Master your payroll
Three payroll questions (and answers) every small business owner should know.
by Emanuela for 99designs
Payroll is the sparkly soul of your business. At first glance, it might not look like it. Many business owners still see payroll as some mysterious thing that just happens to recharge their employees’ bank accounts overnight. But there’s something much deeper inside. Payroll is about the connections between people. It’s about the zeal and dedication people bring to their jobs and the way employers appreciate that level of awesomeness. And with payroll comes payday, which creates an opportunity to bring that gratitude to life. Making payday personal shows that you not only care about your team’s contributions, you also truly care about their lives.
Yet with all the complexities involved, that shimmery specialness can get obscured. In this piece, I’ll explain how to make sense of some of the toughest rules and regulations, so you can spend time on what I believe is the best part about being a business owner—appreciating your incredible team.
1. How often should I pay and file payroll taxes to avoid penalties?
To get to that magical payroll center, you first need to understand the larger universe. And it all revolves around taxes. Until April rolls around, taxes are probably the last thing on your mind. You may be thinking:
Eh, I’ll just deal with my payroll taxes on Tax Day.
As it turns out, you could owe payroll-related taxes all year long. According to the IRS, forty percent of small businesses get fined around $850 per year for improperly paying their payroll-related taxes (eesh). Therefore, it’s really important for you stay up to date, not just to dart the penalties, but so you can ensure that your business can properly care for your employees.
There are a few variables in play when it comes to payroll taxes, which can make things confusing. First off, the IRS and state governments define what your tax payment schedule looks like, which changes depending on where your business is located. Your payment frequency is also impacted by your payroll schedule (i.e. if you pay your employees monthly or biweekly). To stay in the clear, keep a lookout for all IRS and state notices mailed to you year-round. Also, write down the contact info for your state’s payroll tax compliance office so you can always know where to go for help.
2. What payroll and accounting reports do I need to keep on file?
Once you fire off your tax payments, it can be tempting to think you’re good to go for the rest of the year. You may say to yourself:
Okay, I filed my forms. Time for a break?
Don’t run off to that food truck just yet. (Or maybe go get one celebratory taco—but bring it back to the office.) Good reporting can help you better manage your business and your team, in addition to helping you circumvent expensive legal fines. There are a lot of IRS forms you need to stay on top of throughout the year to enable this. We know it’s not easy. And we know it’s nearly impossible for all these forms to capture the abstract stuff, like the look in someone’s face when they feel truly recognized. That’s okay. These forms are just one piece of the payroll puzzle. In fact, they allow the entire payroll engine to work.
Here’s a quick overview of the forms you need to know about:
For your employee:
Form I-9: Each employee needs to fill out Form I-9 to verify that they’re legally eligible to work in the U.S. You don’t need to mail the form anywhere, but you must keep it on file (the cloud counts!) for the entire span of your worker’s employment. Hold on to the form for a minimum of either three years from the hire date or one year from the date of termination, whichever one is longer. You can also choose to verify your employee’s work status online using e-Verify, a nifty tool developed by the Department of Homeland Security.
Form W-4: Your employee will also need to fill out Form W-4 to determine their tax withholding amount. We know you love helping your team, but this is something they have to handle on their own. The W-4 doesn’t need to be mailed anywhere, but you do need to keep your hands on it for a minimum of four years. Let the countdown begin.
What’s a withholding tax you ask? It’s a pay-as-you-go tax that you have to pay to the IRS periodically throughout the year. The amount can easily be calculated through Form W-4 or the IRS withholding calculator.
These three things will determine how much your employees should withhold:
New hire reporting for states: If you just hired someone unbelievable, it’s time to celebrate in style. Whenever you find someone whose skills and philosophies match up with what you’re looking for, it’s a pretty big deal—and a pretty big milestone to recognize.
After the champagne and cupcakes disappear, take the party elsewhere—the state. Really. Each state has a specific department where you can report the new hires you bring on board, and depending on the state, you may have anywhere between a few days to 90 days to submit this information. When reporting new employees, you will typically provide their name, address, and Social Security number. Be sure to check your local state tax, labor, and workforce websites to see exactly how much time you have after your welcome party draws to a close.
Form 941: Every paycheck, you’re required to withhold a certain amount of federal income tax and payroll taxes from your employees. And this is why each quarter you have to file Form 941 to report the amount withheld. You may also see this written as the Employer’s Quarterly Federal Tax Return, but don’t worry, it’s the exact same form.
State-specific withholding forms: Now, this is the state version of the form above. Since the majority of states also require employers to withhold state income tax, this form is used to report the total amount to your state. For example, in California you would use Form DE-9 to tell your state how much you withheld.
Form 940: This form is submitted each year along with your taxes, and is used to compute your Federal Unemployment Tax Act (FUTA) tax. The money you pay goes directly to unemployment funds to help out people who are looking for work. While you’ll send this form in only once a year, you’ll have to pay your FUTA tax payments every quarter.
Form W-2: Don’t forget to file your employees’ W-2s and then distribute them so your team can file their taxes. Generally, here’s how the process goes:
Form I-9: Each employee needs to fill out Form I-9 to verify that they’re legally eligible to work in the U.S. You don’t need to mail the form anywhere, but you must keep it on file (the cloud counts!) for the entire span of your worker’s employment. Hold on to the form for a minimum of either three years from the hire date or one year from the date of termination, whichever one is longer. You can also choose to verify your employee’s work status online using e-Verify, a nifty tool developed by the Department of Homeland Security.
Form W-4: Your employee will also need to fill out Form W-4 to determine their tax withholding amount. We know you love helping your team, but this is something they have to handle on their own. The W-4 doesn’t need to be mailed anywhere, but you do need to keep your hands on it for a minimum of four years. Let the countdown begin.
What’s a withholding tax you ask? It’s a pay-as-you-go tax that you have to pay to the IRS periodically throughout the year. The amount can easily be calculated through Form W-4 or the IRS withholding calculator.
These three things will determine how much your employees should withhold:
- Marital status.
- The number of allowances claimed on the W-4.
- Compensation. (This may depend on the state where your employee receives payroll.) Employees who anticipate a full refund may be exempt from withholding, which is different from employees who are exempt, like clergy or certain visa holders.
New hire reporting for states: If you just hired someone unbelievable, it’s time to celebrate in style. Whenever you find someone whose skills and philosophies match up with what you’re looking for, it’s a pretty big deal—and a pretty big milestone to recognize.
After the champagne and cupcakes disappear, take the party elsewhere—the state. Really. Each state has a specific department where you can report the new hires you bring on board, and depending on the state, you may have anywhere between a few days to 90 days to submit this information. When reporting new employees, you will typically provide their name, address, and Social Security number. Be sure to check your local state tax, labor, and workforce websites to see exactly how much time you have after your welcome party draws to a close.
Form 941: Every paycheck, you’re required to withhold a certain amount of federal income tax and payroll taxes from your employees. And this is why each quarter you have to file Form 941 to report the amount withheld. You may also see this written as the Employer’s Quarterly Federal Tax Return, but don’t worry, it’s the exact same form.
State-specific withholding forms: Now, this is the state version of the form above. Since the majority of states also require employers to withhold state income tax, this form is used to report the total amount to your state. For example, in California you would use Form DE-9 to tell your state how much you withheld.
Form 940: This form is submitted each year along with your taxes, and is used to compute your Federal Unemployment Tax Act (FUTA) tax. The money you pay goes directly to unemployment funds to help out people who are looking for work. While you’ll send this form in only once a year, you’ll have to pay your FUTA tax payments every quarter.
Form W-2: Don’t forget to file your employees’ W-2s and then distribute them so your team can file their taxes. Generally, here’s how the process goes:
- You fill out Copy A of Form W-2 and send it to Social Security.
February 29th: Paper filing deadline
March 31st: Online filing deadline - Then, you give each employee a W-2 by January 31st
- That’s it!
3. How do I avoid misclassifying my employees and contractors?
Categorizing your workers may seem odd at first: all of my employees are awesome, right? We’re completely with you, but in the eyes of the law there are two distinct types of workers: employees and contractors, and both are unique in their own way. You may be thinking:
Contractors make my taxes lower, and since my worker only helps out 20 hours a week, there's no need to make them an employee… I think?
It’s super important to educate yourself on the difference between the two. Why does it matter? Well, miscategorizing your workers can cost you a lot on multiple fronts. For example, if your contractor is actually an employee, you may be underpaying your payroll taxes, which can come back to bite you. On average, employees can cost 25 to 30 percent more than contractors. Furthermore, 30 percent of contractors should be classified as employees, leaving many business owners with steep legal and financial penalties. Plus, your worker will have to clean up the mess as well, so for the sake of you both—make sure your business is in tip-top shape.
Another reason why it’s so crucial to know the difference comes back to why you’re paying your team in the first place. You want to make sure your team is properly recognized for everything they do. So if an employee isn’t receiving the benefits they’re actually entitled to, they may feel like you don’t value them. Don’t let that happen. Crack the classification code right from the start with the quick cheat sheet above.
If you are still unclear, not to worry. Just fill out IRS Form SS-8 and they’ll give you a final call on the type of worker you have on your team. It could take up to six months for them to send over a decision, but it will put your mind at ease once you know the truth (and nothing but the truth).
Wrap-up
As you can see, there are a lot of mechanics in play that make the world of payroll work. We know they’re not all glamorous. We know they don’t all glisten. But these things are in place to keep that magic feeling of appreciation alive. Yes, the government forms and endless acronyms look impersonal, but they are the backbone of the entire payroll system. In fact, they are actually what make the personal part come through. And when you see how everything works together, the details start to take on an entirely different sheen.
If you’d like to learn more about payroll, head on over to the Gusto Resource Center.
With Gusto, you can get payroll, benefits, and workers’ comp in one simple service.
Article by Tomer London. Tomer is responsible for the development and execution of the product vision at Gusto, re-imagining and innovating on how modern payroll, benefits, and workers’ comp should operate. He was selected to the 2013 Inc. 30 Under 30 list. Tomer holds a BS in Computer Engineering from the Technion - Israel Institute of Technology, as well as an MS in Electrical Engineering from Stanford University.
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