I scream, you scream, we all scream for payroll!
If you're an employee who has ever gotten a paycheck, getting paid is a pretty awesome feeling. As an employer, payroll is pretty damn costly. It tends to be the biggest expense for most businesses and not just because of the actual cost of salaries. There are taxes too. Payroll can have complexity and any missteps may cost you. According to an IRS report, roughly 40% of small businesses incur an average of $845 per year in IRS penalties for errors with payroll tax filings and payments.
The reason why such a huge portion of small businesses make these errors is because running payroll has a lot of moving parts. Lots of moving parts means there is a greater chance of fucking something up. The best thing you can do to avoid becoming a statistic is to understand the payroll basics. Know your shit. Let's dig in, shall we?
What is Payroll?
The term “payroll” usually refers to the regular process of paying your employees and paying the taxes associated with payroll. So the main players in the payroll game are the employees who get paid in the form of wages and the government who gets paid in the form of taxes. That's the 50,000 ft view.
However, the world of payroll encompasses more than wages and taxes. It also includes the following:
- Figuring out how much you owe employees
- Figuring out how much taxes are due
- Making sure everyone gets their paycheck and a pay stub
- Filing and processing tax forms like W-2s and 1099s
- Keeping records of wages, bonuses and salaries
- Filing required forms with various tax authorities
- Complying with local, state and Federal payroll rules and regulations.
If all of this sounds overwhelming, don't freak out. Most payroll service companies realize this is a pain point. And guess what? In a capitalistic society, companies are created because they realize they can take away pain in exchange for money. And that's the value of a payroll service provider.
What Is a Payroll Service Provider?
A payroll service provider has the infrastructure so that you can get your payroll set up. Once it's set up, the service will run the processes we mentioned above on a regular basis. Yes, you might still have to initiate the process and input data (like how many hours your employees worked), but the service provider guides you through it.
Sounds Annoying. Why Payroll?
If you're paying someone to do work for your small business, you might be enticed to pay them as a contractor because it's easier and cheaper. And for someone vendors, it's totally legit to pay them as contractors.
But the law is pretty clear about when you can pay someone as a contractor and when you must pay them as an employee. The IRS has a 20 factor test that can help you determine when you can pay someone as a contractor and when you must be paying someone as an employee.
Payroll is pretty sweet too because it allows you to pay taxes as you go. For example, if you're the owner of an S-corp and you pay yourself a salary via payroll each month, you're paying your taxes each month. It's being paid directly to the government. This can help spread out a big tax bill over time.
Make sure to check with your accountant to confirm that your entity is legally able to have you get paid via payroll. Certain entities and your specific situation will determine whether or not you may set up and run payroll as the owner of the firm.
Here is the most common area employers are fucking up their payroll. As an employee, every time you run payroll, you also make payments toward benefits, employee entitlements, and taxes.
When you first set up your payroll through a payroll service provider, they will get you set up so that each time you run payroll, your company withholds taxes that your employees are required to pay. Not only do you withhold your employees taxes, as an employer, you will be required to pay employer taxes each time you run payroll.
Each time payroll is run, the funds for paychecks and taxes will be pulled out of your account. The payroll service company will tell you how much will be pulled and on what date. You'll often see more than one transaction. One might before the wages paid, another for the employer's portion of taxes and then another for payroll service providers fee. All that work doesn't come for free.
In addition to payroll costing a shit ton of money, there are a bunch of forms you should be keeping on file and forms for tax filings that you must submit. There are due dates that these tax filings need to be completed by. Even though your payroll service provider will take care of this for you, you should still know what the requirements are. If something gets fucked up, you want to know what got fucked up, why and how.
What Forms to Keep On File
Once again, if you're using a handy payroll service provider, part of what they do is keep the required forms on file for you. Here's what you should have on hand for every employee that works for your business:
- Form I-9: This form is used to confirm someone’s identity and verify that they can legally work in the US.
- Form W-4: This form tells you, as an employer, how much federal tax you need to withhold every pay period.
What Forms to File, Where to File and When to File
- Form 941: This form is filed four times a year. It documents the total amount withheld for Social Security, Medicare, and federal income taxes each quarter.
- W-2: This is statement that you must give to your employees at the end of each year. It reports the wages the employee earned and how much they paid in taxes.
- 1099-MISC: Also at the end of the year, you’ll likely need to file this form for non incorporated independent contractors and/or professionals. It’s a statement contractors submit to the IRS to report how much they've earned.
The Payroll Service Providers
Gusto is a fave, for sure. They make the process easy and the interface is great. They're kind of the new kids on the block, but they have a great online interface.
If you're using Quickbooks for bookkeeping, you can easily set up payroll with them. You might have to upgrade your subscription.
You don't technically have to hire a payroll service company to do all of this for you. It's totally possible to hire an accountant to do it or you can do it yourself, just be aware that there may be a learning curve and it may cost you in penalties if you make those mistakes.