The Composition of US Payroll Introduction
The payroll of employees of U.S. companies is governed by federal, state, and local regulations. It is generally comprised of gross income before taxes, federal and state personal income taxes, social security taxes and Medicare taxes, disability insurance, net income, etc. The following is a detailed description of each component, frequency of payroll, payroll taxes, and Form W-2.
- Composition of payroll
Payroll is generally composed of gross income, payroll deductions, federal and state personal income taxes, social security taxes and Medicare taxes, disability insurance, and net income. Gross income is the total payment received by the employee before any deductions or taxes are taken out and includes any other type of earnings that an employee may have. For example, holiday pay, vacation or sick pay, bonuses, and any miscellaneous pay that the employee may receive.
Payroll deductions are a variety of voluntary deductions that can be taken from an employee’s gross pay, some of which are taken on a before-tax basis and some of which are taken on an after-tax basis. Pre-tax deductions are deducted from an employee’s gross pay and are then taxable. They include such deductions as deductions for health, dental or life insurance, certain retirement accounts, or deductions for FSA or HSA accounts.
Payroll taxes consist of federal and state requirements for employers to withhold various types of income taxes and payroll taxes. The payroll tax is used to support Social Security and Medicare costs, while the income tax is used for other federal and state programs.
Net pay is the total amount that an employee receives after all required and voluntary deductions are taken.
The standard payroll also includes a person’s total hours of work, pay periods and dates, company information, payroll information, sick pay, maternity pay, payroll record keeping, overtime, vacation leave, severance pay, minimum wage, etc.
- Frequency of payroll
Companies usually process payroll on a regular basis. This interval varies from company to company and may vary with the different types of employees within the company. According to a study conducted by the U.S. Department of Labor and the Bureau of Labor Statistics in February 2019, the 4 most common payroll frequencies are weekly, biweekly, semi-monthly, and monthly.
- Composition and rates of payroll taxes
Payroll taxes are an important part of the payroll. The rules vary from state to state. This section explains further using the federal and California as examples to further explain.
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Federal and State Payroll Taxes
On the federal level, employers are required to withhold and pay federal income tax, social security tax, and Medicare tax from their employee’s paychecks to the federal tax authorities. The employer is also responsible for paying the appropriate amount of Social Security and Medicare taxes to the Internal Revenue Service on behalf of the employee.
On the California state level, employers are required to report all employee wages to the EDD (Employment Development Department) each calendar quarter. With the exception of some employers of household workers, all other employers are required to make regular State Disability Insurance (SDI) and California Personal Income Tax (PIT) withholding contributions for their employees. The frequency of the employer deposit schedule depends on the employer’s federal deposit schedule and the amount of PIT withheld. At the same time, new employers in California pay a 3.4% unemployment insurance (UI) tax and 0.1% employment training tax (ETT) on the first $7,000 of each employee’s wages (also the first $7,000 of wages). Although the new employer’s UI tax rate does not change for the first three tax years, if the new employer has a negative reserve account balance, the new employer’s ETT rate after the first year maybe 0% (zero). For information on how to determine the UI rate, see DE231Z, Information Sheet: California Experience Rating System. The SDI rate may change each year. Registration forms can be downloaded from EDD’s website.
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Relevant tax rates
If the employer issued required information returns, the section 3509 rates are the following:
- For social security taxes: employer rate of 6.2% plus 20% of the employee rate of 6.2%, for a total rate of 7.44% of wages.
- For Medicare taxes: employer rate of 1.45% plus 20% of the employee rate of 1.45%, for a total rate of 1.74% of wages.
- For Additional Medicare Tax: 0.18% (20% of the employee rate of 0.9%) of wages subject to Additional Medicare Tax.
- For federal income tax withholding, the rate is 1.5% of wages.
If the employer didn’t issue required information returns, the section 3509 rates are the following:
- For social security taxes: employer rate of 6.2% plus 40% of the employee rate of 6.2%, for a total rate of 8.68% of wages.
- For Medicare taxes: employer rate of 1.45% plus 40% of the employee rate of 1.45%, for a total rate of 2.03% of wages.
- For Additional Medicare Tax: 0.36% (40% of the employee rate of 0.9%) of wages subject to Additional Medicare Tax.
- For federal income tax withholding, the rate is 3.0% of wages.
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- Form W-2, Wage and Tax Statement
Form W-2 is the wage and tax statement issued by the employer to the employee. Whether you are a part-time or full-time employee, you will receive a W-2 as long as you have a salaried income and an employment relationship with your employer. The IRS requires employers to issue a W-2 form by January 31 of the following year, after the tax year, and the W-2 form includes basic information, income, federal tax-related information, state tax-related information, and local tax-related information.
- Basic Information: This includes basic information about the employer (employer identification number, name, address, etc.) and basic information about the employee (social security number, name, and address, etc.).
- Income and Federal Tax-Related Information: This section includes federal taxable income, federal income tax withholding, Social Security wages, Social Security taxes, Medicare payroll, Medicare taxes, tipped income subject to Social Security taxes, employer-assigned tipped income, dependent benefits, and other information items.
- State tax-related information: includes the name of the state, the employer’s state tax number, state income tax wages (the tax base for state income tax), and state income tax.
- Local tax related information: including local income tax salary (tax base of local income tax), local income tax and location name.
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Reference:
https://en.wikipedia.org/wiki/Payroll
http://www.taxes.ca.gov/Payroll_Tax/reportingbus.html#Payroll Publication 15 (Circular E)~P12-13
http://www.taxes.ca.gov/Payroll_Tax/reportingbus.html#Payroll
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