The Anatomy of a Payroll Service
March 19, 2016
Many people are not really aware of the complexity of what it takes to keep track and submit the proper amounts of taxes to various government entities in regards to payroll taxes.
Primarily the federal income taxes, FICA and Medicare taxes, and state income taxes are withheld from employees paychecks and the are submitted to the various government entities.
FICA stands for the Federal Income Contribution Act, which is the contributions for Social Security. The employee has a portion taken from their pay and the employer has to match it.
Income tax withholdings, both Federal and State are withheld also and submitted to the proper departments as well. All of these figures have to be tracked and matched up, and they must be accurate.
In addition to the taxes that are withheld, an employee’s portion of a health insurance plan is usually taken from hie or her paycheck as well. There may be a host of other withholdings that can be included such as 401(k) contributions, supplemental insurance, and other contributions to various areas.
Back in the day, before the onslaught of taxes and all of the other items that employees could purchase, it was fairly easy to handle one or two of these items by hand, but it is not possible now, and everything is computerized. The process was easily handled in house by a bookkeeper, and everyone was happy.
Now it is much cheaper to hire a payroll service to handle this chore, as they are set up to handle any variation possible that could come up. Of course, computerization has made it much easier. Frankly, without computers, it would be impossible to handle all of the nuances that come up during the process.
Employees come and go, and changes and adjustments have to be made in the payroll process for that individual. All of the major payroll companies have systems that allow for these changes and adjustments on the fly, so to speak. Usually it is just a matter of an email or a software messaging function on the software of the payroll service company.
The tax agencies appreciate these services for payroll processing because they are infinitely more accurate that when they used to be done by hand. Not only are they more accurate, they also provide for automatic payment, as the withheld amounts for taxes and such can be direct deposited as they are withheld.
The computer allows for repetitive functions over and over again, which is pretty much what payroll is over time. If a person is earning a specific salary, he or she will have certain deductions that don’t change, unless they leave, or change their tax status or deductions.
The whole system is very automatic and is really cheaper for the employer than hiring a person to do this job by hand. When you factor in taxes and benefits for an extra employee to just do payroll, it gets very expensive compared to the fee to the payroll company to do the same job.