Payroll Series Part 4 0f 4

When you are starting or expanding a small business there comes a time when you must hire employees to take on some of the workload. While many entrepreneurs believe they can do it all, the long hours can begin to take its toll on your stress levels. There are a few items that need to be considered with the type of payroll system you are going to use at the top of the list.

Choosing a Small Business Payroll System

A small business payroll system involves making several decisions as to the format of the process. Here are a few questions to answer in order to get you started.

• Will you be paying employees by the hour or with a salary? This will depend a lot on the type of work they are performing. Production workers are generally paid by the hour while support staff tends to draw a salary. No matter what you decide overtime rules apply to both hourly and salary. There are no hard and fast rules here so decide which option works for you.

• If you opt for hourly workers then you’ll need to decide on how they will report their hours.

• How often will you run the pay cycle? Pay cycles in the United States can run weekly, biweekly, twice a month, or monthly in most states. Consider how you expect your cash flow to run when deciding this process. The longer the pay cycle, the more time you have to receive payments from your customers. Note that some states require that withholding taxes are to be paid more frequently than once a month so be sure to check with the tax authorities before choosing a monthly pay cycle.

• What will your overtime pay policy contain? All employers must at least follow Federal guidelines for paying overtime. Some states have more stringent rules so check the state rules for paying overtime in your jurisdiction.

• Will you be providing paid time off? This includes sick time, personal days, statutory holidays, bereavement, and vacation time.

• What benefits are you going to offer? Are they going to be fully funded by the company or are deductions from employees required? Benefits such as health, dental, and 401(k) require written authorization from the employee in order to be legally deducted. This is also true of wage garnishments, property, and employer loans.

Processing Payroll

Once those questions are answered, the next step for a small business owner is to decide how the payroll will be processed. There are a few options to consider and with the complexity of the payroll process in our times its ideal that there are so many choices to consider.

• Professional Employer Organization (PEO) – is an outsourcing firm that handles hiring, payroll, benefits administration, and withholding tax submission. These firms handle the details while the small business owner grows the business.

• CPA or Bookkeeper – will in some cases process the payroll for small businesses.

• Payroll Software – there are many excellent software programs that can be implemented to process payroll. The downside is that you require an employee to run the software including data entry, printing checks, direct deposits, and calculating and remitting withholding taxes.

• Online Payroll Processing – is a fairly new way to process payroll. Again, you require an employee to enter the data into the system but the actual processing is done by the supplier of your choosing.

Once you have answered these questions and decide on a course of action then you can get to work on finding key employees.  The payroll process is not something to take lightly as there can be serious repercussions from federal and state tax authorities if things go awry. If the thought of all this makes your head spin a little then a PEO may be your best option.

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Payroll Series Part 3 of 4

In Part I of “Understanding the Payroll Process for Small Business” series we discussed the necessary documentation required in order to hire employees in the United States. In Part II we looked at the various withholding and employer taxes that the small business owner is responsible for deducting and recording. In this post we are going to cover the necessary government reporting that must be done for the various taxing authorities.

Reporting Payroll Taxes to the IRS

In addition to depositing the appropriate payroll taxes to government agencies it is the responsibility of small business enterprises to file various tax reports as well as Worker’s Compensation. The reporting requirements include:

• Form 941 – Employers Quarterly Tax Return
• Form 940/940EZ – Federal Unemployment Tax Act (FUTA) Return
• Form 945 – Annual Return of Withheld Federal Income Tax
• Form W-2 – Wage and Tax Statements
• State Worker’s Compensation
• State and Local Tax Authorities – Depends on your area(s) of operation. For example, Arizona requires the quarterly filing of the A1-QRT and UC-018 as well as an annual A1-R. So be sure to check with state tax authorities.

Form 941 – Employers Quarterly Tax Return

This report is filed with the IRS detailing the withholding taxes payable for each employee, the amounts paid, and those still owing. Social Security and Medicare deductions are also included in this report.

Form 940/940EZ – Federal Unemployment Tax Act (FUTA) Return

This report, filed with the IRS, details the unemployment deductions made from each employee, the amounts paid to date, and the amounts owed. These two reports have been simplified (as much as the IRS can simplify things) and combined into one report. For those who have filed a Form 940EZ in the past you will now use Form 940.

Form 945 – Annual Return of Withheld Federal Income Tax

This filing reports all non-payroll deductions withheld for payment to the IRS. It includes backup withholding taxes, pensions, annuities, and IRAs among others.

Form W-2 – Wage and Tax Statements

Small business employers are also responsible for filing a Form W-2 for each employee in the organization. It must be issued to the employee by January 31st based on the previous year’s income. If an employee’s income is earned in more than one state then it must be broken down into amounts earned in each jurisdiction. Form W-3 is a summary of all of the data reported in the W-2 forms.

State Worker’s Compensation and State and Local Taxes

Be sure to check with state and local tax authorities for regulations in your area(s) of business operation.

As you can see, the tax authorities don’t make it easy to be in compliance when it comes to payroll taxes and reporting. And any errors can come back to haunt the small business owner in the form of interest and penalties so be sure to find the best solution for your payroll needs.

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Payroll Series Part 2 of 4

In Part I of “Understanding the Payroll Process for Small Business” we discussed the legal forms that are necessary to be filled out upon hiring a new employee. In Part II we are going to delve into deducting and processing payroll withholding taxes. While the responsibility of filling out the various forms falls to the new employee, it is the employer’s responsibility to withhold and remit the various withholding taxes to the proper taxation authorities.

The key phrase for handling these taxes is ‘attention-to-detail’ – you need to get it right to prevent interest and penalties being assessed.

Withholding Taxes for Small Business Payroll

There are basically five types of employee withholding taxes that the small business owner must be concerned with. In some cases, there are employer taxes to be paid in conjunction with the employee portion which we will cover further on. The five types of withholding taxes include:

1. Federal Income Tax
2. FICA Tax – Social Security and Medicare
3. Federal Unemployment Tax Act (FUTA)
4. State Unemployment Insurance (SUI)
5. State Income and Other Local Tax

Each pay period will have you deducting taxes from each employee at the federal, state, and local levels. These amounts will be cumulatively accrued or recorded into payroll tax accounts until it comes time to pay them. In addition, the employer must also calculate and record the company portion of employee taxes such as Social Security, Medicare as and Unemployment Insurance. Worker’s Compensation is calculated for each employee and is a burden to the employer as opposed to a payroll deduction. Be aware that some of these taxes are payable at both the state and federal levels. Other deductions such as healthcare insurance, 401(k) plans, and life/accident insurance are also deducted, recorded, and paid where applicable.

Remitting/Paying Taxes to the Government

How often you have to remit taxes to the government is based on the amount of your company payroll. Federal, State, and Local taxing authorities will determine the frequency of payment although, in most cases, it will be semi-weekly at the federal level. Many states require you to deposit taxes on the same schedule as at the federal level but be sure to check with state tax authorities.

Late payments will result in an automatic penalty of up to 10% of the amount due and non-payment can result in a penalty up to 100%. Be sure to keep these funds separate from your general cash accounts so that payment can always be made when they become due. A separate bank account for withholding taxes is always a good idea.

Federal taxes are the easiest to handle when it comes to recording and remitting amounts due. Local and state taxes can be a little more complicated even if you operate in only one locality. If you operate in several states and localities then the record-keeping and payments become a much more complicated process. The good news is that the whole process can be outsourced at an affordable rate allowing the small business owner to concentrate on doing what they do best…growing their business.

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Payroll Series Part 1 of 4

It’s not easy launching a new business or expanding an existing one. But with careful planning and execution, the business plan will fall into place. A key component of any small business with employees is the payroll function. Although payroll is not complicated in itself, it requires a significant amount of attention to detail. Your employees need to be paid correctly and the various levels of government, of course, want their share. And they want the correct amounts each and every time. So, we’re about to embark on a 4-part series of blog posts to take the small business owner through the payroll process.

Getting Started with Small Business Payroll

Before you begin hiring employees, you must determine the type of entity that you want your company to operate under. There are payroll tax issues that must be considered for LLCs operating as sole proprietorships or partnerships. The right organizational structure for your company can help keep your payroll tax obligations to a minimum. A PEO can advise you on the best strategy for your circumstances.

The first step that needs to be taken when hiring new employees is to obtain an Employer Identification Number (EIN) from the IRS. You may have already registered for this number during your business start up, however, if you don’t have one you can obtain this by filing an SS-4 or by applying online on the IRS website.

Once you have taken care of obtaining your EIN then you can begin to hire new employees. As with all things in regards to government there are a few forms that need to be filled out by each new employee. Although the IRS legally requires you to have new hires fill out these forms, they also serve to protect your business from potential tax liabilities in the event of falsified information. So, without further ado, here they are:

• W-4 Form – All U.S. employees are required to fill out this form in order to inform you, the employer, how much federal income tax to withhold. Just a quick note here for you to refrain from giving advice to an employee on filling out the W-4 form to protect your business from any future tax liability in the event of an error.

• I-9 Form – This form verifies that the employee is authorized to work in the United States. In addition to completing the I-9 form, each new hire must provide documentation in regards to their identity and U.S. employment eligibility. A passport, green card, driver’s license, and Social Security cards are some of the eligible documents required.

• State and Local Taxes – You will also have to check with state and local governments in order to withhold and remit taxes based on the legalities of your locality.

Human Resource Policies

To prepare for new employees joining your organization you’ll need to have some procedures in place in order to integrate them into the company culture. Here are a few Human Resource issues to consider in order to get you started:

• Job Applications
• Employee Handbook
• Background Screening
• Drug Testing
• Employee Assessments

These initial steps will set you up to hire new employees for your small business. If it appears a little daunting then a consultation with a Professional Employer Organization (PEO) can ease the pain and help prevent any slip-ups along the way. In the ensuing posts we’re going to cover the withholding taxes in more detail due to the fact that interest and penalties due to error can financially bury a new enterprise. We’ll then move into making the critical payroll setup decisions, tools to process payroll, and various report filing legalities. So, stay tuned.

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While large companies may be able to afford a large payroll staff, it is small and medium-size businesses that may have the most to gain from outsourcing the payroll process. Let’s take a look at some of the benefits to outsourcing payroll.

1. The Bottom Line. In-house payroll requires staffing. And not just any staffing but specialized professionals that understand the payroll process and the complexities of the tax code. Once the employees are paid then the withholding taxes to various levels of government must be taken care of. It is wise for a business to calculate the total cost of running their payroll process in-house and then compare it to a few quotes from payroll service providers. In most cases, you’ll find that the cost is lower with payroll specialists.

2. Specialization. It can be a nightmare to keep up with all of the tax and regulatory changes at the local, state, and federal levels. Or to deal with employees that have received incorrect paychecks. Payroll specialists do one thing and that’s to process payroll accurately and efficiently day-in and day-out. That means fewer headaches for the business owner/manager.

3. Fraud Prevention. The payroll function can be an easy target for those looking to defraud a business. Whether it’s padding a time card, increasing a pay rate, or adding in non-existent workers, payroll service providers have the tools to weed out fraud.

4. Tax Compliance. Government statistics from the IRS report that one in three employers have been assessed penalties due to mistakes made in payroll. These penalties can financially ruin a company if the mistakes are large enough but even small penalties come straight from the bottom line.

5. Peace of Mind. Just think of what you can do with the extra time you’ll open up by outsourcing the payroll function. Employees are happy when they receive what they are owed. The tax authorities receive their portion in exact amounts and on schedule, and, most of all, the business owner/manager has more time to manage the growth of the company. And that’s really what it’s all about.

If you would like to learn more on how a Professional Employer Organization (PEO) and an Administrative Services Organization (ASO) can save you time and money then visit Human Capital Strategies for more information. We are an outsourcing solution for payroll administration, human resources, benefits administration, and tax compliance. While you’re there, please take the time to sign up for our free monthly C.A.R.E.S Business Training Video Series.

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Don't let upcoming IRS audits worry you. (Image courtesy of FreeDigitalPhotos.net)

participate in a special audit by the IRS. This study, conducted by the IRS National Research Program (NRP) will study employment taxes. The purpose of the study is to gather data to calculate possible ‘employment tax gap’ issues and target areas that may be future problems.

Audit specifics
The audits will likely involve a thorough review of the Employer’s Quarterly Tax Returns for the targeted year(s). Other related documents may also be reviewed, possibly forms 1120, 1065 and more.

This will be the largest audit since 1984, and will take place over the next three years. The IRS will examine 2,000 businesses in each of those years. The businesses will be selected at random and will represent a large cross-section of U.S. companies.

There are five main areas that the IRS will focus on: worker classification, reimbursed expenses, officer compensation, fringe benefits and non-filers. It’s a good bet that the auditors may look at other details as they review the five targeted elements.

There is nothing that a company can do to prevent being chosen for the audit, but there are steps that they can take to help make possible audits, future filings and compliance easier.

Review payroll services
Small business owners should review the current payroll practices, focusing on the five areas that the NRP have identified as their specific focus. Review the three most recent years’ employment tax returns, the filing documents and supportive records. A third party payroll service expert can help with this process.

If your company is selected, follow these steps:

• Designate a company representative who is responsible for IRS communications
• Early in the process, retain a payroll service and tax expert
• Request time to respond to IRS requests

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