Payroll codes enable major companies to comply with federal and state income taxes and employee occupational regulations while also allowing the payroll or human resources department to track wage deductions and accruals of wage-related benefits, such as paid vacation time. The use of certain codes is mandated by law.
The IRS and many state tax agencies require businesses to withhold income taxes from wages earned by workers and remit the correct amounts to the government on a schedule. Payroll codes enable major companies with dozens of workers to classify the type of wages paid, so the companies know whether to withhold income taxes from the wages, and the payroll department has a record of whether the wages were paid for hourly or salaried, full-time or part-time, regular or overtime work.
At a basic level, payroll codes allow major companies to meet reporting obligations that are required by law. For example, companies are required by federal tax law to generate a form W-2 payroll summary for each employee at the end of the year. The form enables workers to file their income tax returns. Payroll codes also serve a discretionary function, allowing major companies to track wage-related benefits and payments made to employees that do not result from hours worked, such as paid sick time, and pre- and post-tax wage deductions, such as garnishments and voluntary retirement account contributions.