The Basics of Payroll

One of the first steps a business will take before embarking on the payroll journey is to determine if their entities’ labor base will be comprised of independent contractors or employees. An independent contractor is a self-employed person or entity who is hired to perform work for or to provide services to another person or entity as a non-employee. Independent contractors pay their own FICA (Social Security and Medicare taxes). Annually, an employer will file a 1099-NEC form reporting total payments made to contractors. On the other hand, an employee is a worker employed or hired for a position in exchange for a salary or wages.

Payroll is the process of paying employees renumeration for work completed over a period of time. The payroll process includes tracking hours for employees, calculating earned wages, and then processing payments to employees via check or direct deposit. It also includes the completion of necessary tax filings, government reporting, and annual business and employee wage reports. An employer pays a portion of FICA taxes on behalf of the employee while the employee maintains their portion. At the end of the year, the employer will file a W2 form for the employee.

With entities’ desires to move forward and hire employees, here are a few helpful tips.

Establishing Applicable Employer Identification Numbers

Before an organization can process payroll, there are several items they need to set up and complete. If one is not already in place, an Employer Identification Number (EIN) from the Internal Revenue Service (IRS) will need to be obtained. An EIN number is required for all IRS filings. The company should also determine if state or local jurisdictions require specific employer tax identification numbers. Additionally, many states require a separate state unemployment identification number to file unemployment taxes on behalf of both the employer and employees.

New Employee Forms

Once the business starts the hiring process, they will need to request basic information from the employee. It is good practice for the business to create a new employee packet containing required forms to enhance their onboarding process. Form I-9, Employee’s Eligibility Verification, is used to verify an employee’s identity and eligibility for employment. IRS Form W-4, Employee’s Withholding Certificate, determines how much federal income tax to withhold from employee wages. In most states, the employer is required to withhold state taxes, which may include a state specific withholding allowance certificate. Be sure to include applicable local income tax forms, too.

Recordkeeping/Policies

It is best for an employer to incorporate standardized policies and procedures, including applicable compensation and benefits packages, an employee handbook, payroll processing calendar, and a record retention policy. A compensation package or offer letter would contain rate of pay, potential bonuses, retirement, vacation, holiday and leave benefits. The IRS suggests that businesses maintain payroll related employment documents for at least four years after filing 4^th quarter reports. IRS regulations can be found here.

In-House or Outsourced Payroll

Payroll can be processed either in-house or outsourced. In-house payroll is often handled by an entity’s accounting department. Some advantages to in-house payroll are maintaining control over the payroll process, cost, and data security. Disadvantages include time spent processing payroll, lack of expertise, and compliance risks. A third-party company is able to handle outsourced payroll. The benefit of outsourcing payroll includes streamlined processes, compliance accuracy, and risk assumption. The cons of outsourcing are increased costs and sharing data through third-party systems.

Taxes and Regulations

It is essential for businesses to comply with tax payment and filing schedules. The IRS will inform an organization of its employer responsibility. Federal tax deposits are required to be made through the Electronic Federal Tax Payment System (EFTPS). Tax payments, made by the employer, include both employer and employee taxes. State and local taxes should be made through their respective portals.

Payroll tax returns are filed quarterly and annually. IRS Form 941, Employer’s Quarterly Federal Tax Return, reports quarterly wages paid, employer and employee taxes, including federal income tax, Social Security, and Medicare. The quarterly tax return and the supporting schedules reconcile tax balance due to tax payments made. IRS Form 940, Employer’s Annual Federal Unemployment Tax Return, reports federal unemployment taxes on eligible wages.

A business must adhere to numerous payroll laws and regulations while completing the payroll process. The Fair Labor Standards Act (FLSA) sets the national minimum wage and overtime rates, as well as payroll recordkeeping requirements and child labor laws. The Federal Insurance Contributions Act (FICA) funds Social Security and Medicare programs. The Federal Unemployment Tax Act (FUTA) offers temporary income assistance for workers who have lost their jobs through no fault of their own. The Equal Pay Act (EPA) is designed to prevent wage discrimination.

As one can see, payroll can be a complex and time-consuming process. However, if payroll is set up and handled properly, many headaches can be avoided. We have several payroll resources available to assist businesses owners with questions on employer and tax compliance matters. For specific questions, assistance, or additional information, please contact Maria Dicent-Hernandez or Rebecca Lauffer. If you would like to talk to one of our professionals on any other business-related topic, please do not hesitate to contact a member of our Advisory and Business Consulting team.

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