There are many facets and challenges of running a business. While a potential business owner may be extremely talented in a certain field, being aware of everything that comes with operating a business is essential to long-term success. From hiring and retaining new employees, to knowing and complying with HR regulations, and proper accounting practices, every step along the way is important. However, one of the most important factors in business operations is payroll. This article will provide you with some payroll 101 guidance for how to handle your payroll process.
Payroll 101: How to do payroll
There are many important things to consider when preparing and processing payroll.
Know the rules
Before hiring your first employee, take the time to research the rules of payroll. Payroll is not as simple just writing your employees a check. There are certain payroll taxes that must be withheld from your employees as well as certain employer taxes that businesses need to pay or match for each of their employees. Additionally, there are rules around which deductions from your employees pay are considered pre-tax or post-tax deductions. Knowing how to handle your employees wage garnishments is another compliance challenge. Violating any payroll rule can result in audits and potential fines for your business, so knowing the rules ahead of time is critical to getting started on the right path.
Speaking of payroll taxes, learning the ins and outs will keep your business compliant. Generally, employees cost a business an extra 10% in payroll taxes throughout the year. This consists of the employer portion of taxes such as Social Security and Medicare tax, as well as State Unemployment Tax and Federal Unemployment Tax. Another facet of payroll taxes is the deadlines in which these taxes must be filed. Businesses must submit quarterly payroll taxes if the tax liability is over a certain threshold. Furthermore, it is essential for a business to follow proper payroll accounting practices and accurately record the employer portion only of payroll taxes on their general ledger.
Should a business have employees living and performing work in a different state than the state that the business operates, the business is required to withhold and file taxes with those states. This is becoming more common with a great percentage of the workforce working remotely.
Gather the proper employee information
Every business should have an employee onboarding program. An onboarding program not only benefits the employee, as it will setup them up for long-term success within a company, it can also benefit the employer by maintaining compliance in employee data collection and security. Every business must have a Federal Form W-4 and a Form I-9 kept on file for each employee. Be sure to collect this paperwork from your new hires on or before their first day of work. Waiting to collect the required documents can result in violations by the U.S. Citizenship and Immigration Services.
Know your pay period, work week, overtime, and minimum wage rules
A business must select the pay frequency and work week that works best for them. Businesses often choose weekly or bi-weekly pay frequencies as it is easier to adhere to labor laws. The work week for any business is any 7 consecutive days. Any hours worked in a work week, or in a 7 consecutive day period, must be paid at the overtime rate or the blended overtime rate for those employees earning multiple pay rates.
One way to potentially reduce overtime costs, especially for those in the hospitality industry, is to choose a different work week than the standard Sunday to Saturday. For example, implementing a work week of Thursday to Wednesday allows employees to work most of their hours in the beginning of the week, the busy weekend shifts, and less hours at the end of the week, the typically quiet middle of the week shifts.
Another key to compliant payroll is knowing the minimum wage laws of the state in which the business operates and the employees perform work. All employees must be paid at least the higher of State or Federal minimum wage. For remote employees, they must be paid at least the minimum wage of the state in which they are living/performing work if different from the state in which the business operates.
Another requirement of businesses with at least one employee is worker’s compensation insurance. The insurance is used in the case of injury to cover things like:
- Lost wages
- Medical bills
- Job retraining
- Disability benefits
- Funeral services
The amount a business pays for worker’s compensation insurance is directly related to its’ payroll. Traditional worker’s compensation is based on estimated payroll at the beginning of the year. Year-end audits determine if the business has overpaid or underpaid. The worker’s comp pay-as-you-go model allows businesses to pay smaller payments each pay cycle based on actual payroll amounts. This is a more accurate way to make insurance payments and results in little to no difference at year-end audits. Knowing the worker’s compensation requirements and methods is essential for all business’ payroll process.
Reporting is an important aspect of all areas of a business, however, not adhering to payroll reporting requirements is another way to receive fines and penalties levied by the IRS. There are two major categories for payroll reporting. First, quarterly reporting of payroll taxes are filed on the 941 and State Unemployment report. These quarterlies will report the amounts due for Federal Withholding, Social Security Tax and Medicare, as well as report the wages earned by each employee and the taxable wage associated with each employee.
The second category is the annual reporting of payroll taxes. Annual reporting requirements consist of the Form W-3, Form 940 , and a State W-2 Filing Report. A copy of each W-2 must be provided to each employee no later than January 31st of the following year. A total of the wages and taxes paid, as well as a copy of each W-2, is reported on the Form W-3.
Lastly, when dealing with payroll processing, remain consistent to avoid IRS fines and disgruntled employees. Once your work week and pay day are determined, keep those choices consistent. Moving payroll back a day because cash flow is low will only upset employees and increase liability. If changes to pay day or the work week are needed, give staff plenty of notice of the upcoming change.