What are the key components of payroll processing?
In a nutshell, processing payroll involves calculating gross wages, deducting taxes and other withholdings, accounting for benefits and overtime, and ensuring accurate and timely payments. See Step by Step: How Payroll Is Run.
How do I calculate payroll taxes for my employees?
Payroll taxes include federal income tax, Social Security, and Medicare. You can use IRS guidelines and tax tables or consider using payroll software or outsource payroll to ensure accurate calculations. See Best Practices for Payroll for more information.
Do I need to provide year-end tax documents like W-2s to my employees?
Yes, as a small business owner, you’re required to provide employees with W-2 forms that summarize their earnings and tax withholdings by January 31st of each year. See Beyond the Paycheck: What Small Businesses Must Do for more details.
What tax forms do I need to submit that are related to payroll?
Reporting requirements vary based on the size of the business and how it’s structured. Some examples include: Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return; Form 941, Employer’s Quarterly Federal Tax Return; Form 944, Employer’s Annual Federal Tax Return; Form W-2, Wage and Tax Statement. See Best Practices for Payroll and Special Considerations in Payroll for more information.
How often should I run payroll?
State laws and collective bargaining agreements with unions may dictate how often a business must run payroll. If such requirements don’t apply to them, employers may choose a payroll calendar that works best for them and their employees. The most common are weekly, bi-weekly and semi-monthly. See Best Practices for Payroll: Decide on a Payroll Schedule.
How should I pay my employees?
Payment options include paycheck, direct deposit and pay card. However, some states have strict rules regarding electronic and alternative forms of payment, which must be followed. See Best Practices for Payroll: Determine How You Will Issue Employee Pay.
What is an EIN and where do I find my company’s EIN?
An Employer Identification Number, otherwise known as a Federal Tax Identification Number, is necessary for businesses to pay taxes. After they apply for one, employers receive a confirmation letter from the IRS with their specific number. See Best Practices for Payroll: Obtain Required Business Information for more details.
What are pretax deductions?
Pretax deductions are generally employee contributions to employer-sponsored benefits, such as group health insurance, group term life insurance, some types of retirement savings plans, and so on. They are advantageous because they lower an employee’s taxable income. See step three in Step by Step: How Payroll is run to learn how to calculate payroll deductions.
What is the difference between exempt and nonexempt?
Under federal law, employees who are non-exempt from the Fair Labor Standards Act (FLSA) are entitled to at least minimum wage and overtime pay at a rate of 1.5 times their regular rate of pay if they work more than 40 hours in a workweek. Please note that this is a general guide. For specific advice, it’s always best to consult with a payroll expert or legal advisor. See step six in Best Payroll Practices.
What’s the most common mistake small businesses make in payroll?
Not making tax deposits in a timely way. It’s very important to file and pay your company’s required taxes on time, because you’re exposed to fines and penalties if you don’t.
Both state and Federal taxes need to be paid quarterly, by specific dates — and the dates can vary. Failure to pay on time results in fines, penalties, and interest.
Are there any other common mistakes?
Not handling administrative matters correctly. In payroll, the word “administration” covers a lot! Administrative concerns include failures to:
- Register for tax accounts in the states where they operate (withholding, unemployment and local/benefits)
- Obtain workers’ compensation insurance if their state and type of employees require reporting and coverage
- Offer benefits as required by the state or offered as part of employee retention
- Follow human resources laws and requirements in their state(s) (PTO, benefits, FMLA, etc.)
- Open bank accounts for processing payroll transactions (if separate from business operating account)
- Hire a 401k investment manager
- Use an accounting service to balance the books
In addition, many companies don’t handle garnishments and other after-tax withholdings correctly. Companies are legally required to withhold garnishments from employee pay. The garnishment is usually sent directly to the organization or person who obtained the garnishment.
Employee paychecks can be garnished if they don’t pay legally required debts or obligations after a certain period of time. The most common garnishment is for nonpayment of child support and alimony. But multiple entities can garnish paychecks, such as the IRS, for late tax payments, student loan servicers or the U.S. government, for unpaid student loans, and creditors, for late payments.
Is workers’ compensation part of payroll withholding?
No, workers’ compensation is not part of payroll withholding. Employers must pay for workers’ comp if the state requires it — and most states do. Employees do not pay for it.
Some states, however, require an ID for workers’ comp separate from your EIN or other ID numbers, so it’s a good idea to obtain that information at the same time as you obtain your payroll ID numbers.
Workers’ compensation is an insurance program designed to pay benefits to workers injured or made ill due to workplace activities or environments.
What are FICA taxes for and who pays them?
FICA stands for Federal Insurance Contributions Act. Taxes assessed through FICA pay for Social Security and Medicare. Both employees and employers are responsible for FICA payments.
Should I consider outsourcing my payroll processing?
Not only can outsourcing payroll help you keep accurate records of employee hours and earnings, but it can also save you time and money while helping you avoid costly mistakes. Many small businesses opt to outsource their payroll or work with a payroll service provider to ensure compliance and accuracy. You can also use time-tracking systems or software to record employee hours and integrate it with your payroll system for accuracy.
For an all-in-one system, consider partnering with Guidant Payroll — payroll that’s specially tailored to support small businesses. See How a Payroll Services Provider Helps Your Company for more information.
What are the consequences of payroll tax non-compliance?
Non-compliance with payroll tax regulations can lead to penalties, fines, and legal issues. It’s essential to stay updated on tax laws and meet all requirements.
What is the difference between an employee and an independent contractor for payroll purposes?
Employees work under your control and are subject to tax withholdings, while independent contractors are typically responsible for their taxes. Misclassifying workers can lead to legal issues, so it’s vital to understand the distinction. See Special Considerations in Payroll for more details.
How can I stay compliant with changing payroll laws and regulations?
Stay informed by regularly checking government websites, consulting with a tax professional or HR expert, and using payroll software or service provider. See How a Payroll Services Provider Helps Your Company to learn more.