Hi again,

You are a new business owner and you hire an employee immediately, unfortunately, you don’t have an accountant or a payroll service provider.  Employee A works for you for a month and he needs to get pay, what do most of the business owners do?  They pay their employees by cash or a check without any tax deductions.  What are your obligations as an employer?

One of the most common mistake that employers make are giving out cash advances with no tax deductions taken out.  If Employee A was paid on January and February and your company didn’t hire an accountant or a payroll service provider until March, you are still obligated to report those wages for those months and pay those taxes.  Before you start paying these back wages and taxes, you need to understand that the pay date determines your tax liability.  If wages were paid out in January and you are a monthly depositor, the taxes would have been due by February 15 or earlier if you’re on a semi-weekly depositor.  You must be wondering what can you do to avoid the penalties and interests, according to the IRS the check dates determines the tax liability.  If you hire a payroll service provider or an accountant in March, you have the following options:

Option 1: Report the cash amount that you paid your employee on top of the next paycheck.  For example, Employee A received $500 in January and $500.00 in February.  You are paying him $500.00 for March, here is what it would look like:

Gross: $500.00 + Other Pay: $500.00 (Jan Pay) + Other Pay: $500.00 (Feb Pay) =$1500.00 – Taxes (FIT: $400.00 – FICA: $93.00 – MED: $21.75 – SIT: $100.00)  – Cash Advances: $1000.00 (You already gave this employee his net check for Jan and Feb, there is no need to pay him again) = NET: $385.25 (his take home check)

Option 2: Have your service provider calculate the taxes for January’s paycheck and backdate it January (Gross: $500.00 – Taxes $200.00 = NET: $300.00).  You will collect the funds back from the employee by having the employee write you a check for $200.00 or do a deduction on his/her future paychecks.  The Employer will be responsible for paying the late penaltiies and interests for the back dated checks.

Please contact your tax advisor or contact the IRS for the best advice.  The next time you hand your employee a check with no tax deductions, please consider the consequences and how it may affect your tax liability. 

At work today, I had a few clients asking me how do you determine the number of hours for each pay period?  To  begin this analysis, let’s determine, how many hours are in a year?  An employee normally works 8 hours a day x 5 days a week is 40 hours a week x 52 weeks in a year is 2080 working hours per year.

Here is a breakdown of the number of hours per pay period:

Weekly (Paid 52 times a year) is 2080 hrs / 52 times  = 40 hours per pay period

Bi-Weekly (Paid 26 times a year) is 2080 hrs / 26 times = 80 hours per pay period

Semi-Monthly (Paid 24 times a year) is 2080 hrs/ 24 times = 86.67 hours per pay period

Monthly (Paid 12 times a year) is 2080 hrs / 12 times =  173.33 hours per pay period

In the future when an employee asks you how the number of hours are determined especially for salary employees, you may use this calculation as an explanation. 

Hi All,

Sorry about my absence, I just had a newborn and had been busy in the past couple of months.  It’s actually an exhausting job being a new parent and the irregular sleep that I get.  I am getting use to my 4-5 hours a sleep per day, anyway, enough about me.  I will try to write a post often as time permits.  Thank you all and continue checking back. 

At my work place, many small employers just fired their CPA’s or Payroll Service Provider and they would like to know how they can create a payroll for their employees.  You actually have a few options:

1. Continue writing a net check amount based on the previous paystubs from your CPA or Service Provider.  The downside is that there are some limits on certain tax categories such Social Security (FICA) or State Disability Insurance (SDI) and you would have to calculate it manually.

2. Use the paycheck calculator at www.paycheckcity.com.  The website has many payroll calcualators that I found useful and you can even print out a generic paystub for your employee if they requested it.  The downside to this is that it will not give the employee a Year-to-date (YTD) figure on the paystub.

3. Hire a local CPA or Payroll Service Provider immediately and have them calculate the taxes for you.  Unfortunately, many CPA and Payroll Service Providers request payroll reports from your previous service before they can set up your company on time for payroll. 

In my opinion, before you fire your CPA or Payroll Service Provider, make sure you have all the payroll records before you leave them because your number one priority is get your employees paid on time.