Payroll Management Overview

Payroll Management generally includes activities in two major areas, Payroll Accounting and Payroll Administration.

  • Payroll Accounting consists of: 1) calculating the earnings of employees and the related withholding for taxes and other deductions, 2) recording the results of payroll activities, and 3) preparing required tax returns. The definition includes the task of reporting the results of payroll activities to the federal, state and local tax agencies.
  • Payroll Administration deals with the managerial aspects of maintaining a payroll, many of which are distinct from the accounting aspect of payroll. Payroll administration includes:
    • Managing employee personnel and payroll information
    • Compliance with federal, state and local employment laws

Understanding Payroll Management

There are several basic principles to good payroll management.

Generally Accepted Accounting Principles

Generally Accepted Accounting Principles represent the accounting standards that a payroll accountant must follow. These standards play a major role in how the payroll professional accounts for business and payroll transactions.

Internal Revenue Service (IRS) Requirements and Penalties

Employers must comply with a number of employment tax rules and procedures contained in the Internal Revenue Code (IRC). The IRC addresses the following issues:

  • Determining whether the federal tax coverage rules apply.
  • Computing an employee's taxable wages.
  • Calculating the amount of employment taxes to be withheld and paid by the employer.
  • Depositing the correct amount of employment taxes with the government.
  • Filing employment tax returns.

Your Responsibilities

Reporting and depositing payroll taxes to the appropriate agency in an accurate and timely manner is vital to your business. Late or inaccurate deposits may result in penalties and interest charges. These complex payroll tax requirements may seem intimidating but by learning a few simple concepts, you will be able to understand your payroll responsibilities and choose the best method for meeting them.

  • Payroll Management Overview
  • Payroll Management Options
  • Hiring Your First Employee
  • Employers who fail to comply with these requirements may be subject to civil and/or criminal tax penalties.

State and Local Requirements

Most of the 50 states require that state income taxes be withheld on employee earnings in the state in which they work. States which do not have state income tax are:

  • Alaska
  • Florida
  • Nevada
  • New Hampshire
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

Calculating and reporting tax withholding amounts requires familiarity with the laws of the state(s) in which your company operates. Check with your state for exact withholding requirements.

Some local entities (city, county, parrish or school district) also have withholding and reporting requirements. Like the states, most local entities that require reporting and withholding have patterned their laws after federal tax codes.

Avoiding Common Pitfalls

Whether you calculate your payroll yourself, have it done by an accountant, or use an outside service, federal and state laws dictate that reporting and payment of all payroll taxes are the employer's responsibility. Timeliness and accuracy are of utmost importance, so the method you choose for doing payroll is a vital business decision. Reliable software will help you make accurate calculations, but you still have to ensure that deposits are made on time. A reputable payroll service will generally make deposits for you and will share your liability for penalties if errors occur.