Paperwork
When a company hires a person for the job, the first thing they must do is fill out the paperwork. This is the law in every state. One of the pieces of paperwork is the W2 form, which tells the employer how much tax to withhold from every paycheck. The employee is responsible for correctly filling out this information and for making any changes to the W2 when his life situation changes, such as when he gets married or changes his name.
W2
The W2 asks for a person's name, address and social security number. Then it asks for the number of exemptions. The law allows every person to claim himself or herself, but many people may have more deductions, such as a spouse, children or elderly parents who reside with them and are dependent on their salary to live. The employee must accurately determine the number of dependents. She may put down a lesser number, but she must not put down a greater number of actual dependents.
Calculations
The employer uses the information from the W2 to determine payroll calculations according to the laws of the Internal Revenue Service (IRS), Medicare, social security and state or local taxing authorities. The IRS deducts a certain amount based on the wage and the number of exemptions. The IRS compiles this information in a handy chart, which they distribute to employers. The payroll clerk looks at the gross wages, then runs across the column to the number of dependents and takes that figure for the withholding for the IRS. Medicare and social security taxes compute by multiplying the gross wages by the current percentage. Social security has a cap, which means that when a person reaches the limit for that year he no longer has to pay social security tax for that year. Each state and local taxing authority also provides charts to employers with their predetermined rates or percentages listed.
Payroll Software and Calculators
It used to be that the payroll clerk would actually determine payroll by performing the complex calculations for each individual employee. However, with the computer age, most companies now use payroll software (see Resources). This software utilizes the IRS, social security, Medicare and state and local taxing authorities' information so that all the payroll clerk has to do is enter the employee's W2 information, frequency of payroll and the employee's gross wages for that payroll period. The program then spits out the figures for each deduction, as well as the net amount made by the employee.
