What is Payroll and Payroll Tax?
Payroll is nothing but a paysheet that includes the sum of all financial records of Salary of an employee such as wages, bonuses, and deductions. Payroll Tax is one type of tax which is levied by Government of India on the payroll of an employer. In this tax, all it includes are the forms of remuneration paid to his/her employees by the employer. Without considering the economic status, family status or any other circumstances of the employee this Payroll tax is charged by the Government. So the taxes on which the employer pays on behalf of his/ her employees is known as Payroll Taxes.
Payroll has many different aspects or features. During the process, the business evaluates and withholds Government taxes like Social Security and Individual Income Taxes from employee salary. In accounting, Payroll plays a vital because Payroll Taxes considerably affect the net income of most companies.
There are 2 types of Payroll taxes. They are
- Payroll Tax may follow a fixed rate format or
- The rate may be directly proportional to the income or wage of the employee.
Payroll main component Salary
The most important of Payroll is Salary. Salary in India includes basic salary, encashment of leave salary, advance of salary, various allowance such as dearness allowance, entertainment allowance, house rent allowance (HRA), and also includes perquisites by way of free housing, free car, free schooling for the children of employees etc.
Salary is chargeable in the year of receiving or in the year of earning salary income, whichever is earlier. Salary income is taxable in the hands of individuals only.
Objectives to meet Incentive Scheme of Payroll Tax
To meet the following objectives the Payroll Tax Incentive Scheme was introduced:
- To provide the provision of the rebate, that is paid by the employer for his/her employees.
- To help in enhancement and growth of the businesses.
- To help in the successive functioning of the businesses.
- To help in the businesses which are shifting their location from one place to another.
- To help the businesses that are going to expand their payroll and undertaking the liability of payment of payroll taxes.
Categories of Payroll Tax
Payroll Tax is divided into 2 different categories:
Deduction from an Employee Salary: In this category the Payroll Tax is clearly explained that an employer is required to withhold (refuse to give) from his/her employee’s salary or wages. This mechanism is also known as Withholding Tax. This is used to cover advance payment of Income Tax or disability insurances and unemployment.
Taxes Paid by The Employer instead of Employee’s Wages: In this category, the Payroll tax is paid by the employee by from his own funds. This tax is proportionally related to worker’s salary or directly related to certain fixed charges or related to employing a worker. These charges paid by the employer generally cover the employer’s contribution towards insurance programs, social security, etc.
What is meant by Payroll Deduction
Payroll Deduction means a contribution scheme in which an employer deducts a certain amount from the employees salary and puts the deducted amount in any of the healthcare, national insurance, or social security, etc. They may also include group insurance or pension fund. Mostly the employees choose the Payroll Deductions on the Voluntary basis. Here you can some standard type of Payroll Taxes.
- Federal Tax.
- State Tax.
- Social Security Tax.
- Medicare Tax.
- Local Taxes.