Payroll taxes

Government agencies at various levels require employers to withhold income taxes from
employees' wages.[1]
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.
[edit] 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"[2] by Internal Revenue Service - IRS;
2. Social Security tax withholding.[3] 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.[4] 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.
[edit] Payroll Frequencies
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.
[edit] Payroll Outsourcing
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. In many countries, business payrolls are complicated in
that taxes 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) 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.
[edit] Payrolling
Payrolling is the business practice of referring a contingent worker to a staffing vendor or
payrolling provider so that they are the employer of record responsible for employer taxes,
payroll, and all legal matters pertaining to employing workers. Different from sourcing (or
recruiting) where the staffing vendor uses internal recruiters to locate contractors on behalf of the
requesting company or client, payrolled workers are identified by the client.[not specific enough to verify]
Often payrolled workers are known to the client from previous engagements or as former
employees. Because the costs of recruiting workers in to contract positions are eliminated the
payrollees are often processed at reduced mark up rates.
In the last several years, some dedicated payrolling companies have emerged in the staffing
industry to provide payrolling services. In the US they are known as Professional Employee
Organizations or PEO's. They charge the cost of the employee payroll and add a surchage for
their services.
[edit] See also
• Paycheck

Look up payroll in Wiktionary, the free dictionary.

[edit] Footnotes
1. ^ "Introduction to Payroll Taxes.".
http://payroll.intuit.com/payroll_resources/payroll_101/index.jsp.
2. ^ Publication 15 (2010), (Circular E), Employer's Tax Guide
3. ^ SSA Publication No. 05-10003, January 2010, ICN 451385
4. ^ SSA Publication No. 05-10003, January 2010, ICN 451385

[edit] References
• Institute of Payroll Professionals official website
• Glossary of Accounting Terms
• Steven M. Bragg. Essentials of Payroll: Management and Accounting.
ISBN 0471264962.
• Independent research, seminars and consulting on multi-country payroll
• Direct Deposit information resource
• Publication 15 (2010)(Circular E) Employer's Tax Guide
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