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This section of payroll accounting focuses on the amounts withheld from employees' gross pay.
Payroll withholdings include:
Employee portion of Social Security tax
Employee portion of Medicare tax
Federal income tax
State income tax
Court-ordered withholdings
Other withholdings
1. Employee portion of Social Security tax
A key component of payroll accounting is the Social Security tax. (The Social Security tax along with the Medicare tax make up what is referred to as FICA.) Social Security tax is withheld from an employee's salary or wages and the employer is also required to pay a Social Security tax. In other words, the employer is responsible for remitting to the federal government both the employee and the employer portions of the Social Security tax.
2. Employee portion of Medicare tax
Medicare tax is also withheld from an employee's salary or wages and the employer is also required to pay a Medicare tax. In other words, the employer is responsible for remitting to the federal government both the employee and the employer portions of the Medicare tax. As a result, Medicare tax is both an employee withholding and an employer expense. (The Medicare program helps pay for hospital care, nursing care, and doctor's fees for people age 65 and older as well as for some individuals receiving Social Security disability benefits.)
3. Federal income tax
Another part of payroll accounting involves the employees' federal income tax. An employer is required to withhold the federal income tax that an employee is expected to owe based on salaries or wages. The amount withheld, however, is rarely the exact amount of income tax that the employee will owe to the government. The employee's year-end income tax return will dictate the exact amount owed for the year, meaning the employee will either pay in a little more in taxes, or will receive a tax refund.
4. State income tax
In most states payroll accounting will involve a state income tax. In those states an employer is required to withhold the state income tax that an employee is expected to owe based on salaries or wages. Like its federal counterpart, the amount withheld is rarely the exact amount of income tax that the employee will owe to the state government. (It should be noted here that some states do not levy a personal income tax.)
5. Court-ordered withholdings
Payroll accounting also involves withholdings for items other than payroll taxes. For example, courts of law may order employers to garnish (withhold money from) an employee's salary or wages for purposes such as paying child support or repaying debts.
6. Other withholdings
In addition to the mandatory withholdings that an employer makes for taxes and court orders, payroll accounting often includes amounts that employers may be willing to withhold at the direction of its employees.
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