Payroll Accounting Fundamentals
Payroll accounting involves bringing together information about the hours your employees work, their hourly wages and their individual tax situations. Payroll accounting can be intimidating for a new business owner but is straightforward once you get the hang of the fundamentals. The best approach to making friends with payroll accounting is to learn the fundamentals step by step.
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Withholding Information
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Each employee should fill out a W4 when he begins working for you, and he should update the information on that form if his tax withholding information changes, such as if he marries or has a child. This form includes information about his filing status such as whether he is married or single, as well as the number of withholding allowances that he believes corresponds with his tax situation. The greater the number of withholding allowances he claims, the less income tax you take out of his paychecks.
Federal Taxes
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To determine an employee's federal tax withholding, first calculate his wages by multiplying the number of hours he worked during the pay period by his hourly rate. Multiply his gross wages by 4.2 percent as of 2011 for Social Security withholding and 1.45 percent for Medicare withholding. Determine his income tax withholding by using the tax tables in your federal employer's tax guide to find the line in the column on the page that corresponds to the information he provided for you on his W4 form.
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State Taxes
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When you start your company and apply for a state business license, the application you fill out will give you the opportunity to register as an employer. Once you do so, your state's industrial insurance and unemployment insurance agencies will send information about tax rates. These rates may change over time if employees make claims against your accounts. Some states allow you to deduct a small percentage of these taxes from employee paychecks. If this is the case, your state agencies will provide this information along with your tax rates. State income tax withholding rates vary from state to state. Check with your state's revenue department about your applicable state income tax.
W2s
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At the beginning of each year you must compile all of your payroll information from the previous year on W2 forms. You send your employees W2s so they can file their personal tax returns. Use W2 forms to provide gross payroll totals as well as total amounts that you withheld through the year for income tax, Social Security tax, Medicare tax, and state payroll tax. Provide copies for your employees by January 31, and mail copies to the Social Security Administration by February 28 or file them online by March 31.
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References
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