- What is payroll?
- How does payroll work?
- What are small business payroll taxes?
- How do I calculate payroll?
- How do I do payroll for my small business?
- When do I have to deposit employment taxes?
- Why use small business payroll services?
What is payroll?Payroll is defined as the total amount of wages paid by a company to its employees. While expanding your bandwidth and adding members to the team can certainly help your business grow, it undoubtedly adds complexity to your former self-employed income. You’ll need to acquire an employer identification number, gather your employee’s information, distribute and collect appropriate tax forms, establish a regular pay period, track hours worked, calculate tax withholdings, plan your payroll processing… and that’s just the tip of the iceberg. According to 40% of small business owners, bookkeeping and taxes are the worst part of owning a small business. And that’s for good reason: it’s complicated. Don’t worry, we’re here to help.
How does payroll work?Let’s say you’ve recently launched a startup company. After a few months, you’re beyond happy and relieved to witness the success of your fledgling business. To lighten your load and keep up with the demand, you’ve decided it’s the right time to hire additional help. After narrowing down applicants and finding the best fit, you extend the job offer and soon have your very first employee! As exciting as this chapter may be, you can’t neglect your new responsibility as an employer and need to learn the ins and outs of small business payroll. At this stage, it’s unlikely that you’ve hired a bookkeeper or accountant to handle your payroll, so the job’s on you to learn how to do payroll and ensure your new employee is justly compensated. If you think you’ll have room for growing pains as you figure out your new system, think again: 49% of employees will start looking for another job after only two payroll errors.
Here’s a step-by-step guide for setting up your small business payroll to ensure best practices:
- Schedule a pay period
- Distribute new hire forms
- Determine tax withholdings
- Pay employment taxes Businesses are required to pay the Federal Unemployment Tax (FUTA) along with applicable State Unemployment Tax (SUTA). These programs are designed to provide compensation to employees who have lost their jobs.
- Know your penalties
What are small business payroll taxes?Incorrect tax filing penalties recently totaled nearly $5 billion—meaning the IRS takes their business seriously. Be mindful of these small business tax obligations and their corresponding due dates if you want to steer clear of expensive fines.
Annual wage and tax reportingTaxable wages include compensation for services performed such as hourly or salary remuneration, bonuses, and gifts. Some forms of compensation, such as reimbursements for travel or meals, are not taxable. Gross wages equal the total amount paid to the worker before deductions (including benefits, taxes, and withholdings); the remaining amount is the worker’s “net pay”.
Federal and state income taxWithin your payroll processing, you must withhold income tax from every employee paycheck. The amount of state income tax to be withheld, if any, depends on location. Nine states don’t collect individual income tax at all, others mandate a flat tax regardless of income level, such as Pennsylvania’s 3.07% tax, and it reaches as high as 13.3% in states like California. FICA taxes The Federal Insurance Contributions Act (FICA) requires employers to withhold Social Security and Medicare taxes from their employees’ wages. Employers are also required to contribute a matching FICA tax amount per employee. Federal and state unemployment taxes Employers must submit FUTA taxes if they pay wages totaling at least $1,500 in a quarter, or if they have at least one employee on any given day for 20 weeks in a calendar year. Check with your state’s unemployment agency to see whether you’re obligated to pay additional SUTA taxes. If so, you may be eligible for a tax credit that reduces your federal liability.
How do I calculate payroll?If you’re handling your own small business payroll, you might need a little accounting help. Learning how to calculate payroll can be tricky considering the various tax brackets and tax withholdings per employee. Use these percentages as a business guide to correctly calculate payroll taxes (as of 2019).
- Your small business payroll must withhold federal income tax according to instructions within IRS Publication 15-A. Pick the applicable pay period and wage bracket for your employee(s), then read across the table to the column that shows the number of allowances claimed in order to determine their withholding amount.
- State and local income tax vary by location. Do your research and seek payroll processing help to determine the additional amount you may need to withhold per employee paycheck.
- In 2019, the Social Security tax rate is 6.2% subject to income up to $132,900 (which grew from the 2018 income cap of $128,400).
- Medicare is taxed at 1.45% on the first $200,000 in wages. If your payroll processes an employee’s wages in excess of $200,000, they will be taxed at 2.35% (the standard 1.45% plus 0.9% additional Medicare tax).
- The FUTA tax rate is 6.0% for the first $7,000 paid to each employee as wages during the year. If your state requires additional unemployment tax, you may be entitled to as much as 5.4% (which reduces the FUTA tax rate to 0.6%).
How do I do payroll for my small business?To complete your small business payroll, follow these steps:
- Determine the amount of taxable employees; to ensure compliance, you must file the appropriate tax form for each employee and keep these records on hand should the IRS ever request them.
- Determine the amount of each employees’ taxable wages. Be sure to carefully track the hours worked within a given pay period to avoid payroll mistakes.
- Calculate the employee’s federal income tax withholding using the information on their Form W-4.
- Calculate the employee’s FICA tax contribution.
- Calculate your employer FICA tax contribution.
- Calculate your employer FUTA tax and SUTA tax, if applicable.
- Combine these figures to determine the necessary tax withholding for both your business and your employee.
When do I have to deposit employment taxes?There are two deposit schedules for income tax withheld and both the employee and employer FICA taxes: monthly and semi-weekly.
- Monthly Depositor: Deposit taxes on payments made during a month by the 15th of the following month.
- Semi-Weekly Depositor: Deposit taxes for payments made on Wed., Thurs., and/or Fri. by the following Wednesday; deposit taxes for payments made on Sat., Sun., Mon., and/or Tues. by the following Friday.
Why use small business payroll services?If this information seems like a lot to process, that’s because it is. That’s why so many turn to small business payroll services and the many benefits they offer.
The Benefits of Outsourcing Payroll
Accurate reportingAccuracy is everything, and a small business payroll service can better guarantee the taxes you submit are correct and on time.
Employee satisfactionAs we noted earlier, employees have little patience for payroll processing—but an accountant with an eye for numbers will make sure no detail is overlooked.
Worse than being fined, employers who do not comply with the employment tax laws may be subject to criminal and civil sanctions for failing to pay employment taxes. Hiring a trained professional who knows the ins and outs of the IRS tax system to handle your small business payroll helps improve your compliance.