A payroll withholding system exists as a method of collecting payroll taxes, union dues, pension plan contributions, retirement contributions, child support payments, plus other amounts that are to be withheld from one's paycheck. Payroll withholdings occur in both employer-employee and independent contractor relationships. Payroll withholdings involve a legal liability with strict consequences for noncompliance.
The payroll withholding system involves gross pay (hours times pay rate) being decreased by deductions from the pay. These deductions (withholdings) include payroll taxes and other contractual obligations that the employer is required to withhold. The withheld payroll taxes are based upon the earnings and number of income tax exemptions claimed by the employee. All withheld funds are a liability on the employer's books until they are submitted to the proper entity.
It is important to realize that within the definition of a payroll withholding system falls the fact that the system is highly regulated with severe legal implications for noncompliance. Payroll taxes are regulated by the federal government (IRS in U.S.), while other withholdings are regulated by the appropriate entity (such as pension plan or insurance policy). Failure to do comply with these contractual requirements will could result in penalties and interest, plus possibly an audit.
The definition of a payroll withholding system can benefit employees by helping them understand all that is involved regarding their paycheck. Employees can also benefit by adjusting their payroll tax withholding, by changing their exemptions. Employers are benefiting since they are in compliance with contractual and/or legal obligations. They also benefit by implementing and maintaining a reliable and efficient payroll record keeping system. This provides good audit prevention along with aiding the payroll processing.
An important item to consider regarding the definition of the payroll withholding system is the fact that it puts the employer in the position of operating as a collection agency. This is because the employer has withheld amounts, has control over them, but does not legally own them. The employer is holding the money for an outside entity. Plus, the employer is responsible for maintaining proper record keeping of these amounts. These funds are a liability on the company's books until they are submitted to the proper entity.
Time is of the essence when discussing the definition of a payroll withholding system. Payroll withholdings are processed according to when the employer's payroll period is (daily, weekly, bi-weekly, monthly). Employers are responsible for withholding amounts at that time, holding them in a current liability account, and then submitting them to the appropriate entity at time intervals that are stipulated in the individual contracts, policies, or IRS publications. If these time requirements are not met, punitive measures will be taken.