Payroll

If you have employees, you will be obliged to withhold, and pay,  federal, state, and perhaps local, income taxes.  These are directly  related to the type, and amount, of earnings your employees achieve.

There are certain elements of record keeping that must be obtained.   First, you will have to track employees' name, address, and social security number.  You will also need to record all payments of  wages, including the date paid, and the period for which the amount  was paid.  In addition, the amounts of taxes collected, and the  dates, must be maintained.

Each employer must have a federal identification number.  In addition, a state number may also be required.

Employees fill out  exemption certificates, known as a W-4.  These must be retained by  the employer, and deductions are then based on the calculations made  on the form.

Employers are also responsible for the collection, and payment of FICA (Social Security), and FUTA (Federal Unemployment Tax Act),  taxes.  Federal Tax rates, including income withholding, FICA, and FUTA, are  provided within the Department of the Treasury's Circular E, the  Employer's Tax Guide.  The taxes are based on earnings, and may have limits.  Some are paid by the employee, others by the employer, and  some by both.

Taxes must be collected at each pay period.  When they reach the  limits specified in the Circular E, they must be deposited in a  Federal Reserve Bank, or an authorized commercial bank.  The limits,  and time frames, are also described in the Circular E, and change  from year to year.

While some states do not tax income, most do have regulations in  place, published within their own documents.  These taxes must be  collected, and deposited, in accordance with the state guidelines.

A Payroll accounting system must first calculate the gross pay of  employees.  This may be based on hourly wages, commissions, and/or  a salary.  Many employers have incentive programs that provide extra  income to their employees.  The total compensation is known as the  gross pay.  The taxes, and other monies withheld from the gross pay,  are known as deductions.  The amount actually received by the  employee is the net pay.  The accounting system must calculate each  of these, for each employee, and maintain records of all amounts.

At the end of the year, each employer must provide every employee  with a W2, which is a summary of wages paid, and taxes withheld.  A copy is also filed with the state, and IRS.  The employee must file  copies of the W2 with their personal income tax return.

Other  documents are required by the state and federal governments when  making deposits of taxes, and for quarterly progress reports.

Accurate payroll tracking is crucial for small businesses, because  this is the one area of accounting that is monitored most closely,  and on a very regular basis.