Are you an employer looking to master payroll basics? If so, you’ve come to the right place. Payroll basics and compliance can be intimidating, but with the right guidance, it doesn’t have to be. In this article, we’ll provide five helpful tips to get you up to speed on payroll basics so that you can better manage your business’s payroll needs.
Having the proper payroll basics in place is key for any employer. Learn how to ensure you’re ready, understand the building blocks, maintain data compliance, avoid common pitfalls, and choose a process that fits your business. Payroll processing can be complex and time-consuming, but employers can confidently navigate their payroll tasks with the right preparation and resources.
Get Ready
It’s time to prepare by familiarizing yourself with the terms and information specific to payroll, so payroll is set up correctly. Payroll compliance is crucial to the success of a small business; without compliance, there can be significant penalties and fines.
When starting a small business, payroll processing is an important part of the equation. Not only is the business responsible for handling employee tax amounts, but also there is an employer portion that the business pays (Social Security, Medicare, Unemployment-federal and state). Before your first hire, you need to make federal and state tax authorities aware that you are going to have employees. If you have been operating under your own Social Security number, now is the time to get an Employer Identification Number (EIN). Business owners will also need State ID numbers for the State withholding taxes and for the state unemployment taxes.
If you have never participated in payroll processing before, your next step should be to read IRS Publication 15 (Circular E), which is the IRS Employer’s Tax Guide. This very important reference will help you clarify the official definition of an employee versus a contractor, how to handle different forms of wages and tips, payroll periods, withholding, required notices, depositing payroll taxes, reporting withholding on Form 941, and depositing Federal Unemployment Tax (FUTA).
Learn About State Requirements
Decide the Payroll Specifics For Your Business
Small business owners must understand and follow all the payroll specifics that apply to their business structure. The correct forms must be used for workers, such as 1099 or W-4 forms. Depending on the type of business and the state, there may be deductions for state taxes and employee benefits like health insurance and retirement funds.
Small businesses should also decide on a pay period. Businesses can choose from several pay frequencies (weekly, bi-weekly, semi-monthly, monthly). However, it is important to check with state and local authorities for any requirements regarding pay periods. Additionally, employers should decide on a payment method; most companies use direct deposit, though a paper check may be standard in some industries.
In addition to issuing payments, small business owners are responsible for filing timely federal and state payroll tax reports. Reports must be filed with the IRS on Form 941 at the end of each quarter and with the state department of revenue, Social Security Administration, Medicare, and other tax authorities. All funds withheld from payroll should be promptly distributed to the appropriate federal or state tax authority, health insurance provider, or retirement fund manager by the appropriate government agency deadlines.
Maintain Data Compliance
As a small business owner, it is essential to maintain accurate payroll data to comply with federal and state labor laws. Here are some tips on how to maintain data compliance:
- Know your pay rates. For a salary (exempt) employee, gross pay is the annual salary divided by the number of pay periods in the year. For an hourly (non-exempt) employee, gross pay is the number of hours worked in the period, times the regular and overtime rates, as applicable.
- Know your job classifications. Be careful to classify all employees and contractors correctly, as penalties for labor law violations can be severe.
- Apply pre-tax deductions. Once you have all income accounted for, deduct the employee portion of health insurance premiums, contributions to a 401k retirement plan, and any health savings account (HSA) or flexible spending account (FSA) contributions.
- Collect federal and state taxes. Business Owners will collect the FICA tax (Social Security and Medicare) and any state taxes which may apply.
- Calculate employer portions owed. For each employee, the employer portion is equal to the amount of the employee’s entire FICA tax owed.
All small businesses must follow these steps to remain compliant and avoid costly penalties.
Note: This list is not inclusive of all industries. For example, in instances of variable income (i.e., if your employees earn commissions or tips) different payroll rules and regulations apply to business owners.) It’s important to seek guidance from a Payroll Professional.
Avoid Common Pitfalls
When running a small business, it is essential to be aware of potential pitfalls and how to avoid them. One of the most important areas to pay attention to is payroll. To make sure you stay compliant with federal and state regulations, here are four tips to help you avoid common payroll mistakes:
- Pay attention to your payroll and tax calendar. Ensure payroll is completed on time and federal payroll taxes are deposited on time and filed at the end of each quarter. Missing a deadline will result in penalties or even labor lawsuits or a tax audit.
- Independent contractors are not employees. Your business must follow the IRS requirements for contractors, including their work behavior, financial agreement, and relationship with your company. Send them (and the IRS) Form 1099 to show the amounts paid throughout the year.
- Accurate records are key. The IRS requires businesses to keep employee tax records for four years, but longer is better. Accurate payroll records can protect you in case of a lawsuit or audit.
- Classifying employees correctly is also critical. Decide if they are an employee or contractor, exempt or non-exempt. Misclassification can lead to back taxes or overtime lawsuits. Choose carefully.
Choose a Process That Fits
When it comes to payroll, small businesses have three main options. The first is to handle it all yourself with a manual process. This may seem like a good idea, but the time and effort involved quickly adds up. You’ll need to use IRS tools and spreadsheets to make calculations, keep accurate records, pay taxes, and file reports.
The second option is to use payroll software. This is faster than manual payroll and cheaper than using an outside bookkeeper. The software can automate calculations, remind you of filing dates and keep digital records. However, the burden of responsibility still falls on the business.
The third and best option for small businesses is to outsource payroll services. All you have to do is provide the employee details and rates of pay, and the rest is done for you. With professional payroll services, there’s no risk of missing deadlines or tax mistakes. While this service costs, the time saved and the worry avoided may be worth the expense.
To learn more about payroll basics or to get an instant quote for affordable, professional payroll services, visit CRI Payroll Services . CRI is a full-service payroll solution to make fast, accurate work of all your pay and time processing, including federal, state and local taxes.
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