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What Is Payroll?

The sum total of all compensation that a business must pay to its employees for a set period of time or on a given date. Payroll is usually managed by the accounting department of a business. Small-business payrolls may be handled directly by the owner or an associate.

If you have ever received a paycheck, then you have probably noticed that a portion of your pay is taken out for various taxes. What you might not know is that your employer pays taxes on your wages as well - out of their own pocket. These taxes are called payroll taxes.

The payroll tax is a multitude of taxes that are paid by the employer and in some cases, withheld from an employee's paycheck. The employer then remits these taxes to the appropriate tax authority.

There are numerous types of payroll taxes, including :

Types Of Payroll Taxes :

The appropriate amount to be withheld from an individual's paycheck depends on their gross wages, where they reside, and where they work. Let's briefly explore each of the payroll taxes.

Federal Income Tax :

Federal income tax withholding is withheld per IRS tables in publication 15. When you are hired, you fill out a form called a W-4. This indicates to your employer how many allowances you wish to claim. The employer takes this information, along with your wages, and looks up in IRS publication 15 how much in federal income taxes to withhold from your paycheck.

Social Security and Medicare Tax :

Combined, the Social Security tax withholding and Medicare tax withholding are known as FICA (Federal Contributions insurance Act). In 2014, the tax responsibility for individuals is 7.65%; 6.20% is Social Security tax, the remaining 1.45% is Medicare tax. The employer responsibility is also 7.65%. However, the Social Security tax has a wage base limit, and in 2014 that limit is $117,000. The wages over $117,000 are not taxed with the Social Security tax.

Additional Medicare Tax :

The additional Medicare tax withholding is levied only on employees earning more than $200,000. This tax began in 2013, and is 0.9%, paid by the employee.

State Income Tax :

State income tax withholding, if applicable (some states do not have a state income tax), is withheld in a similar manner as federal income tax withholding.

Local Tax :

Various local tax withholdings, if applicable, are withheld if required by the local tax authorities. Examples of various local tax withholdings include city income taxes and school district income taxes.

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