An employer's
obligations
An employer has many obligations related to their payroll.
Below are some basic payroll topics you need to understand in order to
process a payroll.
FLSA
An important task involves complying with regulations
established by the Fair Labor Standards Act (FLSA), also known as the
Federal Wage and Hour Law.
FLSA is designed to protect employee rights. Here are
a few of the things it covers: the federal minimum wage requirement;
definition of "what are wages?"; establishment of regulations
on overtime pay and on equal pay for equal work; establishment of laws
governing tips and tipped employees.
Who are employees?
Generally, employees come under two categories -- common
law and statutory employees.
- Common law employees
Anyone who performs services is an employee if you, as the
employer, control what will be done and how it will be done.
You have the legal right to control the method and result of
the services, even when you give the employee freedom of action.
Generally, people in business for themselves are not employees,
such as doctors, lawyers, and construction contractors.
- Statutory employees
Someone who works for you and is not an employee under the common
law rules for federal withholding.
Wages and other compensation
Wages generally include all pay you give an employee
for services performed. The pay may be in cash or other forms. It includes
salaries, vacation pay, sick pay, commissions, bonuses, and fringe
benefits. Wages and other compensation are generally subject to employment
taxes.
Many benefits that an employer provides to employees
are also subject to employment taxes such as cafeteria plans, pension
and annuity plans, dependent care programs, stock options, and achievement
awards.
Pay Frequencies
A payroll is prepared at the end of an established pay
period. An employer must establish how often the employees are to be
paid. This could be anything from a daily frequency to annually. An
employer may also elect to pay some of the staff weekly and some people
semi-monthly, or with any other combination of pay frequencies.
At the end of each pay period, an employer must gather
all information necessary to prepare a payroll for the pay period.
This procedure may include (but isn't limited to) totaling each employee's
timecard to find the hours worked for the pay period. It may also include
other documents the employer establishes for rate changes, address
changes, other types of pay, and other factors.
Today an employer has various methods they may use in
the actual preparation of payrolls.
Employee paid taxes
Most employers are required to withhold specific employment
taxes from an employee's pay, including:
- Federal income tax
The IRS provides different withholding methods that an employer
can choose from. The amount that an employer withholds is
based on information that an employee reports on Form W-4, Employee's
Withholding Allowance Certificate for marital status,
number of allowances, and exemptions.
- Social Security and Medicare taxes (FICA)
The Federal Insurance Contributions Act (FICA) provides a federal
system for old-age, survivors, disability, and hospital insurance.
Employees are required to contribute a percentage of their wages
to support the financing of this system. These benefits, with the
exception of hospital insurance, are supported by the social security
tax. The Medicare tax supports the hospital insurance benefit.
One amount may be deducted from an employee's pay to cover both
portions. Each of these taxes are reported separately.
- State and local income tax
An employer must withhold income tax as specified by each state
or locality requirement.
- State Unemployment Insurance
Some states require that an amount be deducted from an employee's
pay to cover the costs and benefits of the state's unemployment
compensation program.
- State Disability
Some states require an amount to be deducted from an employee's
pay to cover the costs and benefits of the state's disability program.
Employer paid taxes
An employer is required to pay the following employment
taxes:
- Social Security and Medicare (FICA)
Employers also contribute a segment of the social security
and Medicare taxes to be paid to the IRS (the concept of
employers simply "matching" employee contributions
is a fallacy). A business is liable for the entire tax due,
regardless of the amount actually withheld from employees.
So, the total liability is calculated, the amount collected
from employees is subtracted, and the remaining amount is
the employer's portion.
- Federal Unemployment Insurance
The Federal Unemployment Tax Act (FUTA), in conjunction with
state unemployment insurance programs, provides payments to workers
who lose their jobs. An employer is required to pay a federal unemployment
tax as well as a separate state unemployment tax. The federal unemployment
tax is strictly an employer paid tax to help finance administrative
costs and state programs as needed.
- State Unemployment Insurance
The state unemployment insurance program pays the actual benefits
to unemployed workers. An employer is required to pay a state unemployment
insurance tax . If the state fund is depleted, the state may borrow
from the federal government (hence, FUTA tax).
- State Disability
A few states require that an employer contribute to a state
mandated disability program. These contributions are normally paid
quarterly with a state return.
Payroll tax deposits and
returns
Employers must deposit taxes and file many returns
and reports. Payroll reporting requirements are often complex and
confusing and employers must be alert to the different rules. The
timely deposit of taxes and the accurate and thorough preparation
of returns is essential to an employer's compliance procedures. Otherwise,
an employer can easily incur a costly penalty.
Tax deposits
An employer is responsible for depositing taxes deducted
from an employee's pay and employer paid taxes based on deposit schedules.
Federal taxes, which include federal income tax and
both the employer and employee social security and Medicare tax amounts,
must be deposited into authorized financial institutions or a Federal
Reserve Bank.
Federal unemployment and state unemployment taxes (both
employer and employee amounts) are typically paid quarterly.
State and local income tax amounts are usually paid
directly to the state or local taxing agency. State disability amounts
can be paid to the state agency in conjunction with either the state
income tax or state unemployment tax, depending on the state's requirements.
Tax returns
- Federal Income Withholding, Social Security and Medicare
taxes
Employers are required to report these taxes and wages separately
on Forms 941 (Employer's Quarterly Federal Tax Return) and Form
W-2 (Wage and Tax Statement).
- Federal Unemployment tax
Employers must report FUTA taxes and wages on Form 940 (Employer's
Annual Federal Unemployment Tax Return).
- State Unemployment Insurance Tax
Employers are required to report state unemployment taxes and
wages on the state-specific form.
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