There are two kinds of taxes that a business conducting accounting payroll has to be concerned with to run payroll effectively. There are withholding taxes which are also known as Pay-As-You-Go/ Earn (PAYG/ PAYE) held from an employee’s pay, or the employer pays from their own funds. The later form can be in fixed amounts, or linked by proportion to the pay a worker takes home.
The calculation of payroll deductions requires a detail-oriented approach and accurate work on the part of the payroll accountant. Payroll is reported through calculating various payroll deductions as well as gross pay in order to come up with a net pay amount. Withheld amounts from employees net pay include Federal, Medicare and Social Security.
FICA are both the company’s and worker’s share of Medicare and Social Security taxes. These are withheld by ½ and federal income tax is withheld from a workers pay as well. A company can be required to pay federal and state unemployment amounts, and withholding county, state and city income tax may also be a requirement in some areas. Worker’s and independent contractors need to be differentiated when amounts are to be withheld, as hiring companies are not required to withhold from independent contractors.
A Trust Fund Recovery Penalty is charged on employers who do not pay the U.S. Government withheld taxes and is enforced by the IRS. Individuals who willfully do not pay, account for or collect the amounts and are determined as responsible for the payout by a 4180 Interview, are assessed the Trust Fund Recovery Penalty which is 100% of what is owed in addition to interest accrued. Whether nonpayment is intentional or accidental, the Trust Fund Recovery Penalty is a substantial hit to an employer’s funds, and it is important for employers to keep records of when withheld payroll taxes are due to be paid.
Unemployment taxes are both state and federal (FUTA and SUTA). Hiring companies are allowed credits of up to 5.4% on State unemployment amounts if they have gained eligibility for the maximum credit, and usually net 0.8% of gross compensation. State rates differ for FUTA based on the base of minimum wage, and companies are only liable for the first $7,000 in an employee’s calendar year of compensation.
Be sure that a detail-oriented approach is used when calculating payroll deductions, and use additional care when scheduling the payment of amounts withheld to avoid unnecessary penalties.