What Is Payroll?
Payroll is the net wages paid to your employees after calculating and subtracting taxes and benefits from the gross pay. Payroll is one of the most critical functions of any business. Not only is payroll an employees paycheck; payroll is also benefits, paid time off and, most importantly, taxes. Payroll functions must then be performed accurately and timely.
What Are Payroll Taxes?
There are two forms of payroll taxes: Withholding Tax, or Taxes paid directly from an employer’s funds to employ a worker. Both taxes affect employer and employee equally. Let’s take a look at these taxes.
- Withholding tax refers to any tax that is taken out of an employee’s wage. This would include such payments as state and federal income tax withholdings, Social Security and Medicare taxes. These taxes amount to 6.2% of wages for Social Security and 1.45% of wages for Medicare. Federal and State Withholding Taxes are determined according to the income of the employee and the number of exemptions they take. Both employer and employee pay these taxes.
- Taxes paid from an employer’s funds would include Social Security, Medicare, Federal Unemployment Taxes (FUTA) and State Unemployment Taxes (SUTA). These taxes are a percentage of taxable wages with a cap, varying by state. Social Security and Medicare taxes, collectively known as FICA (Federal Insurance Contributions Act) add up to 15.3% of all wages. Both employer and employee pay 6.2% for Social Security and 1.45% for Medicare.
What Are Your Responsibilities For Payroll?
As a small business owner, you are responsible for running payroll operations: paying your employee’s salaries, and for ensuring that you are reporting all taxes to the Federal Government accurately and in a timely manner. Failure to timely and properly pay federal payroll taxes results in an automatic penalty of 2% to 10%.