The Basics of Payroll
Payroll is very complex. However, working as an intern at the Cain Advisory Group allowed me to glean some insight into how exactly payroll works. Let’s delve into the basics: (If you’re in a hurry, just scroll down to the bottom and read the five point summary). Before we start, you may ask: “what is payroll?” Simply put, payroll is the total amount of money (this includes bonuses) that an employer pays employees during a consistent period of time (whether it be weekly, monthly, yearly, etc.). When dealing with payroll, there are many aspects that enter the picture. Here, we’ll discuss deposit schedules, payroll taxes (what they are and whether they should be paid or withheld), and workers’ compensation:
According to the IRS, “there are two deposit schedules—monthly and semi-weekly—for determining when you deposit social security, Medicare, and withheld income taxes. These schedules determine when a deposit is due after a tax liability arises (for example, when you have a payday). The deposit schedule you must use is based on the total tax liability you reported on Form 941 during a look-back period. Your deposit schedule is not determined by how often you pay your employees or make deposits. You are required to deposit 100% of your tax liability on or before the deposit due date. You must deposit employment taxes using electronic funds transfer. Certain exceptions apply. Late deposit penalty amounts are determined using calendar days, starting from the due date of the liability.” It is imperative that you make your deposits on time to avoid any appropriate consequences!
When it comes to payroll taxes, both the employer and the employee are subject to these state and federal taxes. You may be curious about how much of a worker’s pay is subject to federal employment taxes. Well, the IRS states that “wages subject to federal employment taxes generally include all pay you give to an employee for services performed. The pay may be in cash or in other forms. It includes salaries, vacation allowances, bonuses, commissions, and fringe benefits. It does not matter how you measure or make the payments.”
Deciding if Payroll Taxes are to be Paid or Withheld (Important for Employers!):
It is important to note that determining whether your worker is an employee* or an independent contractor is vital, as it determines if taxes should be paid or withheld. Employees will usually split costs with the employer for relevant taxes (Social Security and Medicare). Independent contractors, on the other hand, will usually pay the entirety of the tax. The employee usually pays Federal and State Withholding, Social Security, Medicare, and CA State Disability insurance taxes. The employer usually pays Social Security, Medicare, CA State Unemployment (SUI) and Employment Training Tax (ETT), and Federal Unemployment (FUTA) taxes.
In regards to business and insurances expenses, the employer covers costs for its employees. Independent contractors cover costs of business and insurances expense on their own.
*Regarding corporate officers: the IRS states that “an officer of a corporation is generally an employee, but an officer who performs no services or only minor services, and who neither receives nor is entitled to receive any pay, is not considered an employee”.
Workers’ compensation insurance protects employers from having to pay costs for injuries sustained on the job. This insurance may cover medical bills, lost wages, and legal expenses related to the situation. The costs for workers’ compensation will depend on a number of factors, such as wages and employee types.
So to summarize:
- Make your tax deposits on time.
- Both the employer and employee pay payroll taxes.
- Wages subject to federal employment taxes include all pay given for performed work.
- Having an employee vs. an independent contractor determines whether taxes should be paid or withheld.
- Workers’ compensation insurance helps employers who may have to pay for expenses related to on the job injuries.