Need help managing your work payroll? Take a look at this payroll 101 guide for everything you need to know about managing your payroll.
Close to 40% of business owners run payroll themselves. Payroll is necessary for your business and your employees’ wellbeing. Yet, it’s time-consuming and confusing for many business owners.
There’s a lot that business owners need to know, from payroll taxes to recordkeeping. A mistake can be costly in fines and penalties from the Department of Labor or the IRS.
Do you need a Payroll 101 primer? Read this guide to learn how to pay payroll taxes, streamline your process, and avoid costly payroll mistakes.
Creating a Payroll System
In order to manage basic payroll easily, you have to have a system that works for you. Start by deciding how often you plan to pay employees.
Do you plan to pay them weekly, bi-weekly, or monthly? Some businesses opt to process payroll on the first and third Fridays of the month.
That’s a good balance between giving employees payroll throughout the month and optimizing your time so you don’t have to run payroll every week.
Employees need to submit their for the pay period by a certain time to allow you to process payroll. This needs to be communicated to them and you have to make it clear that any adjustments to timesheets need to be submitted by this deadline.
For example, employees often forget to clock back in after lunch and they need to have their timesheets adjusted. You could process their check already to learn that it’s not correct.
This deadline will prevent you from redoing payroll to accommodate your employees, which can add hours to doing payroll. If employees don’t submit their adjustments on time, then the adjustment will happen in the next pay period.
Another thing you can do to create a system is to have software take care of the work for you. They centralize the data you need, from payroll withholding records to timesheets. View here to find an example of such a system.
Calculating Payroll Tax Withholding
At the core of basic payroll knowledge is knowing how much tax you need to withhold from your employee’s paycheck.
There are federal income taxes, state income taxes, local income taxes, and Social Security and Medicare withholdings.
Social Security and Medicare taxes are the easiest to figure out. Deduct 1.45% of gross earnings for Medicare and 6.2% for Social Security.
It’s the responsibility of business owners to withhold those funds and pay them to the IRS. Businesses match those funds in the form of payroll taxes. Payroll taxes are typically paid to the IRS each month.
State taxes are a big variable because the income tax rate is different in every state. Some states, such as Florida and Washington, don’t have state income taxes.
There are states that have a flat income tax rate. Pennsylvania is an example of a flat income tax scheme, with a rate of 3.07%.
States also have a progressive tax scheme. This is similar to federal income taxes, where the tax rate goes up with higher earnings.
Calculating federal taxes is complex because there are so many variables at play. The amount of income tax withheld depends on the annual income, tax bracket, tax filing status, and number of allowances claimed.
You need to refer to the IRS withholding forms to make sure you’re withholding the right amount from employees.
Keeping Payroll Records
Why should you maintain payroll records? Federal law doesn’t require that you keep payroll records, but it’s a good idea to maintain payroll records for each employee.
A payroll dispute could come up with an employee. Should one of your employees file a complaint with the Department of Labor, you may have to produce payroll records to support your case.
If you don’t have payroll records, you can’t defend yourself and your business. The Department of Labor is likely to side with your employee.
Another potential pitfall is with the IRS. The IRS has stepped up auditing small businesses to make sure they pay the correct amount of payroll taxes.
They’re also keeping a close watch to make sure businesses correctly classify their employees and independent contractors.
You want to maintain payroll records and W-2 forms in your office for about 4 years. That will ensure you’ll be able to produce vital records to protect your business.
Avoiding Payroll Mistakes
What are some of the most common mistakes business owners make? These are the expensive mistakes that you want to avoid.
Forgetting About Unemployment Taxes
Both state and federal governments require businesses pay a contribution to the unemployment fund. Unemployment insurance exists to help people without jobs pay bills and pay expenses while they’re unemployed.
The federal unemployment tax rate is 6% on the first $7,000 of gross earnings per employee. The maximum amount you’d pay is $420 a year per employee.
The state unemployment tax amount depends on the laws of your particular state.
You’re human and things happen all the time. You can get distracted while you’re running payroll and make a typo on an employee’s paycheck.
Employees have two years to make an underpayment claim. The best way to correct the error is to work with the employee to give them the funds earned as soon as possible.
If you don’t pay the employee what they are owed, they can file a claim with the Department of Labor. That can turn into an investigation, fines, and penalties.
Missing Payroll Tax Deadlines
Tax authorities don’t mess around with tax payment deadlines. If you’re 2 days late on your payroll taxes, you’re assessed a 2% penalty.
The percentage goes up the longer it takes for you to pay your payroll taxes. Interest is tacked onto those penalties, which can be up to 6%.
Payroll 101: It’s Important to Get the Basics
This payroll 101 guide introduced you to the basics of running payroll. As you can tell, there’s a lot to learn. The consequences of making mistakes are severe.
You want to make sure that you get it right, even if that means getting outside help or using software that does most of the work for you.
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