The year-end payroll gauntlet is fast approaching. With the holiday season in full-swing, taxes around the corner, and fourth quarter payroll requirements looming, there is a lot of pressure on business owners to complete these tasks smoothly and accurately (especially since even simple mistakes may accrue fines and fees). If you’re looking for a simple guide to walk you through your year-end payroll responsibilities, we’ve got you covered.
We’ve broken down the year-end payroll process into 10 easy steps. This way you can close out your payroll and ensure that you file all of the proper tax forms on-time. To make things even easier for you, we’ve also created a printable Year-End Payroll Checklist so you can mark your progress.
Small Business Year-End Payroll Checklist (PDF)
You can print the Year-End Checklist now and use it to follow along, or you can jump right in.
How To Complete Year-End Payroll
Year-end payroll is all about balancing your books, ensuring you’ve paid people the right amount of money, and double-checking that you’ve sent the right amount of taxes to the government. By the end of January, employees should have access to a W-2 or 1099, which is a record of payment received and taxes paid. You will also need to submit wage and tax information to the Social Security Administration (SSA) and the Internal Revenue Service (IRS).
Payroll is a year-long process: keeping your records updated as you go throughout the year will help with any end of the year accounting and paperwork management. Even if you outsource payroll, there is information you should verify and deadlines you shouldn’t miss. (Also, now is the perfect time to review your company’s payroll choices. Anything you/employees want to change before the new year?)
As always, the exact process for your payroll processing is dependent on your state and industry, so use these steps as a guide and verify with an accounting or bookkeeping professional.
Step 1: Verify All Employee & Company Information
As the year winds down, you will need to ensure that all of the information for your company and employees are correct. First, verify that your company name, tax IDs, and company tax information is updated and accurate. Next, make sure that your employee information is up-to-date. For employees, check the following:
Employee’s name is spelled correctly
Correct Social Security Number
Updated/accurate employee addresses
If you find any discrepancies between recorded information and accurate information, update your files and/or let your payroll service provider know of any changes.
Step 2: Verify Wages, Taxes, & Benefits
After you’ve checked and made sure all your employee and company information is accurate, the next step is to run through and verify that your wage, tax, and benefit numbers match up with your payroll numbers. Here’s what you’ll need to verify:
Yearly PTO accrual
Worker status (active, terminated, on leave)
Filing status (exempt or non-exempt)
Number of exemptions
Year-to-date wages and taxes
Most of the information above is on an employee’s W-4 form. Employees can change their tax information with the government at any time, so this is where you may find and remedy discrepancies. Bonus: Many payroll software programs have reporting features that will do this work for you.
Step 3: Order Your W-2s
If you run payroll yourself or if you do not have a payroll provider that manages your W-2s, you will need to order paper forms from the Internal Revenue Service. A W-2 is a tax and wage statement for your employees. Contractors will receive a 1099 form. You can also file these forms online on the IRS website. Paper forms take 10 business days to mail, so plan ahead and order these in December.
Step 4: Manage Paid Time-Off
What is your company’s paid-time-off (PTO) policy? Do you offer PTO as a lump sum at the start of the year or does your PTO accrue as the year progresses? Will your employee’s PTO reset in January? What happens to the unused time?
Some states have mandates on whether or not a company can clear PTO, so check with your accountant or bookkeeper about the laws in your state. If you pay-out accrued PTO, you will need to manage that payment with the last paycheck of the year and keep a record of that payment for tax purposes.
Step 5: Decide On Bonuses
If you are awarding bonuses, those payments must go out with the last paycheck of the year. You will need to keep a record of bonuses given for tax purposes.
Step 6: Update Your Compliance Posters
In November or December, it’s important to order your new labor law posters for the upcoming year. These posters are federally mandated and expected to be displayed in a conspicuous place where all employees can read them. Failure to post updated labor law posters could result in fines, fees, or even labor lawsuits.
Step 7: Update Payroll Information
Before you run your first payroll of the new year, you will need to update your payroll information. That includes checking for new tax rates, making adjustments to employee information, balancing PTO, and tweaking yearly deductions.
Step 8: Deliver W-2s/1099s To Employees
Your employees need their W-2/1099 forms documenting their pay and taxes for their own tax filings. You have a legal responsibility to deliver pay and tax information to employees by January 31st.
Step 9: File Your W-2s/1099s
File all W-2s and 1099s with the Social Security Administration by January 31st. (You may also need to file W-2s with your state or county, depending on location and local tax laws.) In addition to each W-2, you will send a W-3 form; this form is needed for each employee and is a summary of the information on the W-2.
Step 10: File Tax Forms 941, Form 940, and Form 944
Forms, glorious forms! You will need to pay your federal unemployment tax (FUTA) from the fourth quarter with Form 940. You must also file federal income taxes and FICA (social security and medicare taxes) through Form 941. The last form (Form 944) is an annual return of all paid payroll taxes. All are due by January 31st.
Payroll Year End FAQS
Still have questions about closing the books? Here are the most popular year-end payroll questions. Don’t see your question? Leave a comment below.
What does year-end payroll mean?
Year-end payroll is about checking that the numbers to ensure your payroll reports add up to the money you’ve given and withheld during the calendar year. This is the last opportunity before you file your taxes and year-end forms to reconcile any discrepancies, change or update information, or adjust payroll choices for the new year.
What year-end payroll forms do businesses need to file?
So many forms. The good news is that many of the payroll software options available offer tax and year-end payroll support, and many of these forms can be filed online. (Always check with your accountant or bookkeeper about your specific state and industry requirements.) Here are the most important year-end payroll forms you will need to file:
W-2 Form: This form reports wages and withholdings to the IRS
W-3 Form: This is a summary of the information in the W-2s. This goes with employee W-2s to the Social Security Administration.
1099 MISC: This is a statement of income for contractors.
Form 1096: If you’ve paid any contractors and given them a 1099 MISC, you will need to summarize that payment information and submit it to the IRS with this form.
Form 940:Â This is the form needed to pay your Federal Unemployment Tax (FUTA) liability to the government.
Form 941:Â This form is due quarterly and reports employee payroll taxes collected for each quarter. Payroll taxes include federal income taxes, social security and Medicare taxes.
Form 944:Â If your payroll taxes are less than $1000 annually, you may qualify to pay these taxes yearly instead of quarterly. Small businesses that qualify will fill out a Form 944 instead.
Form 1095-B: If you offer health insurance, you will need to send this form to the IRS and to your employee to document that health coverage.
When does year-end payroll have to be submitted?
All the forms related to year-end payroll reports are due by January 31st to their respective locations.
What year-end tax forms do employers have to provide their employees and contractors?
Employers need to send their employees a copy of their W-2 and contractors a copy of their 1099-MISC. This accounts for wages paid and taxes withheld.
When do employers need to complete their employee W-2s?
All W-2s need to be filed with the social security administration with copies sent to employees by January 31st.
When do employers need to complete their contactor 1099-MISCs?
All 1099-MISC forms must be sent to the IRS with copies sent to those who received nonemployee compensation by January 31st.
Get Started With Our Year-End Payroll Checklist
Small Business Year-End Payroll Checklist (PDF)
It’s understandable if all the steps above feel overwhelming. It’s best to think about year-end payroll like this: This is when you account for the wages and taxes you’ve paid and withheld throughout the year.
As you look to settle books and wrap up your fourth quarter taxes, you might find that you’re interested in outsourcing the task next year, if you don’t already. Some payroll software companies like Gusto and Intuit offer tax services as part of their payroll programs. Whether you’re running payroll yourself or outsourcing, use our Merchant Maverick Year-End Payroll Checklist to get started, and check out our other great payroll and tax resources for more help running your small business.
What Can I Write Off As A Small Business Tax Deduction?
Everything You Need To Know About Small Business Payroll
What Are Payroll Taxes? And How Do You Calculate Them?
Small Business Accounting: How To Close The Books At The End Of The Year
The post Small Business Payroll: Your Complete Year-End Payroll Guide appeared first on Merchant Maverick.
Most people don’t like the idea of taxes in general, not to mention the excruciating minutia of what goes into calculating how much to pay the government and when. And if you do like those things, then you are probably an accountant or a payroll tax expert already. God bless you, you don’t need this article. However, if you are a small business owner who is entering the world of payroll, understanding payroll taxes can feel daunting. It’s true: there’s plenty to learn and making a mistake can result in costly fees. Using payroll software might take the guess-work out of the process and do the calculations for you, but it’s still important to have a rudimentary understanding of payroll taxes, especially if employees have questions about their paychecks.
In this post, we’ll cover what payroll taxes are, who’s responsibility it is to pay them and when, how to calculate them, and more.
What Are Payroll Taxes?
Payroll taxes are the money an employer withholds from an employee’s earnings to pay taxes to the state and federal governments. How much an employer takes out and sends to the government is based on the employee’s salary and wages, and it is the employer’s responsibility to manage these taxes. There’s only one exception: 1099 contractors are in charge of their own taxes! Contractors, freelancers, and small business owners pay a self-employment tax which is the equivalent of employee/employer payroll taxes.
Payroll taxes make up a substantial part of government revenue and are the second-leading money generator for the United States. (And we can often look to payroll in America as indicators of how our economy is growing or receding, too, as payments reflect growing trends in hiring and stagnation.) When an employer runs payroll, the process involves calculating the employee’s net pay. Net pay is the take-home paycheck employee’s receive on payday, and how you calculate that net has to do with how much state and federal taxes you, as the manager of the payroll, take out, collect, and pay to the appropriate agencies. It’s a detail-oriented process that has multiple opportunities for missteps and steep penalties for mistakes.
Bear in mind that when someone says “payroll tax,” they are lumping together all of the various taxes paid out of a person’s paycheck for services, but in the next section I’m going to breakdown where those payroll taxes go.
Types Of Payroll Taxes
When an employer removes taxes from an employee’s paycheck, that money is earmarked for state and federal services. Here’s how payroll taxes breakdown individually:
Federal Income Tax Withholding:Â Federal income tax is based on income level and the rates are progressive, meaning that as you make more income, your rates move, and your income tax increases as you travel up the tax brackets. There are currently seven tax brackets that tax income at: 10%, 12%, 22%, 24%, 32%, 35% and 37% as income increases.
Social Security Tax:Â This tax is also called the Old Age, Survivors, and Disability insurance, and it’s a flat-rate tax of 12.4% of taxable income. Both the employee and the employer are responsible for paying half (6.2%) of the social security tax.
Federal and State Unemployment Taxes: The Federal Unemployment Tax is a mandatory tax paid quarterly versus monthly. State requirements differ widely.
Medicare Tax:Â This tax is also a flat rate of 2.9% with the employer and the employee splitting the cost at 1.45% each.
State Income Tax Withholding:Â There are currently seven states that do not have a state income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming) but for everyone else, income taxes work similarly to federal income tax withholdings. The tax rates are very specific to each state, so check the withholding tables on the state government website where your business is located.
Local Taxes:Â Local taxes are very specific to city and state. Most states have a state unemployment tax that is accounted for in this local taxes section. These taxes are based on local tax laws and the tax rates vary, so small business owners need to check/verify those taxes through the state’s tax department.
Payroll Tax VS Income Tax
Payroll taxes include FICA taxes (social security and medicare) and local taxes withheld, and the additional percentages provided by the employer.
Income tax specifically refers to the federal, state, and local income tax rates
So, running taxes for your payroll involves collecting both payroll taxes and federal/state income taxes. When people say “payroll taxes” they are providing an umbrella term for all collected tax, but the term “payroll tax” refers to FICA taxes (social security and medicare) and local taxes withheld from an employee’s paycheck, plus the additional percentages provided by the employer. Income tax specifically refers to the federal, state, and local income tax rates. Even though the two are joined together in one lump, payroll taxes are specifically earmarked for certain programs. Income tax, on the other hand, is delivered to its respective federal or state governments and is used to manage the budget.
Who Pays Payroll Tax?
The burden of managing payroll and sending payroll tax payments is on the company, and the burden for paying those taxes falls on both the employee and the employer. Each state has different regulations and requirements for how state income tax is paid to the government, and the federal government collects payroll taxes quarterly.
Employer Tax Responsibilities
Okay. You are a small business owner and it’s time for payroll. What tax responsibilities do you have?
Social Security: You will pay your half of the 6.2% and you will withhold 6.2% from wages for your employee’s portion.
Medicare:Â You will pay your half of the 1.45% and you will withhold 1.45% from wages for your employee’s portion.
Federal Unemployment Tax:Â This tax is employer-paid and the current rate is 6% on the first $7,000 earned by an employee.
If you are self-employed or working under contract, you are the employer and the employee and it’s your responsibility to pay for both sides of the payroll taxes. That means that contractors need to withhold the full 12.4% for social security and 2.9% for Medicare, and withhold their own state and federal income taxes (saving 15-20% of each check to cover these taxes is the recommended practice). Some states also charge additional taxes for small businesses that become the responsibility of a contractor, as well. When contractors file their taxes, they will pay their portion of these taxes then.
When Are Payroll Taxes Due?
Once you have collected the payroll taxes for your small business, they are due on either a monthly or semi-weekly deposit. Semi-weekly deposits are primarily required just for large businesses with a large payroll tax revenue, so it is most probable that you will deposit your withholdings monthly. Payroll taxes are due on the 15th of every month (unless that falls on a weekend, then the next available Monday).
If you are self-employed, you most likely will file estimated quarterly taxes (although some states accept yearly payments if you make under a certain amount). Check your state’s specific rules and tax brackets for the most accurate information.
How To Calculate Payroll Taxes
Calculation of payroll taxes uses all the great basic math skills: multiplication, addition, percentages. Be aware that if you make a mistake or are late processing a payment, the government likes to slap fees around. (I mean, no doubt, fees are a source of revenue for the government, too.) While you can do payroll calculations by hand (and many do, including an adorable 80-year-old woman on Facebook who chastised me for suggesting someone run payroll using anything other than their head, a pencil, some paper, and the numbers), there are many great payroll software options that can do this part for you: Gusto, Square, Paychex, and ADP are all reputable companies that you can use to outsource payroll.
However, maybe you really want to tighten the budget and only have a few employees and you’re not gonna let me convince you to give the computers their chance at this one. Okay. Pencil. Paper. Calculator. Spreadsheet with equations, maybe?
You’ll need to know how many times you are paying/withholding taxes from your employees before you can run payroll, so determine whether you are running payroll, weekly, biweekly, or monthly. Then you will need to decide if you’d like to pull taxes using the wage bracket system (recommended by most tax experts for small businesses) or the percentage method (not recommended for small businesses attempting payroll on their own).
When you onboard employees, you will have them fill out a W-4. You will use that W-4 to note the employee’s withholdings and whether they are filing single/jointly/head of household. This is the data you need to calculate federal income taxes. The following image is from the IRS Publication 15 for the 2019 tax season and gives the step by step numbers for calculating the federal income tax withholdings through either method.
After you withhold the money for federal income taxes and any additional pre-tax deductions (retirement, worker’s compensation, healthcare), then you calculate the FICA (social security and Medicare) taxes. To calculate the social security tax, you will take your employee’s gross pay (the amount your employee receives before payroll taxes are removed for that pay period) and multiply it by .062 — the product is the amount of money to be withheld from the paycheck and matched by the employer.
You would do the same thing for the employee’s portion of Medicare by taking the gross pay for the pay period and multiplying it by .0145%. The product is the amount you’ll withhold and match for Medicare.
All state and local taxes are calculated on a state-by-state basis.
How To Report & Pay Payroll Taxes
When you run payroll, calculating the taxes and discovering your employee’s net pay (aka their take-home pay or the amount they make after payroll taxes are removed) is only the first part of the process. After you’ve run your payroll numbers, you face the important task of getting those taxes into the right hands and accounting for your payroll to the government. As a small business owner, it is your responsibility to:
Withhold all payroll taxes and submit them on time (the 15th of every month, or next available business day) to state and federal agencies.
Report income, withholdings, matching of payroll taxes to the government quarterly.
Keep records of yearly payroll for state and federal reporting agencies.
Send W-2s and 10-99s to employees and contractors listed with the correct amounts of their gross/net pay and tax withholdings.
When you have the monthly deposit to submit, you must submit the funds electronically (barring special circumstances allotted to small businesses only) using one of the following methods: via a third-party (through a software/payroll service like ADP, Gusto, or Paychex); through your bank’s Automated Clearing House (ACH) network; or by the Treasury Department’s free Electronic Federal Tax Payment System online/over the phone.
Some small businesses, especially those with low liability, can opt-in to a yearly payroll payment. This requires filling out a Form 944. Check the government’s website to check for current eligibility requirements.
Your Federal Unemployment Taxes are due to the government quarterly. Form 941 is your guide to reporting income, withholdings, and payroll taxes to the government, and the tax forms are due on the last day of the month after the end of the quarter. For example, quarter one ends March 31 and the report is due by April 30. And at the end of the tax year, you have until January 31 to deliver the necessary tax forms to your employees, former employees, and contractors, so they can file their taxes correctly.
If you are self-employed, you’ll need to gather your 1099-MISCs and file a Schedule C when you file your taxes (due April 15).
For both small business owners and the self-employed, it is imperative to maintain impeccable records of your state and federal payroll taxes, whether by hand in a notebook, in an old spreadsheet document, or by using online software.
Payroll Tax Penalties
Alright, here’s the big scary number: 100%. If you fail to withhold the proper amount from your employees, you the employer are 100% liable and will need to furnish the missing monies from your own pocket in addition to any legal penalties and fees you face. Look, people get real serious when you don’t give them the correct money owed. Also, these funds go toward employee services, so sometimes your employees can’t access these services if the account is behind. Employer error is costly because tax laws say that the onus for accuracy is on you, the business owner. And if you can’t pay those fees? That trickles down into every aspect of your business in a cycle: higher consumer costs, decreased employee wages, a hiring freeze. Not to mention that it erodes the trust between an employer and an employee.
If you don’t pay your payroll taxes on time, every month, you incur a 2% penalty for 1-5 days late; 5% penalty for 6-15 days late; 10% for 16+ days late or within 10 days of first hearing from the IRS. The maximum is 15%.
Also, the government doesn’t care if you outsource these jobs — if a third-party isn’t paying on-time (your payroll service or your bookkeeper), you still hired them and will receive the penalty all the same.
There are other ways you can be penalized, too, like if you miscategorize employees or you make an error on your reporting. There are too many potential errors to explain them all, so it’s important small business owners meet with tax attorneys or other tax experts for a full understanding of the myriad ways things can go off the rails.
Payroll Tax Deductions
But hey…those Statutory Payroll Tax Deductions (all the things we just talked about above: federal and state income tax, social security, Medicare, unemployment taxes) are not the only payroll tax deductions you’ll need to make as you process payroll. In addition to the mandatory deductions, you also have Voluntary Payroll Tax Deductions. These are things like health care, retirement benefits, worker’s compensation, or any other pre-tax deductions. As a small business owner, you might offer some of these programs and benefits but some of the cost can (and does) trickle down to employees.
Nothing concludes this post better than this: payroll taxes are complicated. But, they don’t have to be.
If you have a handful of employees, and you want to calculate payroll taxes yourself, then yes you can! You now know the basics of which payroll taxes you are responsible for, how to calculate them, and how and when to pay them. People have been processing payroll manually for longer than they haven’t been.
Or, you can opt for payroll software to help handle the calculation for you. Even if you do have a software program or an online program helping you, it’s great to know what those numbers mean and where that money is going. There are also free online calculators to use in lieu of a software program, or a regular calculator, or an abacus. All in all, these payroll taxes — while they may be an added stressor to the laundry list of small business owner responsibilities — are what pay into great social programs and protections. The most important thing to remember is that rates and guidelines can change yearly depending on inflation and tax laws, so keep up with current literature on the tax brackets from the IRS Forms. Know your state’s laws, file accurately and promptly, pay on time, and report on time. And if you want someone else to do it for you, check out our reviews of some of the leading payroll service vendors out there: Gusto, Square, ADP, Paychex.
The post What Are Payroll Taxes? And How Do You Calculate Them? appeared first on Merchant Maverick.
When it comes to paying your employees, setting up a payroll system is an important component of your business plan. But before you set up a payroll system, you’ll need to make a few choices, and one of the first is to decide on the pay schedule that works best for your business. Should you pay employees monthly? Bi-weekly? What do all those terms mean and what are the pros and cons of each? How do you know you’re making the best choice for your business?
Read on while we delve into the debatable topic of pay schedules.
Types of Pay Schedules
Pay schedule is defined by your pay period and your pay date. When and how often will you pay your employees? There are four major prevailing pay schedule types businesses may choose when setting up payroll:
Each type has its own pros and cons, and assessing the right fit will boil down to what works best for your business and your employees. However, it’s important to note if your state has a minimum payroll frequency requirement or other payday requirements based on industry.
What it means for your business and employees
Employees are paid more often for a total of 52 paydays per year.
Employees are paid every other week for a total of 26 paydays per year.
Employees are paid twice a month for a total of 24 paydays per year.
Employees are paid once a month for a total of 12 paydays per year.
The Weekly Pay Schedule
The weekly schedule means employees are paid every week for 40 hours of work, usually on a Friday, with 52 paychecks a year.
Paying weekly is a standard in some of the trades like construction, warehouse, plumbing, or back-of-house jobs. In general, employees like being paid more often, and a weekly pay schedule works best for employees living paycheck to paycheck. It is also the easiest for calculating overtime for employees who work irregular schedules.
The more pay periods, the more money your company might lose in fees, especially if your payroll system charges per payroll run. Fewer payroll runs, fewer costs. Not only does a weekly payroll cost the most for your company but it also takes up the most time for or your accountant.
The Bi-Weekly Pay Schedule
The bi-weekly schedule means employees are paid for 40 hours of work every two weeks, usually on a Friday, for 26 (or 27) total payments a year. With the bi-weekly method, two months out of the year, employees will be paid three times a month, and the way weeks fall year-to-year will impact whether you issue 26 or 27 paychecks annually (Leap Year, you sly little troublemaker).
This is less expensive than running a weekly payroll and less time-consuming. This method is often the most ideal for hourly workers and preferred among employees for its consistency (every other Thursday; every other Friday, etc.) and can be useful for financial planning and paying bills.
Bi-weekly pay can be the most cumbersome for an accountant or payroll supervisor in terms of time and difficulty. With the inconsistency of 26 or 27 paychecks, this method is the most headache-inducing to calculate benefit deductions and taxes.
The Semi-Monthly Pay Schedule
The semi-monthly schedule pays employees for 40 hours of work twice a month usually on the 1st and 15th (or 15th and 30th) of the month, for 24 payments a year. How is this different than bi-weekly? Under the semi-monthly plan, paychecks are consistent and there are only two paydays per month. Employees receive fewer and slightly bigger paychecks on the semi-monthly schedule.
Accountants like the consistency of running payroll. Payroll dates are set, and there is no confusion about paydays. Filing and taxes line up nicely at the end of the month with reporting cycles.
Bank holidays can put a wrinkle in a payment schedule, and the semi-monthly pay schedule doesn’t always line up with the work week.
The Monthly Pay Schedule
Employees are paid for their 40 hours of work once a month, toward the end of the month, for 12 payments a year.
This is the easiest for the employer with only 12 payroll runs per year; also, your payroll money has longer to sit and accrue during the month. It’s the easiest to run for salaried employees, and is the most cost-effective method. Accountants like it, too!
This is the least preferred method among employees.
How To Choose The Right Pay Schedule
In trades, where irregular scheduling makes week-to-week different, paying your employees consistently is an important factor. If it is industry standard to pay your employees weekly, it’s best to remain competitive and (if you can swing it) offer weekly pay.
However, choosing a pay schedule has more to do with the time you can commit to payroll and any state requirements you need to follow. If you pay employees a salary, calculating hourly wages may be less of a concern. So, as you try to marry your needs and wants, ask yourself these questions:
Do I have the hours/ability to commit to a weekly payroll?
Do I have a professional/service calculating payroll taxes/deductions?
How much is my time worth?
What method of payment would my employees prefer?
Does my payroll service charge per payroll run?
Do I want every Leap Year to make me irrationally angry at the universe?
Does my state have a minimum paycheck requirement?
What does my monthly cash flow look like?
Does my industry offer overtime? Which pay schedule is best for calculating overtime?
Payroll is important, necessary, and a foundational aspect of your business. The pay schedule you choose will impact your business, dictate your cash flow, and matter a lot to your employees. No pressure, right? If you have an accountant or bookkeeper, weighing their time and abilities is important: you do not want to create a burden on employees. However, once you’ve decided on a method, stick to it and, if you’re ready, outsource as much of payroll as you are able.
There are many cloud-based payroll software options for small businesses and some of those even allow for different pay schedules depending on employee type. We recommend Gusto as a place to start for full-tax services with competitive pricing. However, each payroll system is unique — like your business — and you might find one of the other systems a better fit. Check out our reviews of Square, QuickBooks, Paychex, and ADP to see if there is a program that works for you.
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There is popular little nugget of business wisdom these days that says: If you can outsource a non-essential task, you must outsource that non-essential task. But while it’s nice to assume that every small business owner has the option to outsource, it might not be a practical choice for all businesses.
Running payroll is an integral part of business management because both your employees and the IRS need to be paid on-time and accurately. But the process of payroll can feel burdensome and overwhelming to small business owners who find themselves wearing lots of business hats. For small businesses that want to ensure payroll simplicity, outsourcing the job to a third-party reduces stress and helps you stay compliant. However, outsourcing isn’t free, and depending on how you outsource, it doesn’t guarantee simplicity, either.
Don’t know if outsourcing is right for your business? Keep on reading to find out.
What Is Payroll Outsourcing?
Payroll outsourcing is the process of paying a third-party to manage and run your payroll for you. This can be done via the use of payroll software, hiring a bookkeeper, or employing a Professional Employer Organization (PEO). It used to be true that outsourcing payroll was only something only the big companies could afford, but that is no longer the case. In recent years, the options for payroll outsourcing for small businesses have increased and it is easy to find an affordable option that fits your business needs.
How do you outsource? Well, your small business could start by exploring one of the many payroll available software options, including Gusto, Square, Intuit Quickbooks. If your payroll needs are a bit more nuanced, hiring a bookkeeper with payroll knowledge is a great asset. Another option is a PEO, which not only assists with payroll but also helps address HR compliance and all other aspects of employee management.
All reputable payroll software or services should offer help in the following areas:
Paying your employees or contractors through direct deposit/check
Filing your Federal and State taxes (some will also file your local taxes for no additional charge)
Filing your quarterly payroll taxes and paperwork
Paying vendors on your behalf
Garnishing wages and processing other deductions
Assisting with pre-tax and post-tax deductions and benefits
Time tracking/PTO tracking
Assisting with W-2 preparation and distribution
Many payroll companies are combining their services with HR, too, and can offer training modules, employee handbooks, and access to the legally required labor law posters. These programs are designed to create easy onboarding, provide clients with tax support, and help employees access their own wage information.
With payroll software, while most of the work is outsourced, someone from your business is still responsible for managing funds and hitting that “Pay” button. Plus, you’ll still be responsible for making sure your employees track their hours correctly. Full outsourcing could include hiring a national payroll service, a bookkeeper, or a PEO.
The Pros & Cons Of Outsourcing Payroll
Less chance of errors
Can be expensive
Loss of control
Outsourcing has benefits and challenges. When making the decision to outsource, small business owners must think about the most cost-effective and easiest way to manage their businesses.
The Pros of Outsourcing Payroll
Tax Assistance & Reporting: Employers must send payroll taxes to the government regularly and file quarterly tax paperwork on their payroll data. With lots of room for error, some small business owners might not want the headache of manually running payroll and carrying the burden of responsibility to pay the right taxes to their respective locations.
Reduces Risk Of Error: Whether you are hiring an expert or using a sophisticated cloud-based program that guarantees accurate payroll reporting, this is a handy aspect of outsourcing. IRS penalties and fees are very real and can hurt your business if you miss filing your reports or make a payroll mistake. Also, making a mistake on an employee’s payroll can be a headache to fix. Give those worries to someone else.
Saves You Time: Manual payroll runs may be time-consuming. Anything you outsource saves you time to spend differently for your business.
Enhanced Security Of Sensitive Information: Many outsourced payroll options come with enhanced and increased security for sensitive employee information. If you don’t want the responsibility for protecting social security numbers, maintaining HIPPA laws, etc., then it’s best to outsource the protection of that data.
Offer Employees Direct Deposit:Â Direct deposit is the most preferred method of payment among employees, and current stats say that up to 82% of employees are paid via direct deposit. However, not all small businesses may be eligible to offer this on their own based on federal and state laws. Outsourcing provides the opportunity to transcend the restrictions and offer direct deposit (although, you should always ask the payroll representative about relevant bank or industry restrictions). This is a state by state, company by company decision, so it’s best to contact a payroll or tax expert.
Easy To Combine HR Compliance: As an employer, you have responsibilities to your employees required by law. It is becoming more common for top payroll outsources to include HR compliance in their list of services. Since this addition is a competitive feature on most payroll programs, it’s a great additional time-saver.
The Cons of Outsourcing Payroll
It’s Not Free:Â Outsourcing payroll can be expensive. Depending on your company’s needs and number of employees, a good payroll system or PEO isn’t a cheap investment. (However, if you currently use an accountant or bookkeeper for payroll, perhaps outsourcing to an online company would save you the cost of an entire employee. So, price is neutral depending on your needs.)
Loss Of Control: By relinquishing payroll, you are giving up control of a major aspect of your business and entrusting it to someone else. That might mean doing it their way instead of doing it your way, and that can always be a challenge. Another thing: Business owners are ultimately still on the hook for payroll errors even if you outsource the job.
Business Unreliability: And there is the sad, but possible situation, that you could invest in a business that doesn’t do the job for you in myriad ways. Whether the business turns out to file taxes incorrectly or fails to offer you stellar customer service when you need it, relying on someone else is always a risk.
The Pros & Cons Of DIY Payroll
Higher risk of error
Takes a lot of time
Many small businesses make the decision to run payroll in-house. The DIY route is a solid option for small businesses with uncomplicated payrolls and a thrilling spirit of accomplishment. Some people hate the minutia of payroll, but some people really love it! It’s definitely a great job for a detail-oriented human with a penchant for numbers and reports. DIY payroll can also be a great route depending on your specific business. For example, do you just pay contractors? There are no employer required taxes for contractors, so you may not need a sophisticated program for tax and benefit deductions.
The Pros of DIY Payroll
It’s Free: Money matters, cost matters, and if every dollar in your company is crucial and you need ways to save, you can run payroll yourself. For some small businesses, outsourcing just isn’t in the budget. There are several free online calculators available that assist with tax requirements. Simple accounting software helps with numbers and there are also free payroll templates online.
You Are In Control: Running payroll and reports on payroll is a huge part of the business and helps create a story about the business as a whole. There might not be a program or person out there that does it exactly the way you desire; or maybe it’s important to spend time managing the financial aspects of your business.
The Cons of DIY Payroll
Payroll Dependent On Human Being: In this scenario, you or an employee are entrusted to learn how to manage payroll. Now imagine that person on a long vacation, going on leave, or getting ill. If you only have a single human running payroll (which may be complicated depending on your business), you could run into some stress if you need someone to quickly take their place.
It Takes Time: It’s the business dilemma. Time and money are both limited, so you’ll spend whichever you have more of. If you have more money than time? Outsourcing is a solid option. If you have more time than money? DIY might be a better fit.
Increased Stress/Risks: Payroll takes time; it requires attention to detail; it requires punctuality and precision and patience. If that’s you, awesome. If it’s not? Don’t try to be the person who wants to do-all-the-things and ends up hating life. There is increased stress with running payroll on your own, and due to the tax requirements, there is a lot of room for error.
Payroll Outsourcing Options
If outsourcing seems like something your business might pursue, there are several roads to explore. You can hire a bookkeeper either full or part-time, find payroll software to use, or even hand payroll over fully to an accredited program. Each option comes with its own benefits and risks.
Payroll Outsourcing Options
Full-Service Payroll Software
Businesses looking for payroll software that handles most tasks for you including automatic filing.
Self-Service Payroll Software
Businesses looking for basic payroll software that calculates their payroll, but doesn’t file taxes for you.
$10 – $35/mo
Accountant or CPA
Businesses with complicated payrolls and tax situations.
$100 – $400/hr
Businesses looking to outsource bookkeeping and payroll tasks.
$20 – $45/hr
Professional Employee Organization
Business looking to outsource all payroll and HR management.
$150 – $2,000/mo
Full-Service Payroll Software
Best for businesses looking for payroll software that handles most tasks for you including automatic filing.
A full-service payroll provider will run payroll for you — start to finish. You help onboard employees and give the company information about pay and pay schedules, and then all you have to do is click “pay.” (It’s not entirely hands-off, but as close as you can get.) Some of these programs are similar to their self-service online counterparts. Here is where most of them differ: Some will take over the onboarding of employees, many file your quarterly and year-end payroll taxes for you, and many come with a tax guarantee. You are paying for the guarantee that their company, not your business, is on the hook for penalties related to tax mistakes.
What Does Full-Service Payroll Do?
A full-service payroll provider pays your employees, removes taxes and deductions and garnishments and sends them all to their respective places. They file your taxes for you and assist with distributing W-2s. It’s full-service, darlin’, so order up any reports you want and benefit from same-day direct deposit. And: most full-service payroll providers combine integrations to offer benefits, retirement plans, and HR platforms. Sounds nice, huh?
Don’t get too excited: you still need to keep employee records accurate, be able to answer employee questions about payroll and the laws in your state, and follow local tax laws. (If a mistake turns out to be yours, well, the fine print in the guarantee says that renders the no penalty guarantee null and void.)
What Does Full-Service Payroll Cost?
Each service provider is different, but the range of costs for full-service payroll run between $40 – $300 a month plus $3 – 6 a month per employee depending on the service. There are sometimes additional fees, too, for integrations, implementation, and benefits administration.
Which Businesses Should Use Full-Service Payroll?Â
Times are changing. Even a few years ago, it was not cost-effective to outsource full-service payroll for a business with fewer than 50 employees. However, with more and more services entering the market, the competition among providers is heating up. A small business with a few employees might find a few hundred dollars a month a reasonable price to pay for payroll. Depending on the business, the benefits outweigh the DIY route. Any company of any size can find a full-service payroll system that works. For the most affordable option for small businesses, check out Square Payroll. Merchant Maverick uses Gusto and we highly recommend the program for its features, integrations, and attentiveness to customer service for small businesses. For businesses already using QuickBooks, check out Intuit’s full-service payroll program.
Self-Service Payroll Software
Best for businesses looking for basic payroll software that calculates payroll but doesn’t file taxes for you.
There is crossover in payroll services between the full-service payroll options and other more bare-bones payroll services. If full-service isn’t economical, practical, or on your radar yet, there are other payroll service options in addition to those who do-it-all. Intuit QuickBooks has a desktop program that runs numbers for you and can assist with printing checks and paystubs, but you will still need to file your own payroll taxes with your quarterly payroll updates to the government.
What Does Self- Service Payroll Do?
Payroll services vary. Most of them will take on calculating payroll, managing deductions, and printing checks. Without a full-service option you are often sacrificing tax filing and support, or other HR features like managing benefits or tracking time and paid time off. Many major competitors like ADP and QuickBooks offer simplified payroll services at a more economical rate.
What Does Self-Service Payroll Cost?
Pricing will always depend on the size of your business and how many payrolls you run. For example, ADP charges per payroll, so you will pay more if you are on a weekly pay schedule. In general, some basic payroll services, like Patriot, have a base fee as little as $10 a month + $3-5 dollars per employee. Some are subscription-based, like QuickBooks, and start at $35/mo+. The more services you need, the higher your monthly cost will be.
Which Businesses Should Use Self-Service Payroll Software?
Small businesses that want to pick and choose the features they pay for and receive some basic guidance will benefit from picking a payroll service that suits their needs. Whether that is a local payroll service company or services from the same providers who offer full-service options.
Best for businesses looking to outsource their bookkeeping and payroll or for businesses with complicated payrolls and tax situations.
It is true that in our fast-changing automated world, the roles of bookkeeping and accounting are slowly shifting toward computers. If you miss real-person contact and you don’t want to ship payroll off to the cloud, you may also find hiring an accountant or bookkeeper is still a solid option in 2019.
What Does An Accountant/Bookkeeper Do?
An accountant manages and analyzes a company’s money, taxes, and compliance. A bookkeeper is the business record keeper of all financial transactions. There are many online bookkeeping and accounting services available that will include running payroll as part of their services. These companies and real humans do more than payroll, however, as they will help manage all credits, debits, and loans, as well. In this capacity, you are not adding HR services or other options. You are hiring someone to run and analyze the numbers for you.
What Does An Accountant/Bookkeeper Cost?
To hire accountants and bookkeepers, they will let you know their hourly rate, or you may offer a competitive salary. Accountants, who are schooled and trained in regulation and money, will cost more per hour ($100-400 per hour on average) than their bookkeeping counterparts ($20-45 per hour on average).
Which Businesses Should Use An Accountant/Bookkeeper?
If you have complicated payrolls and a complicated tax situation, an accountant is a worthwhile addition to your company. Having an accountant in-house is nice, but it’s also a luxury. You can hire accountants per hour to help you with specific tax issues or money needs. Bookkeepers manage the day-to-day money in your company. If you have a lot of money coming in and out, someone specifically focused on keeping your accounts current and paying your employees is a great asset.
Best for business looking to outsource all payroll and HR management.
A Professional Employee Organization is an entity that provides small businesses with help for human resources, payroll tax filing, worker’s compensation insurance, safety and training, and so much more. If a bookkeeper focuses solely on running payroll, a PEO focuses on running anything employee-related in your business.
What Does A PEO Do?
First, your business and the PEO enter into a co-employment. This is so the PEO controls and manages, on your behalf, everything tax-related, and you are freed from administrative duties such as deductions, benefits, retirement plans, etc. A PEO also takes over the burden of human resource management as well. In many of those areas, there are strict regulations and a lot of risk of getting it wrong. It might be prudent and more cost-effective in the long run to outsource the more delicate aspects of employee management. (Also, a PEO might be the only way a small business may offer competitive health benefits which makes your business a more attractive place to work!)
What Does A PEO Cost?
PEOs are either paid a flat rate per employee or take a percentage of payroll. Depending on the PEO, the small business, and the number of employees, those numbers fluctuate between $150-$2000 a month per employee or they take a 3-8% cut of payroll on average.
Which Businesses Should Use A PEO?
If your business is growing and you really do want/need to outsource everything that isn’t strictly related to your business, a PEO will fill that void. Also, if you are a small business owner and you don’t know how best to offer your employees competitive health/dental/retirement benefits, a PEO can pave the way to make those options available for any business, no matter the size. Use a PEO if you want to seamlessly integrate payroll, taxes, HR, employee management, and so much more.
How Much Does Payroll Outsourcing Cost?
The breakdowns listed in the section above show the range in payroll costs among each option. However, there are a few more things to consider.
A simple DIY route could cost nothing at first, but if you misfile taxes and incur penalties, the fines and fees will negate any savings. Or maybe you are a small business paying for services you don’t need or use. Payroll can range from $40-100 for small businesses with few employees up to thousands a month for full-service payroll. Hiring a bookkeeper or accountant part-time or full-time is a solid tens-of-thousands of dollars. Only you know what payroll option works best for your situation.
Which Payroll Option Is Best For Your Business
My magic ball says the right option for you is…
That was a trick: There is no magic option. You will need to assess your business needs with what you can afford and your own level of pioneering spirit. Here are some questions to ask yourself as you make your payroll decisions:
Do I have a complicated payroll?
Do I want help filing taxes and quarterly reports?
Do I have the time to commit to monthly payroll?
Am I afraid of making payroll mistakes?
Do I want to offer HR services to my employees?
Do I want to offer benefits to my employees?
Do I enjoy puzzles and numbers?
Am I inundated with employee paystub related requests?
Can I afford a payroll service?
Do I have the time to pick options or do I need something fast?
Am I dazzled by endless reports and features or am I just fine with barebones systems?
Whatever payroll system you chose, make sure your research includes quotes. Some payroll services charge extra for benefits and HR per employee and by the time it’s added up, you’re looking at a more expensive option than a PEO. Know how much you want to tackle, how much you want others to tackle, and what you can spend and go from there.
If you’re still not sure, here are some benefits to both. See which is the better fit.
The Benefits to Payroll Outsourcing
If you do not have someone employed by you who knows how to run payroll, outsourcing is a great option. Since some companies combine payroll and HR, since there are so many available options to also outsource both, it can save your company time and money. Also, when you are running a business and wearing lots of hats, sometimes it’s nice to take one off and not have to worry about where you set it down. (I really just wanted to see that example through.) Outsourcing isn’t stress-free but it is stress-reducing, and that’s important.
The Benefits of DIY Payroll
If your business doesn’t have a complicated payroll (maybe you hire mostly contractors) or there is something calming in running payroll yourself, there are a great number of benefits to keeping payroll in-house. Not only do you have control, but you also don’t have to be dependent on someone else to fix mistakes or make changes. Also, you won’t have to pay any outsourcing fees. With the free tools and resources on the internet, you can find a DIY system that works.
How To Choose The Right Method
Follow your heart! (So cliche, so hardly ever used about payroll, and also so true!) Only you know what’s best for your business and your past experiences with payroll. No matter what method you choose, there will be some required time involved in the payroll process — how much time is up to you. In order to make the decision, you need to know how much money you want to spend, how much time you want to spend, and if you want to offer benefits to employees. If you just need to pay people, DIY. If you want to offer benefits, training, and other employee integrations, outsource.
No matter what you choose regarding payroll, outsource vs. DIY, there are numerous options available for businesses of all sizes. We’re lucky to live in such a technological age where services that used to be only for a few are now available to many. Large, full-service companies like ADP and Paylocity have rebranded themselves with options for small businesses, and those heavy-hitters bring a lot to the table. Certainly if you are looking for ways to streamline your business, between the payroll and accounting services and software available, competition among plans and services is fierce. Merchant Maverick recommends Gusto as a full-service provider with solid features and integrations. Some other payroll service providers worth checking out are Square, Intuit Online, and Paychex.
The post Should You Outsource Payroll Or Do It Yourself? appeared first on Merchant Maverick.
Payroll is a daunting component of any business, and many small business owners admit frustration with managing their payroll documents. But payroll is necessary. Not only is it important that you pay your employees correctly, but making a mistake on payroll is messy, complicated, and could impact taxes. If you’re looking for a quick and easily digestible introduction to payroll, you’ve come to the right place. Let’s delve on in.
What Is Payroll?
If you have employees, you pay them a wage for their work; that’s just a basic fact of life. Payroll is defined as the regular payment of wages to employees, and it includes withholding the correct amount for taxes, insurance premiums, or retirement plan contributions. Payroll can be complicated and unwieldy with technical minutia, but managing payroll is a legal requirement, so don’t try to skimp on understanding the basics.
In essence, with all payrolls there are dual systems at work — there is the money allotted to employees as wages and there is money that is withheld for payroll taxes. As a small business owner, you are responsible for managing those withholdings. So, when payday rolls around, you give your employees a check that has the appropriate amount withheld for taxes, and when tax time arrives, you provide employees with statements of income (more on this below) and pay the government their share of the booty. That’s payroll, in a nutshell.
The Components Of Payroll
Payroll is broken down into several steps. As the small business owner, you are responsible for providing your employee the correct wages and for withholding state and federal taxes. Your records for payroll need to be clear and accurate, and whether you do these calculations by hand or use payroll software to run the numbers for you, it’s important to understand how payroll works. Anything dealing with money and taxes is fundamentally crucial to your business, and it’s important to your employees, too. A functional payroll sends a message of respect and stability to the people you employ.
Before you set up a payroll system, here are the payroll terms and the concepts you should be familiar with.
What does it mean when someone runs payroll? It can mean running the monthly wage reports for employees, including their withholdings. And it can mean organizing the financial documents related to wage and withholdings for the entire fiscal year, as well. Payroll can also simply mean the amount you pay to employees and the government every year.
Your employees work for you for a certain amount of money, and processing the money you owe them is payroll. In order to set up a payroll system for your business, you will need to acquire some information from your employees. Here’s everything you must have to set up your payroll system:
Your company’s legal name or DBA (Doing Business As)
Your Federal employer identification number (EIN)
State tax withholding ID number
State unemployment tax ID number (SUI)
Local tax ID numbers
Your state unemployment tax rate information
Details on the pay rate for each employee
Personal information for all employees, including
Social security number
Tax filing status
Information on deductions and contributions
Once you’ve gathered this information, you can set about calculating the appropriate withholdings and deductions in order to be compliant with the law.
Salary & Wages
Money, money, money, money! Look, wouldn’t it be amazing if each of your employees was independently wealthy and believed in your business enough to work for free? I mean, sure, as a small business you may temporarily use your friends, but if you have someone working for you day after day, then put that person on the payroll. It might feel easier to pay a handful of employees under the table, but it’s both illegal and hurtful to your bottom-line. Here are some salary and wage terms to understand:
Gross Pay/Gross Earnings
Gross pay is the amount of money your employee has earned before any deductions. This includes commission, bonuses, and other payments.
Net pay is the amount of money your employee has earned after deductions and taxes are withdrawn. This can also be called “take-home” pay.
This is the accumulative yearly wage for employees. That salary is then divided up and distributed on a set pay schedule. The payment schedule could be weekly, bi-weekly, or monthly. (A salaried employee has set earnings per month versus an hourly employee.)
This is the amount of money paid per hour to employees who are not receiving a set salary. Freelancers, contractors, and all hourly employees are paid per hour. In a payroll system, the hourly rate is set for employees and is calculated when payroll is run.
If an hourly employee works more than 40 hours a week, any additional hours you approve over that is considered paid overtime. An overtime wage is a set rate and is subject to tax deductions. Overtime calculations can become complicated depending on when payroll is run, so if you have quite a few employees who earn overtime, factor that into your payroll choices.
Someone working for your business on contract has a specific pay schedule related to that contract. As a 1099-employee, a contract is based for a specific amount of time and ends on an agreed-upon date. As an employer, you do not withhold taxes from a contract employee — he/she is responsible for their own withholdings.
This is an amount of money rewarded to an employee for good performance. While it may be a one-time payment in addition to a salary, all bonus money is subject to taxes.
A tip or gratuity is an added amount of money received by employees for a job well done. Some payroll systems allow employees to keep track of their tips, as those wages are taxable income. Having a system to account for tips is important to your business and maintaining compliance.
If you are a sales-based company, your employees might earn money off of each sale they make, and this is called a commission. Even if your employees are commission-only, the IRS still considers commissions as supplemental income and it should be taxed at the regular rate.
Earning time-off is an important part of being an employee. Time off can appear in various forms; family and medical leave, paid vacation time, sick leave, and personal time. Your small business needs time-off policies and a way to calculate those hours separately from paid work hours. Your payroll system will also include information about your business’s time-off policies and calculate adjustments to a paycheck for earned time off. An automated payroll system can calculate earned time off for your employees — making it easy to put available vacation hours on pay stubs.
Paid Time Off (PTO)
This is a set amount of hours per year your employee has to take a paid time away from work. Some companies provide a block of hours employees can use toward sick, vacation, or personal days. Under federal law, you are not required to provide paid time off to your employees, but happy and healthy employees are good for business, so offering PTO is often in the best interest of employers (and can be a huge deciding factor for an employee’s job decision).
Set up a policy for paid time off and communicate it clearly to employees. What happens to unused time at the end of the year? Are employees paid a regular or amended rate for paid time off? Once you’ve made these decisions about time off, then you can find a payroll system that automates the process for you.
While Paid Time Off (PTO) and vacation days can be used interchangeably, they are different. Vacation time by definition is time your employees can take and to be totally free from work duties without restrictions. Business policies regarding vacation will vary. Make some choices about your vacation policies: do employees need to declare vacation by a certain time? How many hours of vacation are employees given a year? How are vacation days tracked?
Humans get sick. Humans make little humans who are sometimes sick and can’t go to school or daycare. Illness is a fact of life and business owners need to prepare for the inevitable with a sick day policy. Bonus: encouraging your employees to stay home when they are ill protects your business from sickness spreading! Check with your state to see if there are state-mandated sick leave policies. Note:At the time of this article, 13 states/territories have paid leave laws: Washington, Oregon, California, Arizona, Michigan, Connecticut, Maine, Maryland, Massachusetts, New Jersey, Rhode Island, Vermont, and Washington DC.
In addition to sick leave and vacation leave, you may want to consider offering other leave options to employees. Personal leave is scheduled time for your employees to use for adulting purposes (doctor appointments, car check-ups, parent-teacher conferences, school meetings, emergency plumbing disasters, mental health). Also, developing a plan for family leave/maternity and paternity leave is a must. Brainstorm the ways an employee might need to be absent and have firm policies in place for those occasions.
Employees care about benefits. Second to salary, benefits matter when employees choose where they want to work. Sometimes small business owners think they can’t afford to offer benefits to employees, but they actually can’t afford to risk the loss of employees by not offering benefits. The value far outweighs the potential cost.
So what are benefits? These are the extras a small business provides for their employees — health care, dental care, life insurance, or a retirement plan. As a small business, depending on your size, you might be required to provide some of these benefits to full-time employees, so as always, check the laws in your state. Here are a few benefits that may be legally required:
Time off to vote or serve in the military
Pay state and federal unemployment taxes
Comply with FMLA (Family Medical Leave Act) laws
You are not legally required to provide a retirement plan for employees; however, should you provide a retirement incentive, there is marked improvement in employee retention and happiness. There are also tax credits and incentives for small business owners who provide retirement benefits. The options for retirement benefits are tiered and varied; for companies with a small number of employees, retirement options like a Simple IRA or a Simple 401K are easy to implement, and many payroll software systems can help with employer contributions and matching.
Do you need to provide health insurance to your employees? Possibly! The current legal requirement is this: If your business is considered an Applicable Large Employer (ALE) with 50 or more full-time employees for more than six months out of the year, then you will need to provide your employees with health insurance as a legal requirement of the Affordable Care Act.
If not, then health care benefits are a choice! (But a good choice! And one that leads to happy employees, higher retention rates, and a thriving and healthy community.) Need to know more about health insurance, even if you are a small business with only one employee? We have you covered. Check out ourÂ Ultimate Guide to Small Business Health Insurance or our post on How Health Insurance Works for One Employee.
As a small business, you may offer life insurance to your employees. Group life insurance is an inexpensive and easy way to communicate to your employees that you value them. (Also, did you know that you can even singularly insure a really important employee? Like, if your business won’t function without a particular human being…insure that human! It’s called Key Person Insurance. Check it out.)
Fringe benefits mean any additional supplement to income that you may offer your employees. They include the benefits listed above, but also include many other types of assistance you may want to offer. Some companies provide access to a company car, rewards for healthy living, transportation vouchers, discounts for schooling, employee discounts on merchandise, technology grants, and paid career advancement conferences. Most fringe benefits are tax-free, but it’s important to check with a tax expert.
Tax Deductions & Withholdings
The most important thing, equal to paying your employees, is paying the government. Managing federal and state tax withholdings is a crucial component of payroll. It is your responsibility as the small business owner and employer to understand the tax law and the federal tax rates (you, or a software program, or a hired accountant). Your employees, when hired, will fill out and send the proper forms to the Internal Revenue Service (IRS), and that paperwork along with current tax rates will tell you how much to withhold for payroll taxes.
We know it’s a lot to take in, but before you start hyperventilating, we’ve broken down the tax withholding basics below.
Federal Income Tax Withholding
This is the amount of money withheld from an employee’s paycheck each month that goes to pay federal income taxes. The federal rate for income tax withholdings changes depending on your income level and your employee’s allowance preferences (as reflected on their W-4s).
State Income Tax Withholding
This is the amount of money withheld from an employee’s paycheck each month that goes to pay state income taxes. As an employer, you are required to calculate how much to take for state and all local taxes.
The social security tax is a federal income tax that affects all employees, no matter what. The tax rate for social security depends upon a formula that takes inflation into account. In 2019, the current rate is 12.4 percent which accounts for a 6.2 percent employee and 6.2 percent employer contribution. (Unless you make over $200,000 a year, then you gotta pony-up an extra .9 percent.) Combined with Medicare, this is what is referred to as Federal Insurance Contributions Act (FICA) Taxes. And FICA taxes are also called payroll taxes.
Along with social security, Medicare is considered a FICA Tax which is considered the cost to the government for employment. The current Medicare rate is at 1.45 percent for all employees, and there is no cap. You will collect this money as part of the paycheck withholdings and send it along to the IRS throughout the year.
Payroll Tax Forms
You cannot create a payroll system without having the right tax documents from each employee. (Cue Roz’s constant battle-cry for paperwork in Pixar’s Monster’s Inc.). Our current digital landscape allows for the ease of sending and receiving tax forms via the internet, so we can cut down on the “paper” part of all this paperwork.
Filing payroll? Here are the forms required by law that you/and or your employees must fill out:
W-2: Every employer is required to send this document to each employee and the IRS. This form is a statement of all wages earned and all taxes withheld during the previous year.
W-4: This form is filled out by employees and communicates how much tax they’d like withheld from their paychecks. You will need to know their withholding allowances in order to correctly run payroll and take out the right amount of money.
1099: This form is for people who worked under contract or freelancing for your business and do not earn a regular salary. This form is for tracking miscellaneous income, or extra income, a person may earn. Money sent to a 1099 employee does not have taxes withheld, which means the burden of paying taxes moves away from you as the temporary employer.
Schedule C: If you are an independent contractor or a sole proprietor of a business, you will need to fill out a Schedule C profit/loss report and file it with the IRS. A profit-loss statement is also called an income statement and its purpose is to help calculate your self-employment tax. Under the new tax laws, you will file a Schedule C form with your 1040 form.
1-9: This form is required to verify the identity and employment availability of your employees. When you hire someone and onboard them to your business, every single new hire needs to fill out this form. After your employee fills out the first part, you as the business owner need to fill out the second part. Since this is used to establish identity, your employees will need to send you formal identification: a current US passport, a green card or alien registration card, birth certificate, social security card, among others.
940: When you run payroll, you will pull out and withhold certain taxes to send to the federal government. One of those taxes is the Federal Unemployment Tax. That money is used to compensate workers who are unemployed and are qualified to receive assistance.Â You will need to fill out a 940 form every year to declare your payroll: how much your employees earned and how much money you pulled for your unemployment taxes.
941:Â This important payroll tax form tells the federal government how much you paid your employees and how much money you withheld to pay for income taxes, social security taxes, and Medicare taxes. You will file the form and then send the IRS the money you withheld from employees when you ran payroll.
944: If you are a big company running payroll, you will pay your payroll taxes every quarter, and this form doesn’t apply to you. However, if you are a very small business and your total withholdings for payroll taxes are less than $1000, then you can file a 944 form once a year.
The phrase processing payroll means several things. We’ve already discussed the biggest decisions regarding setting up payroll. To process payroll means all of these things:
Determining your employee’s wages and salaries
Determining an employee pay schedule
Calculating payroll taxes
Withholding payroll taxes from employee paychecks
Delivering paychecks with the proper withholdings
Submitting taxes to the government
Dispensing paperwork to employees via W-2 or 1099s.
Payroll is not a single step, but a collection of steps that lead to paid employees and a paid government — keeping the people you employ happy and the tax gods happy. Here are the factors to consider in order to set up and process payroll:
Who Is On Payroll?
You’ve hired an employee. Yay! Now, you need to pay that employee. Your payroll will include any W-2 and 1099 employees you pay regularly. But not everyone who works for your business will need to be processed through a payroll system, so who does get paid via payroll?
Whether or not someone is considered an employee has a lot to do with whether or not you control his/her workload, control his/her paycheck, and control your relationship. (If you have control over another human…you’re the boss!) If you can say yes to any or all of those questions, then that person is your employee and you have legal requirements related to paying that individual. If you’re super confused about whether or not you are someone’s boss, you can fill out an SS-8 form with the IRS and they’ll help you figure out the classification.
A contractor is not an employee. They are a freelancer helping your business for a set time or a set project, and are paid according to their contract. Contract employees are responsible for withholding their own taxes! When you run payroll for contractors, pay them their wage and your part is done. (Easy peasy.)
Now it’s time to make important choices about how often your employees will get paid. Twice a month? Once a month? Once a week? Here are the options, challenges, and benefits of each.
On a weekly payroll schedule, employees would receive a paycheck each week for a total of 52 pay runs per year. Some employees like being paid weekly; it can be good for monthly budgeting. However, running payroll every week can be a time-consuming practice for you or your accountant. Many payroll companies will charge you each time you run payroll, so a weekly payment schedule might seem nice, but it’s expensive and hard on the people in your accounting department (or if you don’t have an accountant: you).
A bi-weekly paycheck would arrive every two weeks, regardless of how that week fell on the calendar. Bi-weekly payroll doesn’t always even out since every month is not exactly four weeks. With bi-weekly payroll, there’s a total of 26 pay runs per year (which means that most months, employees will receive two paychecks per month, but twice a year they will receive an extra check). This means the paychecks may appear to come inconsistently and some people find this harder to rely on.
A semi-monthly paycheck arrives twice a month, usually on a set date (for example: the 1st and the 15th; or the 15th and the end of the month). Unlike bi-weekly payroll, semi-monthly payroll has a total of 24 pay runs, meaning employees will get paid twice a month no matter what. Semi-monthly is the best for employees who earn a salary but is cumbersome for calculating overtime.
On a monthly payroll schedule, employees receive a paycheck once a month. Some employees don’t like the once a month payments, but with only 12 pay runs a year, it is the easiest on the person running payroll. The end of the month corresponds with payments to the IRS, so it can be simple to withhold, collect, and report.
One of the components of payroll is giving each employee a pay stub. This is a formal piece of communication between you and your employee about how much they earned and how much you withheld. Each pay stub also includes all the year-to-date figures. The type of information required on a pay stub varies by state.
Payroll Payment Methods
When the time arrives to give your employees their paycheck, you have several methods to choose from. You may offer payment choices to your workers, or you can choose for them. Here the three most popular options you can use to distribute your payroll:
1. Payroll Checks
You can give your employees a paycheck. Manually filling out handwritten checks might take a long time every payroll period, but there are automated ways to print checks, too. (Some require a special printer, so be sure to talk to some payroll experts about your needs.) A check has several benefits: employees don’t need a bank account and there are low distribution costs.
2. Payroll Card
A payroll card is similar to giving employees a preloaded credit card — actually, that’s exactly what it is. Every pay cycle, you put money on a payroll card and employees can use the payroll card wherever debit/credit is taken, or pull the money out as cash. These payment cards are gaining in popularity. This is another method that doesn’t require a bank account.
3. Direct Deposit
If you don’t want to mess with checks and cards, direct deposit into an employee’s bank account can be the way to go. This is the most common way employers pay their workers, and it’s easy: if you have an automated online payroll system, linking a direct deposit creates a seamless payroll. However, it can be expensive to set up and not all employees may have a bank account.
How To Run Payroll
Alright, now the nitty-gritty part of this process. You know what kind of employees you have, they’ve filled out their paperwork, you’ve decided to pay them bi-weekly (or, you know, whatever), you’ve learned about rates of withholding and benefits, and you know how the employees want to receive their money. Bam! You’re on a roll! But now what? How do all those numbers and choices combine into a seamless process that won’t eat up major hours of your time?
Here are the options you have as an employer for calculating and processing payroll.
Manually Calculate Payroll
Manual payroll might be your only choice, financially or otherwise, and that’s okay. If you have only a handful of employees, it could be more cost-effective to do those calculations by hand. If you have a salaried employee, you’ll take their salary, divide it up among the pay periods, and withhold the necessary taxes. For hourly employees, you will examine their time cards and make the calculations based on their hours and rate of pay.
Manually running payroll is cost-effective for your small business and could be a good choice if you feel comfortable and confident working with numbers, and you only have a handful of employees.
For example, you have an employee named Jim. Jim’s a salaried guy making $50K a year, with no overtime. Jim gets paid every two weeks, so his salary of $50K is divided up across 24 payments. 50,000/24 = $2083.33 is his GROSS pay every two weeks. You will still need to withhold payroll taxes though. You can use the IRS’s tax withholding percentages to help you calculate this.
According to the IRS, for a bi-weekly gross pay of $2,083.33, federal withholdings are $267.00, social security withholdings are $129.17, and medicare is $30.21, which means you’d give your employee a NET amount of $1717.37 on their bi-weekly paycheck.
How did I calculate that? Well, I did spend some time with a calculator and the federal rates we discussed above. Then I checked my numbers against a payroll software program. Was I right? Yup! Did the software calculate it faster and give me more confidence? Well, also, yup. So, if manual calculation doesn’t get you feeling all fun and loose, there’s a software for that.
Business software has come a long way in recent years, and payroll software is no exception. There are tons of online, easy-to-use payroll solutions. The benefits of payroll software include built-in time tracking and payroll calculations, expert help from customer support teams, peace of mind, and saved time.
Merchant Maverick has already reviewed a few payroll software providers, including Gusto and Paychex. These comprehensive payroll reviews cover pricing, features, customer support, user feedback, security, and more so you can make an informed decision about the right payroll software for your business.
The last option is to hire an accountant or a payroll outsourcing company to manage your payroll from start to finish. While a payroll program can do the calculations and manage your tax tables, as the small business owner you might still be the singular responsible person for managing payroll. By outsourcing the entire process, you can rest assured that professionals are handling the numbers, and it doesn’t have to be a monthly or bi-weekly chunk of time.
How To Choose Payroll Software
So, you’ve decided that as much as you enjoyed your high school math classes, you want to trust in computer calculations, and you want to check out available payroll software. There are many options at your fingertips. All those options can also make finding the right payroll software a bit overwhelming. Do you need bells and whistles? How much can you anticipate to pay? What if you make a mistake?
Ask yourself the following questions before you start to look at programs:
How many workers do I need to run payroll for?
Do I have mostly salaried employees or contract employees?
Do I provide a benefits package?
Do I have a payroll manager who is comfortable with the legal requirements of payroll?
How much am I willing to pay to outsource the work?
Payroll Software Features
Each software program that helps you with payroll comes equipped with different features. Only you will be able to know what features are needed most for your company. To start, here is a list of all the basic features a good payroll software should have:
Payroll Processing Abilities: Maybe this should go without saying, but your software needs to calculate and process your payroll, whatever that looks like. Look for integration with timekeeping software, ease of use, etc.
Tax Calculations: Since this is the trickiest part of payroll, it’s important to have software that you trust to manage and perform automated calculations. There’s less human error and the system will help you file those taxes, too.
Direct Deposit: Automate everything and make sure when you run payroll that your software has the capabilities to work directly with banks.
Time & Attendance Tracking: Some payroll software can also be used for timesheets and keeping track of employee hours. If you have many hourly employees, this might be a nice integration tool so you don’t have to import hours from a different program.
Payroll Training & Support
When shopping around for a payroll system that works for you, make sure that it comes with real-person training and help. Should you get stuck, you’ll want to make sure there is someone who understands compliance issues available to help you. If your business doesn’t have an accountant, then purchasing software that comes with human support should be a high priority. Payroll can be complicated, daunting, overwhelming, and there are many opportunities for human error.
But there are also many online support and training opportunities if you want to learn it on your own or pay an employee to become payroll certified.
Cost Of Payroll Software
As with the costs of all things, the monthly number differs depending on need. There are some payroll systems that start as low as $10 a month and no additional fees per employee; however, some programs charge a fee per employee (in the $4-5 range). And some payroll software companies can charge up to $200 a month. With that much of a variance between programs, it’s important to set a budget and decide what features are the most important for your business as you move forward.
Getting Started With Payroll
Paying your employees is not an optional part of running a small business. You need to find a payroll system and a method of running payroll that adds quality to your business, not chaos. Compliance, necessary HR onboarding, and running payroll during tax season are all components of a small business that might make you want to go take a long nap and turn your brain off if you have a tendency to want to sleep for years when life gets overwhelming (…or is that just me?), but in today’s digital world payroll is easier than ever.
Research and understand what you need, know your business, and take the leap into organizing your systems with seamless payroll. The IRS and your employees will thank you.
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