, ongoing basis is payroll. Payroll
represents the compensation that is regularly paid to the employees
of
a business organization. Labor costs and the related payroll
taxes represent a large and constantly increasing portion of
the total cost of operating most business organizations. Based
on the dollar expenditures and the governmental regulations
relating to payroll, it is one of the most important accounting
activities. While one tends to think in terms of his or her
payroll check at the end of the particular payroll period,
there is more to payroll than just take-home pay.
All employees of a business organization receive compensation
for the activities they perform within the organization. The
compensation is known as salary, wages, or other more descriptive
terms, such as commissions or piecework earnings. The number
of employees is not as significant as the nature of the payroll
system that is in use. The payroll system in use must be designed
to perform the intricate computations required by the various
governmental authorities, process the payroll data quickly,
and assure the payment of the correct amount to each employee.
The system should also provide for safeguards against payments
to nonexistent employees or other mis-appropriations of funds.
Payroll
Deductions: The amount earned by an employee, whether
paid on an hourly, weekly, semimonthly, monthly, piecework,
or commission basis, is the employee's GROSS pay. Gross pay
is the total earnings of the employee for the particular payroll
period. The amount of money the employee actually takes home
is known as NET pay. Net pay is arrived at by subtracting certain
deductions from the gross pay. Deductions consist of various
taxes that the employer is required to withhold from the employee's
pay on a regular basis that coincides with the payroll period
in use.
In order for the employer to withhold taxes from the employee's
paycheck, there are certain things the employer must know about
the employee. This needed information is obtained through the
employee's preparation of a W-4 Form, the EMPLOYEE'S WITHHOLDING
ALLOWANCE CERTIFICATE, which is available from the Internal
Revenue Service (IRS). This certificate asks for the employee's
full name, social security number, home address, marital status,
and the number of dependents that the person is claiming. The
form is then signed and dated by the employee and used by the
employer to determine the amounts of the various deductions
to be taken from the employee's gross pay. The typical deductions
made by the employer from the employee's gross pay include:
- Social
Security Tax (PICA)
- Medicare
Tax
- Federal
Income Taxes Withheld
- State
and Local Income Taxes Withheld (where applicable)
- State
Disability Insurance (where applicable)
- Other
Voluntary Deductions
Social
Security Taxes: The Social Security tax is the result
of the Federal Insurance Contributions Act (FICA). This act
provides for monthly pension benefits to be paid to retirees,
for survivor benefits, and for disability benefits. The Social
Security tax is levied on all employees, the funds received
going to support the above mentioned programs. In addition,
employers are required to match the employee's contribution,
which is treated as an expense (FICA tax expense) by the employer.
Beginning in calendar year 1991, the federal government separated
Social Security tax into two components. While the combined
rate was the same, the federal government calculated FICA tax
and Medicare tax separately. Both taxes are known as non-progressive
taxes because each individual has withheld from his or her
salary the same percentage, regardless of the amount of the
earnings for the pay period.
Federal
Income Taxes: The federal income tax is a pay-as-you-go
tax. The amount withheld from the employee's salary every pay
period is not actually a tax, but rather income withheld in
anticipation of the federal income tax. All employees (individuals)
are considered to be calendar year taxpayers, which means that
the calculation of their federal income tax is based on earnings
from January 1 through December 31 of any calendar year. By
the following April 15, each taxpayer is required to voluntarily
prepare and submit an income tax return covering the preceding
calendar year. The tax liability of the individual is determined
based on the income tax return, and the funds withheld by the
employer are used to satisfy the tax liability. If the amount
withheld during the year is in excess of the actual tax liability,
the taxpayer is entitled to a refund. If the tax liability
is greater than the total federal income tax withheld, the
taxpayer has a balance due, which must be sent in along with
the income tax return.
Since the federal income tax is a progressive tax, the more
money the taxpayer earns, the greater will be the percentage
of his income paid in taxes. A single individual is said to
have less expenses than a married person, thus the amount withheld
from a single individual will be somewhat greater than from
a married person. The more dependents a taxpayer claims as
exemptions, the lower the amount withheld from the gross pay
and the lower the eventual tax liability. These three factors
are taken into consideration by the employer in withholding
taxes for federal income tax purposes from the employee's gross
pay.
The employer is required to safeguard the federal income taxes
withheld from an employee's gross earnings by turning the funds
over to a federal depository, usually on a monthly basis, along
with any Social Security taxes withheld and the employer's
matching payments. # # # # # SolveYourProblem.com : 2007
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