By: Jonathan Pocius – Partner, Payroll Services LLC
Many new employers are fantastic at what they do. They are amazing Doctors, amazing Mechanics, they are fantastic at what they do. These employers jump into business and are met head on with the harsh reality that payroll is more than just clicking a “submit button” or receiving a cute email reminding them to enter their payroll. Payroll has a lot of “stuff” that goes with it, more than just writing a check. This guide is to help you learn the ropes and rules of payroll.
Rule Number One: Know the Rules
Payroll is an unforgiving environment full of bureaucratic red tape and auditors looking to catch the “dirty employer”. The biggest trouble an Employer can get into normally revolves around payroll and hr compliance. But wait, you saw an ad saying payroll is simple and anyone can do it, so sign up for $35 a month for unlimited payroll, how hard can it truly be?
You’re reading this guide right? Good – keep reading.
The first thing you need to know is – you must know the rules. Without knowing the rules you are bound to make mistakes causing you to be the target of government audits. If you get something wrong, penalties are assessed faster than you can say “penalties” with no remorse from the auditor.
“First rule: know the rules. Payroll is high stakes, mistakes cost big.”
Rule Number Two: Open Payroll Accounts BEFORE Payroll is Due
The second thing that almost every new employer gets wrong, is they alert the payroll company or try to run payroll within a few days of the first check date. This causes a lot of problems. In order to run payroll you need to have certain State accounts open. State Unemployment and Withholding accounts are required to report and file all of your payroll taxes. If you run a payroll, you have occurred tax liabilities, but the State does not know you exist yet.
This creates problems down the road when you need to deposit these taxes. Without the account being opened first, Employers risk late deposit penalties or worse the dreaded “suspense account” where all “lost” payments go.
Time and time again we see the State issuing “estimated liability” bills because an account was not opened properly. This always stems from the Employer running payroll without getting the State Accounts open first.
Be sure to also have a Federal Employer Identification Number (FEIN) registered. If you are a sole proprietor running payroll make sure you applied for a FEIN as you will want to keep payroll taxes and reporting separate from your SSN.
If you are a non profit hope over to our “non profit” page and be sure to understand your special rules for State Unemployment.
“Certified Payroll has special requirements that all Contractors must follow.”
Rule Number Three – Workers Comp is Not an Option it’s Required
Workers comp is required by law in most states with the exception of a few. Chances are you aren’t in an exception state. If you fail to get coverage you risk major fines as well as being blackballed by private carriers in the future or carriers giving you nasty rates because you tried dodging them to begin with. Suck it up, get covered we all have to do it. My recommendation is to go with pay as you go workers comp, as it will help you with cash flow.
“Most States require Workers Comp by law. Its not an option.”
Rule Number Four : Get the Employee Documents on the FIRST Day of Work
At the minimum (click here to read more about what you really should have) Employers are required to have on file a W-4 and a I-9 for each Employee. The W-4 is a form where the Employee tells you how much taxes to withhold. The I-9 is proof of eligibility to work. Additionally, the I-9 is required to be completed within three days of the new hire’s start date. NOT the day of payroll. I’m looking at you slacker.
Failure to have these forms filed out prevents payroll from running. I can’t tell you how many people have tried to give us the “employee’s name” only and ask for a check. No withholding information, no social security numbers, nothing but a name. Not happening.
We recommend that new businesses create a new employee onboarding packet or utilize an employee onboarding system. Click here to see our onboarding or click here to learn more about what onboarding is.
“Onboard the employee completely on day one.”
“10% is a good number to use to estimate total employer cost.”
Rule Number Five The 10% Rule – Employer Taxes
Every new Employer messes this up. If you pay someone who worked 40 hours $10/hr your cost is not $400, its about $440. This is what we like to call Employer Taxes but others call it donations to the IRS. Everytime you pay an employee, you as the employer have to pay the following additional taxes:
- Social Security – 6.2%
- Medicare – 1.45%
- Federal Unemployment Tax – .6%*
- State Unemployment Insurance – Rates vary but new business is around 2.6%
(add extra taxes if you live in an “aggressively” taxed state)
These equate to about 10% at the end of the year. So the rule of thumb is add 10% on top of whatever you pay your employees and that will be your total cost.
*FUTA tax has stipulations on the rate, such as timely payments of SUTA as well as timely payments by your State to the Fed for their loans.
“Not paying taxes will earn you a spot on the wall of shame.”
Rule Number Six: Employee Taxes are Not a Cash Flow Piggy Bank
Employee taxes withheld from a paycheck are considered the employees personal money. Failure to deposit these taxes is considered theft. Failure to deposit taxes will earn you the honor of showing up on the wall of shame – the state’s public website of people who commit tax theft. Some State’s such as New York, even send emails out with a picture of you on it.
Each Employee should have the following taxes taken out of their paycheck:
- Federal Income Tax
- State Income Tax
- Social Security Tax
- Medicare Tax
These taxes along with the Employer Taxes are due at different times throughout the year. Turn them in – on time.
“Workweeks are seven consecutive days. Semi-Monthly pay frequencies can cause trouble.”
Rule Number Seven: Overtime, the Work Week, and Time Worked
We recommend that new businesses either choose a bi-weekly (every other week) or weekly pay frequency. This is due to the “work week rule”. A work week is considered 7 consecutive days in a row. It doesn’t have to be Sunday through Saturday, it is any 7 days in a row. It can be Monday to Tuesday, or Friday to Thursday. The choice is yours.
The work week rule is what defines what is overtime and what is regular time. Any hours over 40, worked in a work week, are considered overtime and must be paid at 1.5 x the regular rate of pay. This is why we recommend either bi-weekly or weekly. If you choose semi-monthly (twice a month) the work week does not coincide with your pay period and most people get confused which results in labor violations.
Some States have rules that require any hours worked over a certain amount per day to be counted towards overtime. Check your State to be sure you understand the overtime rules that apply to you.
Another pitfall many new Employers fall into is thinking that they can dock the Employees time for clocking in early. The rule of thumb is if the Employee is at work you need to pay them. If an employee clocks in early, have them clock out and go sit in the break room or sit in their car. If an employee works overtime when its not approved, you still have to pay it. Its your job to monitor the employees time. We recommend you use a timekeeping system with schedule lockout.
“Reports are broken into Quarterly and Annual Reports.”
Rule Number Eight : Reporting Reporting Reporting
There are two basic “categories” of reports you will need to understand. Quarterly and Annual. Quarterly reports consist of the 941 and the State Unemployment report. The 941 reports the total Federal taxes due (Federal Withholding, Social Security Tax and Medicare). The State Unemployment report will require you to report the wages earned by employee for the quarter as well as the taxable wage associated with each employee. These are due the month following the quarter end. The Quarter End dates are:
- March 31
- June 30
- September 30
- December 31
At the end of the year Annual reports are due. These normally consist of the W-2 / 3, 940 (Federal Unemployment), and a State W-2 Filing Report. A copy of the W-2 is given to each employee and reports the total taxable wages earned as well as tax withheld. The W-3 is the sum of all the W-2s for your company. Each State will have different requirements for the Annual return so be sure you understand what is required come year end. Unless you live in a State that does not have income tax, something is due.
“All deductions require employee authorizations.”
Rule Number Nine: Deductions Require Approval From Employees
Every deduction (with the exception of garnishments) you take from an Employee’s paycheck requires the Employee to sign off on it. You must receive written permission to take the deduction from the Employee.
If the deduction is for a retirement or medical plan you need to have the employee provide an employee election form stating they signed up for that deduction. Any deduction such as training, uniform, tickets, etc must have a written statement from the employee permitting the deduction. This can be in the form of an employee handbook or an individual employee deduction form.
Do not just deduct money from an employee because they broke that $1,000 bottle of wine. You will lose when the employee challenges you in court.
“Your payroll frequency must be scheduled and reoccurring”
Rule Number Ten: Scheduled and Recurring
Most States require you to have a regularly scheduled payroll that is reoccurring. You cannot just move payroll because cashflow is tight. States have ruled time and time again that this is the fault of the employer. Schedule your payroll around your cashflow. If you are a restaurant and all of your sales come in on the weekend. Make your check date Tuesday when cash is flush, not Friday when cash is tight.
As you can see, payroll is not “push a button and forget it”. There are a lot of things you as the Employer have to be aware of and do correctly. We didn’t even touch on the HR and Compliance side of having Employees. If you are in the construction industry please check out our construction page here or if you are in the restaurant industry click here to read rules specific to you. This is just the “down and dirty” crash course. Let us watch your back. Contact us today .