Demystifying Payroll Processing: From Salaries to Payroll Taxes

💰There are two basic types of compensation: salaries, based on an annual rate of pay, and wages, based on an hourly rate multiplied by hours worked.

📋Payroll deductions may include government-required amounts, such as Federal Insurance Contributions Act (FICA) tax, as well as other withholdings for federal, state, and city income taxes.

💸Each paycheck shows the employee's gross earnings, deductions, and net pay, which is the result after subtracting total deductions from gross earnings.

📆Employers are required to prepare and submit Form W-2, which reports employees' earnings, taxes withheld, and benefits received. Additionally, they may have to file Form W-3, a company-wide summary of all issued W-2 forms.

🔒Internal controls play a crucial role in payroll processing by ensuring that the right people are paid the right amount and reducing the risk of errors and fraud.

What are the two basic types of compensation?

—The two basic types of compensation are salaries and wages. Salaries are based on an annual rate of pay, while wages are based on an hourly rate multiplied by hours worked.

What are some examples of payroll deductions?

—Payroll deductions may include government-required amounts, such as Federal Insurance Contributions Act (FICA) tax, as well as withholdings for federal, state, and city income taxes. Other deductions can be for health insurance, life insurance, charitable contributions, union dues, and retirement contributions.

What is net pay?

—Net pay is the amount an employee receives on their paycheck after subtracting total deductions from their gross earnings.

What is Form W-2?

—Form W-2 is a form that employers are required to prepare and submit to the federal and state tax agencies as well as the employee. It reports the employee's earnings, taxes withheld, and benefits received during the year.

Why are internal controls important in payroll processing?

—Internal controls are important in payroll processing to ensure that the right people are paid the right amount and to reduce the risk of errors and fraud. They help maintain accuracy, security, and compliance with legal and regulatory requirements.

00:00The video introduces the topic of payroll processing and the importance of determining the nature of each employee's compensation.

01:36The video explains the computation of payroll deductions, including government-required amounts and other types of withholdings.

03:52The video highlights how each paycheck reflects the employee's gross earnings, deductions, and net pay.

05:42The video discusses the preparation of payroll records, including the payroll register and forms like Form W-2 and Form W-3.

06:20The video emphasizes the importance of internal controls in payroll processing, including pre-approval of transactions and limited access to payroll records.