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In our last article we continued our series on how to hire and manage employees, with a look at where to advertise a job and find the perfect employee. In today’s article we are going to continue that series, with a look at how to do payroll. So let’s get started!
One of the advantages of working with independent contractors is that you simply write a check and it is the contractor’s responsibility to pay taxes. If you decide to hire employees however, then you are required by the federal government, most state governments, and some local governments to withhold taxes from their paycheck, and remit those funds to the appropriate tax authorities. In many instances companies will also withhold or deduct money for things such as insurance premiums and IRA contributions.
The 3 Primary Options For How To Do Payroll
There are 3 options for doing payroll: do-it-yourself, hire a part-time accountant, and lastly use a payroll software solution. For most small businesses, we think payroll software offers the best combination of efficiency and cost. ZenPayroll’s solution which is rapidly gaining popularity among many small businesses costs $25 a month + $4 for each employee paid using the system. Try ZenPayroll for 2 months for free.
After initially setting up your payroll software, the process of paying your employees should take less than an hour per week. Your payroll software should let you do the following:
Calculate employee gross pay
Calculate employee (take-home) pay after income taxes, FICA, and deductions for things like health insurance, retirement, and child Support.
Pay employees by printing out checks or making a direct deposit.
Fill out and submit required paperwork for federal, state, and local income taxes.
Send electronic payments to the tax authorities.
Regardless of whether you use payroll software or some other method for handling your payroll, in many instances you will need a way to keep track of the hours that your employees work in order to calculate gross pay.
How should you keep track of employee hours?
If you have a few employees with little variation in hours from week to week, you might use a google or excel spreadsheet for tracking hours. Here is a free excel timesheet template. If you have lots of employees and / or the hours that they work vary, there are a number of free and paid software solutions available. Time Clock Free offers the ability for employees to check-in and out of work from assigned computers, which might be very useful if you are dealing with lots of “new” employees that might not always be punctual about showing up at their assigned hours. For a top of the line solution with tremendous functionality and customer support consider Replicon .
Dealing With Overtime
Depending on how many hours an employee works per week (in some states per day), you may owe them overtime pay. For companies covered by Federal labor laws (companies with over $500K in sales and/or that are involved in inter-state commerce), you will need to pay most employees 1.5 times their hourly rate for every hour per week
over 40. For example, a worker that gets paid $20 per hour would receive $30 per hour for each additional hour exceeding 40. In California, there is a daily limit of 8 hours per day before overtime pay kicks in, even if the employee doesn’t work 40 hours per week. For a list of overtime laws for all 50 states see this article from redcort.com.
Many salaried employees are also owed overtime if they work more than 40 hours per week. Employees with managerial duties or that have a fair degree of decision making power tend to be exempt from overtime pay requirements. To learn more about the difference between exempt and nonexempt employees, read this article in CPA Practice Advisor by James Paille, CPP.
Dealing With Vacation & Sick Days
Employers have a great deal of discretion in providing paid vacation time and paid sick days for their employees. However, you should have a company wide policy and a system for recording the accrual and use of both vacation and sick days.
Intuit’s payroll solution definitely offers the ability to record the accrual and use of both vacation and sick days, and we assume some other payroll software does as well. For more advice on creating a vacation and sick leave policy, read NOLO’s article, Providing Vacation & Sick Leave.
In some cases employers may need to also provide employees the ability to have certain things deducted from their paycheck. These include things like:
Contributions to an IRA or 401K plan.
Health insurance premiums
Job related expenses
These deductions can be made on a pre or post tax basis depending on what the deduction is for and can be easily handled by most payroll software.
Reporting Requirements and Payments
Once you have calculated your payroll you will need to complete the necessary reporting requirements and submit payment in the required timeframe.
Annual federal unemployment tax return (Form 940 or 940EZ)
Employer’s quarterly payroll tax return (Form 941)
Annual Return of Withheld Federal Income Tax (Form 945)
Wage and Tax Statements (Form W-2)
Although unemployment insurance payments are not included in payroll, because they are based on payroll you will use your payroll calculations to pay unemployment insurance as well. You can learn more about unemployment insurance payments here .
For details on the timing requirements and how to know when you are required to submit payments see this article from Intuit.
The Benefits of a Full Service Payroll Solution
Payroll software solutions can help you figure out the amounts that you need to pay, however don’t always automatically complete or send the necessary forms or make payments to the appropriate tax authorities on your behalf. This is another reason why we recommend working with Intuit or a similar full service payroll solution which handles these things for you. As an example, Intuit’s full service solution ($79 + $2 a month per employee) offers the following services:
Complete payroll setup—done for you
Keep your payroll tax money until it’s due
Guaranteed error–free paychecks and payroll taxes