Payroll and taxes can be complex areas of business that employers struggle with daily. Payroll processing and tax management should not be a tedious, frustrating process. Your time is valuable, so here are a few taxes and payroll basics, specifically in regard to payroll and income taxes.
The main difference between payroll tax and income tax is essentially what the taxes fund. For example, income taxes are collected by a general government fund, whereas payroll taxes go to Social Security and Medicare funds.
Payroll tax is a flat-rate tax withheld from an employee’s gross wages and an employer’s matching withholding and are used to fund Social Security and Medicare programs, such as retirement, disability, healthcare, hospice, and survivor of deceased worker benefits.
Calculating payroll tax: If an employee earns $500 in gross wages, an employer will withhold $38.25 (calculated by multiplying $500 by 7.65% (0.0765)) from their paycheck. The employer also needs to contribute $38.25.
Social Security tax is 6.2% and Medicare tax is 1.45%. However, unlike Social Security tax, Medicare does not limit its tax through wage limitations. This means that if an employee earns wages above the Medicare tax threshold, an additional 0.9% of their wages must be withheld. Conversely, employer contributions remain static at 1.45%.
Income tax is an amalgamation of federal, state, and local income taxes directed by a progressive tax rate to fund public services, such as defense, education, and transportation.
Federal income tax is dictated by an employee’s Form W-4, which indicates filing status, dependents, and other withholding requests. Federal income tax uses the IRS Publication 15 guideline, which provides percentage and wage bracket tax withholding tables to determine appropriate income tax deductions.
State income tax functions similarly to federal income tax but can have either a flat or a progressive rate.
Local taxes may require a flat, progressive, or dollar-amount rate. To determine this tax, you must reach out to your locality for more information.
Best Practices for Taxes
Invest in payroll software. Payroll software typically streamlines payroll processing through features specifically designed to track, manage, and audit payroll services. A payroll software adds benefits, such as:
- Eliminates manual entry
- Reduces human error
- Condenses paperwork
Explore a PEO. A professional employer organization (PEO), like VensureHR, provides payroll services, including, but not limited to:
- Preparing, filing, and settling payroll taxes
- Issuing payroll checks and/or direct deposits
- Unlimited, customizable reporting
- Distributing annual W-2s
- Managing garnishments and unemployment claims
- Tracking employee paid personal and sick leave
Additionally, PEOs offer more than just payroll services. For example, VensureHR has dedicated HR, employee benefits, workers’ compensation, and safety and risk management teams to provide top-tier industry services, customer service, and resources and tools for businesses to continue their success. PEOs improve business efficiencies by handling mundane but necessary administrative tasks that take up business owners’ precious time to develop and grow their business. Most PEOs are equipped with advanced technology software and systems to ensure smooth integrations, user-friendly processes, and easy-to-navigate user portals. PEO services also add value to employees through unique benefits, such as identity theft protection, pet insurance, car rental discounts, and more.
If you are experiencing payroll issues or looking for alternative solutions to streamline your payroll processing, please contact VensureHR. Our team of payroll specialists will be more than happy to assist in finding payroll services tailored to your business needs.