Definition: The administration of the financial record of employees’ salaries, wages, bonuses, net pay, and deductions.
An employer, regardless of the number of workers they employ, must maintain all records pertaining to payroll taxes (income tax withholding, Social Security, and federal unemployment tax) for at least four years after the tax becomes due or is paid, whichever is later. Altogether, 20 different kinds of employment records must be kept just to satisfy federal requirements.
Income Tax Withholding Records
- Name, address, and Social Security number of each employee
- Amount and date of each payment for compensation
- Amount of wages subject to withholding in each payment
- Amount of withholding tax collected from each payment
- Reason that the taxable amount is less than the total payment
- Statements relating to employees’ nonresident alien status
- Market value and date of noncash compensation
- Information about payments made under sick-pay plans
- Withholding exemption certificates
- Agreements regarding the voluntary withholding of extra cash
- Dates and payments to employees for non-business services
- Statements of tips received by employees
- Requests for different computation of withholding taxes
Social Security (FICA) Tax Records
- Amount of each payment subject to FICA tax
- Amount and date of FICA tax collected from each payment
- Explanation for any difference
Federal Unemployment Tax (FUTA) Records
- Total amount paid during calendar year
- Amount subject to unemployment tax
- Amount of contributions paid into the state unemployment fund
- Any other information requested on the unemployment tax return
Payroll for a small firm is a simple task with a good one-write system. Any office supply store can show you samples of one-write systems, which most accountants recommend because they reduce errors and save time in making payroll entries.
Payroll management can be quite a challenge for the new business owner. There are many federal and state laws regulating what you have to track related to payroll. Failure to do so could result in heavy fines–or worse.
Many business owners use outside payroll services. These companies guarantee compliance with all the applicable laws. This keeps the business owner out of trouble with the law and saves time that can be devoted to something else in the business. If you choose to do your own payroll, it’s recommended that you purchase an automated payroll system. Even if the rest of your books are done manually, an automated payroll system will save you time and help considerably with compliance.