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Category: Payroll

Before you read on, take a quick guess at how many small business start-ups fail within the first five years. No reading ahead!

According to the Small Business Administration, about half of all businesses fail within the first five years. 50% of businesses make it, and 50% don’t. Are you shocked? Maybe feeling a little unsettled about your new business venture?

If you’ve found a way to make money and suddenly it feels more like a business than a hobby or side-job, you’ve got a business on your hands. Congrats! Here are a few quick accounting tips for making sure you’re business is among the 50% that are still around five years from now.

  1. Keep it simple. Get organized, get legal, and get to work. The simplest entity you can form for now is a called a sole proprietorship. This means your business is owned and run by person and there is no legal distinction between the owner and the business. No employees, no payroll, no fuss.
  2. Obtain proper licenses and tax information. Since you’re going to be the owner/entity of your sole proprietorship, you’ve got a few other tasks to take care of. You need to acquire an occupational license (if mandated in your area) and you must remit all state or city tax collections on retail or sales your business collects.
  3. Concentrate fiercely on your business, but don’t be irresponsible. Now is the time to buckle down and build your business—find ways to market to your customers and clients, improve your products and services, and build your brand. As a sole proprietor, the IRS won’t even know you exist until after you file your first personal income tax return. You’ll file your personal taxes (like usual) and also a Schedule C form where profits and losses of your business are reported. If you don’t quite have a streamlined process of doing business yet, not to worry. For a sole proprietorship, a separate bank account is not mandated as it is for an LLLC or Corporation. If your business claims a loss during the first few years, those losses can offset your day job’s income and provide a possible tax refund.
  4. Develop an organized way to pay yourself. Another advantage of a sole proprietorship is that there are no payroll taxes taken out, and no set way you have to pay yourself. You can set up a certain percentage of profits you plan to pay yourself, or you can simply keep what’s left over after paying all business expenses. Often times, S corps don’t have to pay quarterly estimated taxes either. Click here to learn about specific scenarios when they do.
  5. Keep track of expenses and income. You don’t really have to do much with your receipts until tax season comes along, but definitely keep them in a safe place. Perhaps an easier method of tracking expenses and profits is to use a simple two-page Excel spreadsheet, one with incoming money, and the other with outgoing. You can use your business expenses as write offs at the end of the year which deduct from the amount of money owed on taxes.
  6. Plan to succeed, but be prepared for the worst. Remember that statistic from the beginning? If your business fails, no special forms are required to be reported to the IRS, you just simply stop doing business. All you have to do is file one final Schedule C and you’re done.

After your business experiences significant growth or you hit the five year mark, talk to a CPA about changing your entity type to one that could save you more money and be more efficient for your business. Vyde offers free accounting and small business bookkeeping advice all year long. Contact us with your sole proprietorship questions and we can offer some accounting tips and point you in the right direction.

If your business has outgrown your garage and you’ve become more than a one-man band, well, congrats! But you may also be a little confused when it comes to hiring employees and exactly what to offer upon hiring. Choosing which benefits to offer employees is a critical and important task for small business owners. Speaking practically, and assuming you’re not yet offering free on-demand back massages like Google, or fancy scooters to ride around the office like Dropbox, let’s break down the most valued benefits for employees.

Many small business owners find it advantageous to look out for their employees first, and then their customers. After all, happy employees will look after customers which reduces demands on you and keeps your company growing. Thus, it only makes sense to offer as many benefits to employees as reasonably possible, without hurting your business.

Not surprisingly, some benefits are required by law. Plan on allowing your employees time off to vote, to serve on a jury, perform military service, and to have a baby or use FMLA (Family and Medical Leave). You must also comply with worker’s compensation, withhold taxes, and offer retirement and disability benefits. State and federal unemployment taxes are also mandated.

1. Health Insurance

The most sought-after and common benefit for employees is insurance. Unfortunately, as an employer, this is also the most expensive benefit to offer. The Affordable Care Act has changed the requirements for many businesses regarding health insurance and expanded coverage to a wider number of Americans. As of 2014, business owners with fewer than 50 employees are not required to provide a health coverage plan. However, those employees are still required to obtain health insurance whether it be a private plan or through your company.

If you have less than 50 employees and you do choose to offer health insurance, use the Small Business Health Options Program Marketplace (SHOP). Businesses that offer insurance through SHOP and have fewer than 25 employees may be eligible for certain tax credits. Businesses with more than 50 employees are required to offer health insurance.

While the decision is ultimately yours, providing healthcare for employees tells prospective and current employees that you care for their wellbeing. Healthy workers are happy workers, which translates to higher productivity, less stress, and less sick days.

2. Retirement and Life Insurance

Many businesses that begin hiring employees also like to offer 401k retirement plans, as well as life insurance. These are fairly inexpensive benefits to implement and are almost always taken advantage of by employees. These two benefits give employees a sense of security in their present position, as well as for their future.

3. Paid Leave

Most employers are surprised to learn that they are not required to give employees paid vacation, sick days, or holidays. While in the short term not offering these benefits can save you money, generous leave pay attracts high-quality employees and improves morale. Basically, if you choose not to offer any paid leave, you may find yourself without any employees to offer it to. The majority of employers offer some kind of paid leave to their employees.

If you choose to offer vacation pay, you’ll also need to determine a clear and thorough explanation of what is to be done with unused vacation time. Some employers choose to carry it over into the next year, some will pay it out in cash, and others abide by a “use it or lose it” policy. Find what works for you and make sure it is clearly outlined in your company handbook.

4. Health and Wellness Plans and Incentives

An increasingly popular perk employers are offering employees are wellness plans. These often come in the form of gym memberships, pool passes, memberships to various fitness classes, and the like. Many offer an incentive program for employees to set a fitness goal and receive compensation for meeting that goal within a certain time period. Some even join in the fun of offering prizes or money for an office weight loss program. Wellness benefits are a relatively inexpensive perk to offer to employees, and many are thrilled at the prospect of a little extra incentive to meet their existing goals.

5. Childcare Assistance

With a changing workforce and evolving family dynamics, more and more companies are assisting employees with childcare. Many offer child care referral services, and some even offer contracted daycare or in-office childcare.

Visit more posts in our Payroll 101 series:

What is Payroll?

The 1099-Misc Explained

Setting Your Own Salary as a Business Owner

The W-2 Explained

How Often Should You Pay Employees?

What are the Costs Associated with Payroll?

The Power of the Employee Pay Stub


In the infant stage of any business, your salary basically consists of what you earn in sales, minus your costs and taxes. Most businesses start out as a sole proprietorship with no employees and very little business overhead. However, as a company grows, many business owners choose to take on employees or enter a partnership, which ultimately complicates things when payday comes for a business owner.

So how do you “pay the boss” when the boss is you?

Because so much depends on how profitable your business is at the time (which often fluctuates throughout the year), there is no magic formula on setting your own salary. Financially savvy business owners may not see a lot of increase in their own bank accounts at first because they simply pay themselves what is left over after payroll, expenses, and operating costs. While their actual take-home pay may lack in the beginning stages, a successful business with strategic small business bookkeeping will grow over time and profits will increase.

When your business starts to show consistent profit from month to month, you should then be able to set a salary based on a percentage of those profits. Most businesses cannot predict their profits for the year ahead of time. However, after you have been in business for a few years, you can use those profits to review and make predictions about the future. Use your business costs, taxes, and planned investments to determine a reasonable salary for yourself. Most small business owners limit their salary to 50% of the profits.

If you depend on a set amount of money each month, you may choose to research the industry and set yourself a salary in accordance with those standards. The US Small Business Administration offers great comparison charts for salaries across all occupations and may be useful in helping you set a yearly salary and making adjustments over time.

As your business grows, surprisingly, setting or adjusting your own salary can become even more complicated. You’ll want to avoid overpaying yourself and raising red flags with the IRS, but you are also entitled to an increased salary as your profits increase. An accountant or financial consultant can help you determine a reasonable salary based on your company’s growth and financial circumstances.

While entrepreneurship is perhaps one of the greatest freedoms we have as Americans, it also requires a certain level of flexibility. When funds are low, your employees will still expect the same pay. It is you that will take the cut. However, as profits increase, the business owner will likely see the most advantage. If you keep your focus on the long-term growth of your business, having a paycheck that fluctuates depending on how the company is doing can have lasting advantages.

Visit more posts in our Payroll 101 series:

What is Payroll?

The 1099-Misc Explained

The W-2 Explained

How Often Should You Pay Employees?

What are the Costs Associated with Payroll?

5 of the Best Benefits to Offer Employees

The Power of the Employee Pay Stub

You just got a new job. Congrats! Pat yourself on the back and start filling out that mountain of new hire paperwork. Sign here, sign there, date a few places, and you’re ready to start. Most people don’t understand exactly what it is they’re filling out, or what exactly the documents mean that they receive from their employer until they need to understand them.

If you are hired as a regular hourly or salaried employee, you’ll receive a Form W-2 from your employer by January 31st of each year. If you’re self-employed or working as a contractor, you will receive a Form 1099 instead. Because of withholdings and insurance requirements, W-2s are really only useful for tax purposes. If any taxes (Social Security, Medicare, etc.) are withheld—and legally, they always should be—a W-2 will be issued.

You may not realize it, but in most cases, you cannot actually wait until April 15th to pay your entire tax bill. If you’re self-employed, you know this from your estimated quarterly tax payments. However, if you are an employee who receives a W-2, your employer is actually taking care of this for you, based on the information you provide on your W-4. When that magical day, April 15th comes along (and it always does), the numbers reported on your W-2 are subtracted from your tax bill. This helps you to determine whether you are owed a tax refund or if you need to make additional payments to the IRS.

The information on a W-2 is fairly straightforward. Let’s take a closer look at each of the boxes on your form.

Here’s a quick rundown of boxes on the left side of your W-2.

Box a: Your social security number. This information must be 100% accurate to properly file taxes with the IRS.

Box b: Your employer’s EIN. Basically, your employer’s EIN number is equivalent to your Social Security Number—it identifies their business individually. No two EINs are the same.

Box c: Your employer’s legal address. Whether or not that is the exact location you will be working does not matter so much as the legal address being the one reported on a W-2.

Box d: This box is for your employer’s payroll department. Sometimes this box is filled in; sometimes it is not.

Boxes e and f: This should contain your full name as it appears on your Social Security card. It also contains your mailing address. Again, whether or not you actually live in your tiny little PO Box is not as important as providing an address that you can receive mail. The USPS prefers that you do not use punctuation in your address.

If you notice that any of the above boxes are incorrect on your W-2, contact your employer immediately to make the changes. If the information on your W-2 is inaccurate or different from other information, the IRS will want to know why.

Now we’re getting to the good stuff. The boxes on the right side of your W-2 reflect information from your company, wages, and withholdings.

Box 1: This shows your total taxable wages, or, what you’ve earned before any withholdings have occurred. However, this number does not include elective contributions to retirement plans, pretax benefits, or payroll deductions like insurance. It’s not unusual for this number to be less than the amounts in boxes 2 and 3.

Box 2: This box reports the total amount of federal income taxes withheld from your pay during the entire year. This amount is determined by the information you provided on your form W-4 that indicates any exemptions and additional withholdings. You can adjust this number on your W-4 for next year if you feel that it is incorrect.

Box 3: This shows your total wages subject to Social Security tax. This number is figured before payroll deductions which means the amount could be either less or more than the number in box 1.

Box 4: Correlating with box 3, box 4 shows the total amount of Social Security taxes withheld for the entire year. Social Security taxes are calculated based on a flat rate of 6.2%. The maximum amount for Social Security withholdings in one year is $7049.40.

Box 5: This box indicates wages subject to Medicare taxes. Unlike Social Security wages, there is no cap for Medicare taxes and this is likely the largest number on your W-2.

Box 6: This shows the amount of Medicare taxes withheld for the year. Again, this is based on a flat rate of 1.45%. If an individual earns more than $200,000 in a year, regardless of filing status, they are taxed an additional .9%.

Box 7: This box represents tips reported to your employer. If you earned tips and didn’t report them to your employer, you still have to report them to the IRS.

Box 8: Allocated tips reported in this box are those that your employer attributed to you. This is considered income and is taxable.

Box 9: This box will be blank. There is no longer a reporting requirement for this box and it has not yet been removed from the form.

Box 10: This is where your employer reports any benefits paid on your behalf under a dependent care assistance program.

Box 11: This box is used to report amounts which have been distributed to you from your employer’s non-qualified deferred compensation plan. This is a taxable amount.

Box 12: Here you’ll find lots of codes that, to some, seem to be gibberish. Here’s a quick explanation of three of the most common codes you might see here:

  • Code D: Elective deferrals will general be include in boxes 3 and 5, even if they are excluded from wages in box 1.
  •  Code DD: This amount is not taxable, but it reportable to the Affordable Care Act. It is the cost of the employer-sponsored health coverage.
  •  Code P: This code is reported by your employer but not taxable to you. If reimbursments are non-qualified, they are reported as income in boxes 1, 3, and 5.

Box 13: This series of three boxes will be checked by your employer if your earnings are subject to Social Security and Medicare taxes but not federal income tax withholding. It will also be checked if you participated in a retirement plan during the year, or if you received sick pay under your employer’s third-party insurance.

Box 14: Your employers will report anything else here that doesn’t fall under any other categories on your W-2.

Box 15: This box includes your employers state and tax ID number.

Box 16: This box indicates the total amount of taxable wages for state tax purposes.

Box 17: If box 16 is filled in, box 17 will show the total amount of state income taxes withheld during the year.

Box 18: If you are subject to local, city, or other state income taxes, those will be reported here. You will need an additional W-2 form if your wages are subject to withholding in more than one state.

Box 19: The amount of withholding for box 18 will be reported in box 19.

Box 20: This box shows the name of the local, city, or state tax reported in box 19.

All W-2s should be received from your employer January 31st of each year. The IRS requires that a copy of your W-2 form is attached to your tax documents when filing your income taxes.

Visit more posts in our Payroll 101 series:

What is Payroll?

The 1099-Misc Explained

Setting Your Own Salary as a Business Owner

How Often Should You Pay Employees?

What are the Costs Associated with Payroll?

5 of the Best Benefits to Offer Employees

The Power of the Employee Pay Stub

In our last post, we demystified the elusive W-2 Form received from employers for wages earned on the job. However, non-employees who do contract work for a company will receive a Form 1099-Misc instead of a W-2.

Like the W-2, the 1099-Misc Form is an IRS form used for tax purposes only. This form reports miscellaneous payments to individuals for a calendar year. The IRS refers to 1099s as “information returns.”

The person or company who pays you to do the contract work is responsible for filling out the appropriate 1099 form and sending it to you by January 31st of each year. If you earned more than $600 from a person or company, you should receive a 1099-Misc.

When you prepare your income tax return for the year, you are required to report all income showing on the 1099 forms you received and pay income tax on these amounts. If you did work for a company or individual and did not receive a Form 1099-Misc from them, you are still required to report the income to the IRS as self-employment income.

1099 Forms are also issued for other reporting requirements such as: acquisition or abandonment of secured property, proceeds from broker and barter exchange transactions, cancellation of debt, changes in corporate control and capital structure, dividends and distributions, certain government payments, interest income, and other miscellaneous type of income. Each 1099 form will have a letter or series of letters after the “1099” that indicates which type of form is being reported. (Ex. 1099-A, 1099-DIV, 1099-K, 1099-Misc).

All non-employees should receive their Form 1099-Misc by January 31st, and an additional copy of the same 1099 is sent to the IRS by February 28th.

Visit more posts in our Payroll 101 series:

What is Payroll?

Setting Your Own Salary as a Business Owner

The W-2 Explained

How Often Should You Pay Employees?

What are the Costs Associated with Payroll?

5 of the Best Benefits to Offer Employees

The Power of the Employee Pay Stub

 

With electronic banking, direct deposits, pay with your phone options, virtual bookkeeping, and a decreasing need for anything made of paper, technology is changing nearly every aspect of the world. More and more employees are opting to have their paychecks directly deposited into their account and are using online banking to pay their bills. Their account numbers fluctuate tremendously between paydays, all without a piece of paper ever being passed through their hands. Gone are the days of a paper paycheck and pay stub being handed to you on your way out the door on Friday, and here to stay are the days of electronic everything.

It’s no surprise then that younger employees hardly glance at their pay stub, let alone understand what it means. However, the employee pay stub always has and always will provide a tremendous amount of valuable information.

Most pay stubs cover basically the same information, regardless of the company you work for. The pay stubs Vyde issues are no different.

IRS-looking terms

Here’s a quick rundown of all those big IRS-looking terms that show up on each and every pay stub:

Gross Pay is the total amount of money you earned before deductions are taken from your check. Usually, this number will not be the same number as the amount of your paycheck.

Net Pay is the amount of money you take home after Uncle Sam takes his cut, you’ve made your Social Security and Medicare contributions, and other withholdings are taken from your check. This will be the same amount that is deposited into your bank.

Social Security Taxes withheld contributes to your coverage for the Social Security system. After you have paid into the system for years and then retire, you are entitled to receive monthly payments. The Social Security rate is 6.20% for 2015. For example, if your gross is $1,000, $62 will be withheld for Social Security.

Medicare Taxes are similar to Social Security taxes and are mandatory. The rate of Medicare withholdings is 1.45%, and all employers contribute another 1.45% on behalf of the employee. When an employee becomes eligible for Social Security, they are also eligible for Medicare coverage for their medical expenses.

Federal Income Taxes are determined by the information you provided on your W-4 when you were first hired. This amount is what you owe to the Federal government when it is time to file income taxes and is taken incrementally from each paycheck.

State Income Taxes varies from state to state, and some employees are not required to pay state tax. This amount is also deducted from your paycheck in the same way Federal taxes are to cover the amount of taxes you owe to the state come tax season.

Leave Time includes vacation days, PTO (paid time off), or sick days. Most employers include how many hours have been used to date and how many hours remain for the year.

Insurance Deductions are taken from your paycheck depending on the type of health and/or life insurance your company offers. This deduction varies based on the type of plan the employee enrolled in upon hiring.

Retirement Contributions such as 401K or 403B show the amount contributed to either of these accounts.

Expense Reimbursements are included if the employee has used their own money for a company expense, or if they are being reimbursed for travel (gas, hotels, etc.)

Expense Reimbursements

You may also find these common abbreviations on your paystubs:

YTD: Year-to-Date

FT or FWT: Federal Tax Withheld

ST or SWT: State Tax Withheld

SS or SSWT: Social Security Tax Withheld

MST or Med: Medicare Tax Withheld

If you still have questions or if you’re confused about something on your pay stub, contact your Human Resources department for assistance. Understanding contributions, taxes, and withholdings listed on a pay stub contributes to good money management skills and financial independence.

Visit more posts in our Payroll 101 series:

What is Payroll?

The 1099-Misc Explained

Setting Your Own Salary as a Business Owner

The W-2 Explained

How Often Should You Pay Employees?

What are the Costs Associated with Payroll?

5 of the Best Benefits to Offer Employees

When it comes to hiring a new employee, there is a lot of work to be done before the training even begins. Employers have to post the job, screen applicants, conduct interviews, perform background checks and more, all before the employee is even hired.

After hiring an employee, there is even more work to be done. However, hiring a new employee doesn’t have to be as tedious as it sounds if you already have a new hire checklist in place.

Here are seven accounting tasks to add to your new hire checklist for an employee’s first day:
  1. Fill out an I-9. This proves your employee is eligible to work in the US. Find the official form, here.
  2. Fill out a W-4. This form ensures that the right amount of taxes is withheld from an employee’s paycheck, based on family size, insurance withholdings, and more. This form will then need to be sent to your company’s payroll department.
  3. Add the employee to your worker’s compensation plan.
  4. Have the employee fill out health insurance paperwork.
  5. If you offer a benefits package, the employee will need to fill out the necessary paperwork such as retirement, life insurance, wellness programs, etc.
  6. Put the employee on your payroll system and gather all necessary banking information.
  7. If your company offers direct deposit, get a void check with the necessary information to set that up.

Having a new hire checklist in place helps ease the process of starting an employee off on the right foot with your company. You will find that the checklist needs to be modified and changed over time, but streamlining this process and having the accounting paper ready to go can save time and hassle on an employee’s first day. When the process is perfected, you can delegate this task to another employee to take care of so you can start with the actual job training.

Payroll takes up a significant portion of a company’s revenue, but in addition to the money paid to employees for their work, there are other costs associated with payroll as well.

Some of the costs associated with payroll include:
  • Printing checks for employees. Since payroll checks include Year to Date pay information, they must be special business checks.
  • Direct deposit fees and other banking costs.
  • Employer portion of the following: Social Security Tax, Medicare Tax, state unemployment, federal unemployment, worker’s compensation insurance, paid holidays, sick days, contributions toward 401K, retirement, etc.
  • Time spent by a business owner or accountant to calculate gross and net incomes for each employee.
  • If your company uses an outside service to process payroll, they may be charged based on the number of checks cut, plus a flat fee for each time payroll is processed. The more often you pay your employees, the higher your processing fees are.

Many small business owners find that as their company grows, their time becomes more precious, and they can actually save money by outsourcing payroll services.

On average, businesses are overpaying employees by about 4 percent because of differences between the employee’s time and an accurate time record. Hiring an expert accountant to handle payroll can often reduce these discrepancies.

Another quick way to determine if outsourcing payroll would save your business money is to look through your small business bookkeeping and figure out how many hours your employees are devoting to payroll-related activities. Then, calculate how much you’re spending and compare the amount to the plans offered by several payroll-services providers.

Doing payroll yourself can take a lot of time and focus from the money-making aspects of your business. Payroll may not directly increase sales, but done incorrectly, it can put your business in a world of hurt. To be in accordance with the laws and legal requirements of payroll takes a considerable amount of time and detail. Outsourcing payroll will help you save time and allow you to spend more money on the profitable parts of your business.

 

Visit more posts in our Payroll 101 series:

What is Payroll?

The 1099-Misc Explained

Setting Your Own Salary as a Business Owner

The W-2 Explained

How Often Should You Pay Employees?

5 of the Best Benefits to Offer Employees

The Power of the Employee Pay Stub

In the United States, the majority of small businesses pay their employees bi-monthly. However, creating an appropriate payment timetable for employees presents a notable difficulty for small business owners, demanding thorough contemplation of multiple factors.

Federal and state laws require that a small business pays their employees at regular intervals. That is, a company cannot pay an employee twice in one month, and then only once the next month. Regardless of the time in between payroll, it must be scheduled at regular intervals.

The IRS does not mandate a certain number of pay periods each year. However, some states impose minimum payment frequencies. For example, Massachusetts, Ohio, and Utah require that employees are paid semi-monthly.

How Often Should Small Business Pay Employees

Benefits of a Well-organized and Systematized Payroll Schedule

A systematized payroll schedule holds significant importance for businesses due to several key reasons:

Consistency and Predictability

A set payroll schedule provides consistency and predictability for both employers and employees. It establishes clear expectations regarding when employees will receive their pay, promoting stability and reliability within the organization. This consistency fosters trust and satisfaction among employees, reducing uncertainties about their financial situations.

Compliance with Regulations

Adhering to a regular payroll schedule ensures compliance with various federal and state labor laws and regulations. These regulations often dictate specific deadlines for paying employees, and a structured schedule helps ensure that these deadlines are consistently met, avoiding potential legal issues or penalties.

Efficient Time Management

A systematic payroll schedule allows employers to efficiently allocate time and resources for payroll processing. By having predefined dates for tasks such as collecting employee hours, calculating wages, and processing payments, it streamlines the workflow and prevents last-minute rushes or errors in payroll processing.

Better Financial Planning

A scheduled payroll system facilitates better financial planning for businesses. It enables accurate forecasting of cash flow, allowing businesses to manage their finances more effectively. Knowing when payroll expenses occur helps in budgeting and prevents unexpected financial strains on the company.

Employee Morale and Retention

Timely and consistent paydays contribute to positive employee morale and satisfaction. When employees receive their wages on time, it enhances their trust in the employer and promotes a sense of appreciation for their work. This, in turn, can lead to higher employee retention rates and a more motivated workforce.

Reduced Errors and Discrepancies

A structured payroll schedule reduces the likelihood of errors and discrepancies in wage calculations or payments. With a set routine and ample time for processing, there’s less chance of rushed or inaccurate payroll, leading to fewer mistakes and subsequent corrections.

Enhanced Operational Efficiency

Implementing a systematic payroll schedule increases operational efficiency within the HR and accounting departments. It minimizes administrative burdens, allowing staff to focus on other critical tasks, thus optimizing overall business operations.

Small Business Pay Employees

Key Elements to Check for an Efficient and Successful Payroll Scheduling System

Employee Payment Frequency

Determine how often you will pay employees (weekly, bi-weekly, semi-monthly, or monthly) considering the needs of your business and state regulations. Ensure this frequency aligns with your cash flow and budget.

Compliance with Laws and Regulations

Familiarize yourself with federal, state, and local labor laws governing payroll schedules. Ensure your chosen schedule complies with minimum wage laws, overtime regulations, and pay frequency requirements.

Employee Preferences and Needs

Consider the preferences of your employees. Some may prefer more frequent payments for budgeting purposes, while others might prefer less frequent but larger paychecks. Gather feedback to understand their needs.

Business Cash Flow and Financial Planning

Assess your business’s cash flow to determine a payroll schedule that aligns with your financial capabilities. Ensure the schedule allows for timely payment of salaries while maintaining a healthy cash reserve.

Administrative Processes and Workflows

Evaluate the time needed for payroll processing, including tasks such as collecting employee hours, calculating wages, and processing payments. Design a schedule that allows sufficient time for these tasks without rushing or errors.

Payroll Processing Time

Consider holidays, weekends, or other non-working days that might impact payroll processing. Adjust your schedule accordingly to accommodate these days to ensure timely payments.

Payroll Process

Payroll Process: Ways to Compensate Your Employees

1. Understand State and Federal Payroll Laws

As a small business owner, it is important that you familiarize yourself with federal and state laws governing payroll. These laws cover minimum wage, overtime pay, tax withholding, and other regulations. Understanding these regulations is crucial to ensure compliance and avoid legal issues.

2. Choose a Payroll Schedule

Decide on a payroll schedule or pay period that suits your business and state regulations. Common schedules include weekly, bi-weekly, semi-monthly, or monthly pay periods. Ensure consistency and clearly communicate the schedule to employees.

There are several options of setting up a payroll schedule for employees. Some of them include:

  • Weekly: employees are often paid on the same day each week—normally Friday—for the previous week’s hours worked.

  • Bi-weekly: Like weekly, employees are usually paid on the same day of the week, perhaps every other Friday, for the immediate work done (Work September 1-14, paid for that work on September 14), or for the previous two weeks worth of work.

  • Semi-monthly: Payments are made to employees on the same days of each month, for example, the 1st and the 15th of the month. When these days land on a Saturday or Sunday, payday is typically pushed to either the Friday before or the Monday after.

  • Monthly: Paydays fall on the same day every month, normally the first or last day of the month.

You may pay your employees on different days of the month, which reduces the workload for the accountant at payroll time, but can also complicate things if meticulous payroll records are not kept.

3. Collect Employee Paperwork

Obtain necessary paperwork from employees, including Form W-4 (for federal tax withholding), Form I-9 (Employment Eligibility Verification), direct deposit authorization, and any other relevant forms mandated by federal or state laws.

These documents are essential for an employer to gather pertinent information from a new employee. They are typically completed on the employee’s first day of work and are crucial for legal and administrative purposes:

  1. Form I-9, Employment Eligibility Verification:

    This form is required by the U.S. Citizenship and Immigration Services (USCIS). It verifies an employee’s identity and authorization to work legally in the United States. It requires the employee to present acceptable documents to confirm their identity and employment eligibility.

  2. Form W-4, Employee’s Withholding Certificate:

    The W-4 form is used by the employer to determine the amount of federal income tax to withhold from the employee’s paycheck. It includes information such as the employee’s marital status, number of allowances, additional withholding amounts, and exemptions, which directly impact the tax withholding calculations.

  3. State Withholding Allowance Certificates:

    Some states require additional withholding allowance certificates apart from the federal W-4. These state-specific forms are used to determine the amount of state income tax to be withheld from the employee’s wages, based on state tax laws and the information provided by the employee.

Some companies choose to pay their hourly and salaried employees on different days of the month, which reduces the workload for the accountant at payroll time, but can also complicate things if meticulous records are not kept.

Since salaried employees are paid the same amount for each paycheck regardless of hours, they can be paid currently without any delay.

For example, a salaried employee who has an annual pay of $36,000 can be paid

  • $3,000 a month

  • $1,500 semi-monthly

  • $1,386 every two weeks. Since this amount has been rounded up, the last paycheck of the year may be slightly different to account for this difference.

On the other hand, paychecks for employees paid on an hourly basis take more time to calculate and the amounts are different from paycheck to paycheck.

4. Calculate Pre-Tax Pay

Determine employee’s gross pay by multiplying the number of hours worked by the hourly rate or using the agreed-upon salary. Deduct any pre-tax employee benefits, such as retirement contributions or health insurance premiums, from gross pay to calculate pre-tax pay.

5. Figure Out Tax Withholding

Use the information provided on Form W-4 to calculate federal income withholding tax. State income tax withholding may also apply, depending on the state. Utilize IRS guidelines and state tax tables to accurately withhold the correct amount.

6. Determine Net Pay

Subtract all deductions, including taxes and any post-tax deductions (like post-tax benefits or garnishments), from the pre-tax pay to arrive at the employee’s net pay—the amount they receive in their paycheck.

7. Distribute Paychecks

Distribute paychecks or arrange for direct deposits on the chosen payroll schedule. Ensure accuracy and timeliness in payments to maintain employee satisfaction and compliance with fair labor standards act laws.

8. File Taxes

Submit payroll taxes to the appropriate government agencies on time. This includes federal income tax withholding, Social Security, Medicare taxes, and state payroll taxes. Failure to file taxes properly can result in penalties.

9. Pay Into Benefits

If your business provides benefits such as health insurance or retirement plans, ensure that the employer’s contributions are made accurately and on time.

10. Maintain Payroll Records

Keep detailed records of all payroll-related transactions, including employee compensation, tax withholdings, benefits, and tax filings. Maintain these records for the required period as per federal and state laws.

Well-organized and Systematized Payroll Schedule

Before setting up a pay schedule for employees, consider the pros and cons and costs associated with payroll for your company. It is best to have a system including a small business bookkeeping in place before hiring employees so there is less confusion and adjustments to make as the company grows.

Visit more posts in our Payroll 101 series:

What is Payroll?

The 1099-Misc Explained

Setting Your Own Salary as a Business Owner

The W-2 Explained

What are the Costs Associated with Payroll?

5 of the Best Benefits to Offer Employees

The Power of the Employee Pay Stub

Few business owners cite payroll as their favorite business task. In fact, it generally tops the list of least favorites. At what point does it make sense to leave it to the experts?

Here are three big advantages of outsourcing payroll:
  1. Access to expertise and knowledge. Employers have to deal with almost 10,000 federal, state and local taxing jurisdictions across the United States. In addition, employers today rely on technology to operate more efficiently.  As a business grows, employers have more employee records to keep and also need more reporting.  The lack of technology becomes a hindrance to scaling for growth of the business. When you’re doing payroll in-house, you’re more likely to make mistakes that not only upset employees, but the government as well. Payroll service providers may be less likely to make big mistakes, and when they do, it’s easier to approach them about it than if the same mistake were made by one of your own employees.
  2. Minimize costs and risks. Outsourcing payroll can also assist with cutting costs and limiting risks. On average, businesses are overpaying employees by about 4 percent because of differences between the employee’s time and an accurate time record. Larger businesses often have the means to employee an entire accounting/payroll department, but businesses with fewer than 20 employees often find that outsourcing payroll saves them money. A quick way to determine if outsourcing payroll would save your business money is to figure out how many hours your employees are devoting to payroll-related activities, calculate how much you’re spending and compare the amount to the plans offered by several payroll-services providers. Also, be sure to factor in the money your business spends on tasks like printing and distributing checks, creating tax documents, and the like. You’ll probably be surprised by amount of time and money spent on these tasks.
  3. More focus on your core business. Doing payroll yourself can take a lot of time and focus from the money-making aspects of your business. Payroll may not directly increase sales, but done incorrectly, it can put your business in a world of hurt. To be in accordance with the laws and legal requirements of payroll takes a considerable amount of time and detail. Outsourcing payroll will help you save time and allow you to spend more money on the profitable parts of your business.