Overview of Payroll and Taxes
A payroll liability includes wages, salaries, and other compensation amounts that employers owe employees, government agencies, and other organizations. A business's current liabilities arise from salaries that have been earned by an employee but are unpaid at the end of a reporting period. This is primarily because of differences in the timing of the pay cycle and the accounting period. A business must also record and report accrued but unpaid benefits such as vacation and the costs for fringe benefits such as retirement programs and health insurance coverage. In addition, salaries (fixed regular pay) and wages are subject to a variety of taxes, such as income taxes, Social Security taxes, and state unemployment taxes. Employers are obligated to remit these kinds of deductions to government agencies and other organizations on behalf of employees. The deductions are current liabilities until the company remits them.
As payroll is subject to a variety of taxes, employers pay some of the taxes, and employees pay some others. In the United States, payroll tax is employee and employer tax related to payroll and may include federal or state income taxes, Social Security taxes, and unemployment taxes. The Federal Insurance Contributions Act (FICA) is a law requiring each employee to pay into Medicare and Social Security through employee payroll deductions called FICA taxes. Employers must pay matching FICA taxes through the payroll process. In addition, the Federal Unemployment Tax Act (FUTA) is a law under which employers must pay unemployment taxes as part of payroll taxes. All states also require employers to pay unemployment taxes as part of payroll taxes in accordance with the State Unemployment Tax Act (SUTA). Every year, employers must prepare and submit Form W-2 to the federal and state tax agencies and to their employees. The W-2 reports the taxable income for the employee and also lists benefits the employee received during the year.
Employee Fringe Benefits
Base salary is normally a starting point for most businesses when determining the total compensation packages for their employees. In addition, paid vacation, health and life insurance, and employee pension plan benefits can be part of an employee's compensation package.
Paid vacation time earned by employees is calculated based on an accrual rate, or the number of hours, days, months, or years of service an employee has acquired. Depending on the compensation arrangement, an employer may also cover part or all of the costs for providing pension benefits as well as health, dental, and life insurance benefits. These costs along with base salary and wages represent payroll-related expenses and would be current liabilities for the company until they are paid during the current year.
In summary, the total compensation package might typically include salary and wages, employer payroll taxes, and insurance premiums for active employees, as well as costs associated with providing pension benefits.
Payroll and Payroll-Related Costs per Month Period
Payroll and Payroll-Related Costs
|Unemployment tax payable||$1,500|
|Health and life insurance benefits||$6,500|
|Pension plan contributions||$12,000|