Accounting concepts and applications

Accounting

Payroll deductions and other tax benefits have been a very contentious issue of late for many Americans. Employers in particular are clamoring for payroll and corporate tax reform to spur hiring and generate job growth in America (Steven, 2006). Payroll deductions in particular contribute to the growing disparity between the wealthy and the poor. Payroll deductions are amounts withheld from an employee's wages. Reductions affect gross income, deductions do not. In many instances deductions can be classified as either mandatory or voluntary. Below is a list of mandatory payroll deductions provided by the federal government.

Mandatory Deductions

Description and Requirements

Federal Income Tax

Determine amount of withholding from employee signed federal W-4 form (Employee's Withholding Allowance Certificate).

Industrial Insurance (Medical Aid)

State tax for industrial insurance benefits program.

Administered by the Department of Labor and Industries (L&I).

Old Age and Survivors Insurance (OASI) and Medicare

OASI is a federal employment tax for retirement, survivors, and disability benefits. Matching contributions are required from both employees and employers.

The Medicare federal employment employee and employer matching tax supports federal health insurance.

Furthermore, payroll deductions can be separated into two forms of withholdings which include statutory and voluntary withholdings. Statutory are required by law. It is the employer's responsibility to uphold this required by deducting various amounts and distributing them to the appropriate tax authorities (Kennedy, 2006). The company is also responsible for paying its share of payroll taxes, preparing appropriate reconciliation reports, filing tax returns, and so forth. It is also the employer's responsibility to account for employee gross pay while subtracting an mandatory or voluntary payroll deductions. Many employers use a simple formula to calculate net pay. The formula is as follows:

Net Payment Calculation:

Employee's gross pay = (pay rate times number of hours worked)

minus Statutory payroll tax deductions minus Voluntary payroll deductions

= NET PAY

As mentioned above employers are also required to report payroll tax obligations in accordance with federal and state law. Below is a list of following responsibilities on the part of the employer.

Federal tax deposits

Annual federal unemployment tax return (Form 940 or 940EZ)

Employer's quarterly payroll tax return (Form 941)

Annual Return of Withheld Federal Income Tax (Form 945)

Wage and Tax Statements (Form W-2)