How Do Payrolls Work?
Payroll is usually created by an account that provides accounting services in Malaysia. It typically involves a system and it entails everything from the payment of employees to the filing of employment taxes. The details that are outlined usually include the wages, the number of hours, withholding taxes, tax deductions, and paying the employees taxes to the local government.
The system stars immediately when a company hires an employee. Now, depending on your country, there will be some slight differences in the way the payroll system works.
In the United States, for example, an employee is required to fill out a W-4 Tax form. This form will determine the allowances that every employee will qualify for when they are set to calculate their federal income tax. Basically, the more dependents the employee has, the less income they are required to pay.
The payroll system requires that the W-4 tax form, as well as other pertinent documents, should be kept in a file for at least 4 years even after the termination of the employee or if the worker decides to quit.
The accountants that will handle the payroll is also tasked to keep track of all of the employees’ important information, which includes their bank information, personal information such as address and number of dependents, and many more. All of this information should be highly classified and the people who are going to work on the payroll are the ones who have sole access to them.
The payment and withholding of taxes are two of the most important responsibilities that a payroll system must take into account. There are certain differences when it comes to individual countries, but for context, we will just look at the American system.
In the United States, these are the major withholdings that are required by the Federal government:
- Social Security Tax
- Federal Income Tax
- Medicare Tax
- State and Local Income Taxes
Keep in mind that whenever an employer decides to withhold an employee’s taxes from their paycheck, they will act as the trustee for the funds that are withheld until such time that they are paid in full to the Internal Revenue Service, Social Security Administration, and other government agencies that are involved in this matter.
To avoid the confusion that is associated with withholding taxes, all of the taxes that are withheld are usually placed in a trust fund or a separate bank account.
What about Medicare and Social Security Withholdings? Well, if the time has come to pay it, the employer is mandated to match the employee’s contributions. The employer is also required to pay state and federal unemployment taxes as well.
Other deductions, contributions, and withholdings that can safely be subtracted from an employee’s gross wages include:
- Retirement fund contributions
- Health or Life insurance premiums
- Sick days
- Vacation days
- Workman’s Compensation
- Union Dues
- Child Support payments
- Employee Loans
- And many more
By the end of the year, an employer who makes use of the payroll system are required to provide summarized information of all of their employees’ wage and withholding information and put it in a W-2 form (for full-time employees) or a 1099 form (for contract or temporary workers).