Payroll Tax: A Brief Knowledge

Payroll Tax is the tax which the employers have to deduct and withhold from the salary of the employees. The deduction of the Payroll Tax amount depends on the employee’s salary and the state law and rule of Payroll Taxes.

The net salary of the employees will be calculated by deducting the various Payroll Taxes from their gross salary.

The formula used for calculating the net pay of an employee is,

Employers Gross Salary – Payroll Tax Deductions = Employers Net Salary

As per the rules and law of the state, the employer will calculate and deduct and withhold the various Payroll Tax percentage amounts and submit them to the respective tax agencies.

Generally there are 2 types of Payroll Tax Deduction system. They are,

  1. Legal Deduction System, and
  2. Voluntary Deduction System.

Legal Deduction System:

Here the employer himself will deduct the tax amount from the employee’s salary as per the rule and submit directly to the tax agency.

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Some of the tax deductions according to this system are as follows:

  • Social Security Tax,
  • State Income Tax,
  • Federal Income Tax,
  • Medical Care Tax,
  • Miscellaneous Tax like state disability tax, unemployment insurance tax, school tax, etc.

 Voluntary Deduction System:

As the name implies, the Payroll Tax deduction will be on the employees own interest. The employee can select any of the schemes available in the organization to obtain its benefits.

Depends upon the scheme or plan selected the Payroll Tax will be deducted from the employee’s salary as per rules and norms. Some of the plans the employees can obtain for voluntary Payroll Tax deduction are as follows:

  • Life Insurance Plans or Premiums,
  • Pension Plans,
  • Health Insurance Plans or Premiums,
  • Retirement Plans or Schemes,
  • Stock Purchase Plan of the employee
  • Miscellaneous deductions like Dress/Uniforms, Union Committee dues, Food, etc.

Apart from the employee’s contribution in the Payroll Tax, the employers are also contributing in this Payroll Taxes. The employers will pay a certain amount to the tax agency on behalf of the company as a whole. Some of the Payroll Taxes which the employer has to contribute are,

  • Medical Care Tax,
  • Federal Unemployment Tax,
  • Social Security Tax, and
  • State Unemployment Tax.

Both the employee and the employer should be highly responsible in paying their Payroll Taxes on time. In this the main role is for the employer because he is the person who has to deduct the employees Payroll Tax amount correctly as per the rules and regulations and should pay his part of Payroll Tax together.

Hence the employer should report the Payroll Tax responsibility to the agencies in correct time without fail. Mostly the requirements or documents needed during the tax submission are,

  • Wages and the Tax report,
  • Federal Tax Deposit report,
  • Annual return of the Federal Income Tax Report,
  • Employers and Employees Quarterly Payroll Tax Report,
  • Annual Unemployment Tax Report, etc.