How Does Payroll Tax Work
Accounting, taxes, and the law is usually pretty intimidating for most people. Even business owners get intimidated at the thought of “missing” something seemingly small, but very important that can have serious consequences if unattended. Payroll is one of the most important combinations of these three items, both for the employer and the employee.
For the Employee
Payroll is their livelihood. It’s the earnings that help them live life and pay for almost EVERYTHING. Taxes are also important to them, since accidental or purposeful tax evasions are civic or criminal offenses. If the employer withholds too much, the employee might not get the financial resources they need at the moment, but they will receive a tax refund when they file their taxes the next year. If the employer does not withhold enough, the employee might get more in their pockets right now, but they will be liable to pay for the remainder that they owe when filing their taxes.
For the Employer
It’s a little more serious. Not only is there very little room for error (you can’t make a mistake in someone’s paycheck, and you can’t make mistakes with the government’s money – neither group will take it lightly), the employer is responsible to pay certain taxes on their employees behalf. For example, the employee will have the 6.2% Social Security Tax and 1.45% Medicare Tax deducted from their paychecks. But not everyone knows that employers are also supposed to contribute 6.2% of taxable wages to Social Security and 1.45% to Medicare. That means a total of 12.40% is ultimately paid to Social Security and 2.9% to Medicare – this is besides Federal and State Income taxes, Unemployment Taxes and (depending on what state the employer is in) other taxes can apply as well. It’s important to keep that in consideration when making company budgets.
Since the employer withholds taxes that ultimately belong to the government, they have to be very careful with what they do with those funds until they are paid. For the most part, these taxes are withheld every pay period, whether bi-weekly or semi-monthly, or whatever pay period the company has elected. But all withheld taxes are paid quarterly. So in that time, businesses have to accumulate this withheld cash and pay it on time. They are not allowed to borrow from this to pay for urgent expenses and then pay the government back later; they can’t do ANYTHING with it – that would be against the law.
Many companies will outsource the actual payroll process to a payroll specializing company, though a few small companies will continue to do it in house. The benefit of outsourcing this is that the latest laws, the newest rates, and all other tax forms that have to be filed on behalf on the employer can get taken care of with little time investment and risk to the employer. Payroll specialists who love this kind of work can get problem diagnosing and solving jobs with software companies who offer this service to employers, or they can choose to work for a company that does it all in-house.
So if accounting, taxes, and law are something you find fascinating, payroll might just be the thing you’re looking for! We have a GREAT payroll management course in our Accounting Specialist program that you should look into. We cover the basic concepts, practice the calculations, and learn about the journal entries. Afterwards, students learn how to do it themselves using QuickBooks’ payroll processor. We also cover aspects of payroll law in the Human Resource Administration course. This comprehensive approach ensures you’re ready for that entry level position as a Payroll Specialist. Interested? Come check us out!