10 Things you need to know before switching payroll services

So you are frustrated with your current service provider and are ready to make a move to go to another company, here are some tips you may want to consider before switching: 

1. Payroll Records—Make sure you have all the payroll records before switching because your new company will require that information assuming you are transferring in the middle of the year. 
2. Tax Payments and Filings—Please make sure your current service provider will pay all your outstanding taxes and file any forms because the new service provider will not assume liability of what your prior service provider did.
3. Cancellation of Service—Please make sure you do not cancel your current service until the new service provider has completely set up your profile and wages because I’ve seen companies canceling services and unable to run a payroll because the new service provider does not have all the necessary information.
4. New Quarter or New Year—The best advice for business owners planning to switch payroll service is to start in a new quarter or wait until the following year.  The reason behind this is having a clean start with the new service provider; it will be easy to enter the Year-to-Date wages for W-2 purposes.  If you are starting in a new year, then there are no wages to carry over; it would be a simple setup process.
5. Customer Service—Please test out the customer service making sure there are live people answering the phones before switching services.  What good does it do if the price is really cheap and you can’t get basic customer service? 
6. System Functionality—Please verify that the system is able to support all your payroll needs such as 401K, 125 Plans, Internet access, garnishments, etc.  There are so many payroll companies out there, but not everybody can accommodate you like ADP or Paychex.  Some systems only supports up to 50 or 100 employees, you need to make sure they are capable of handling your situation.
7. Local vs National—When thinking about switching service providers, please make sure you know where they’re located at because if they’re local then you can print checks and get it deliver faster compare to a company in a different state.
8. Reports—Certain companies will offer certain reports such as Certified Payroll Reports, ask them about the reports that you need and make sure they can handle it.
9. Tax Debits—If you are tight on cash flow, choose a company that will debit your account two days before the due date; instead of paying the taxes on every payroll.  As you know payroll service providers make money from interest on your money and don’t pay it until the due date.
10. Year End Forms—Please make sure one company is handling your year-end forms such as w-2s, 940, etc.  Sometimes you would cancel service from the previous service provider and they filed a W-2 at year-end for you because you didn’t inform them to stop all the filing obligations.  The new company files a W-2 also and you’ll have two sets at year-end.

I hope you find this information useful as switching payroll service can be complicated, but as long as you understand the concept of it, you can make the transition smoother.

One person payroll department? Good or Bad idea?

Hi again,

If you are a business owner and you have one employee that handles all the payroll duties, you may want to reconsider it?  If you are like many other business owners that give the entire payroll duties to one employee in your company, you are asking for trouble.  One person payroll department have ripped off many small business owners who don’t know much about payroll.  

One of my client’s payroll administrator had 100% control in processing payroll with determining how often the employees are paid,  printing checks, signing checks, and delivering checks.  This employee had created a phantom employee (also known as a dummy employee), since this was a construction company, it was common to have employees on payroll for a day or two and that would be it.  The payroll administrator would create a phantom employee on the payroll and pay that employee once or twice a month.  The employee has a fictitous social security number, address, martials status, withholdings, etc, but he would keep a name that is legitimate from a person he knows.  Since this was a pre-printed check stock with the signature on it, the employee just had to print it with the dollar amount.  The employee will have his acquintance with the legitimate name bring it to a convenince store to cash the check, when the cash is received.  The payroll administrator would terminate the employee and delete the employee from the system as it never existed.  The payroll administrator did this for 8 months before getting terminated and prosecuted.  Since the owner isn’t handling any of the payroll function and nobody else was cross referencing the data and payroll information this person was entering, it’s tough for anybody to monitor the cash flow within payroll. 

It’s very important to separate all the tasks, such as having the owner/manager to sign or verify the checks.   Please limit access to the payroll administrator to processing checks and enter hours and make somebody in charge of printing checks only.  You must make an effort to confirm the payroll data at least once a month.  Payroll is probably the largest expense a business owner would have, why wouldn’t you protect it.

Cash Advances

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. 

Truth about Payroll Service Providers

Hi,

Have you ever wonder how payroll service providers make their money?  The truth is they don’t make money charging you the service fees, the revenue is generated when you process a payroll and make the tax payments through their service.  Whenever you make a tax payment, the payroll service provider will keep those funds in their account until the actual due date.  They get the interest from their bank using other people’s money (OPM) and it’s a common approach in this industry.  Some of these taxes such as the Social Security (FICA) and Medicare are not due until the 15th of the following month if you’re a monthly depositor.  Other taxes such as State Unemployment Insurance (SUI)  are not even due until one month after the quarter ends, so the payroll service provider would have your funds in their bank account for a month to several months before they actually pay it to the appropriate federal or state agency. 

I guess this method is great if you want the payroll service provider to pay your taxes on time and as long as you paid it, it’s a done deal.  The truth is most of you are probably small business owners and need the extra cash flow to keep your business running.  If you are like me and would like to keep all your cash until the due date; my suggestion is to find a service provider that will not debit your taxes until the actual day or couple of days before.  I’m pretty sure you can use that extra hundred or thousand dollars for other bills.

Number of Hours per Pay Period

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. 

Paycheck Calculator

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. 

File Tax Forms

Filing Forms 

Hi All, I wanted to complete the Final step in payroll which is filing forms.  There are several forms that you need to be aware that includes 941, 940, W-2s and W-3s.

Form 941 (Employer’s Quarterly Federal Tax Return) – This is a summary what you paid in wages and taxes for each quarter.  This form is due on a quarterly basis and you must file this form if you’re an employer that report wages, have tips from employees that needs to be reported, withheld federal income tax withheld, Social Security, and Medicare taxes, and have Earned Income Credit (EIC) Payments:

Quarter 1	Quarter 2	Quarter 3	Quarter 4
January-March	April-June	July-September	October-December
Due: April 30	Due: July 31	Due: October 31	Due: January 31 of the following year

For more information, click on this link:

http://www.irs.gov/pub/irs-pdf/i941.pdf

 

Form 940 (Employer’s Annual Federal Unemployment Tax) (FUTA) Return – This form is due on an Annual basis and it’s an employer tax, so remember not to deduct any taxes from your employees.  This program is to provide funds for paying unemployment compensation to employees that have lost their jobs.  It’s only applied to the first $7000 in wages each calendar year. 

Due Date is January 31 of the following year. 

For more information, please click on this link:

http://www.irs.gov/pub/irs-pdf/i940.pdf

Form  943 (Employer’s Annual Federal Tax Return for Agricultural Employees) – This form is specifically designed for reporting wages and income taxes for workers that work in the farm.  This is similar to the small businesses in filing form 944, they only need to file this form once a year. 

Due date is January 31 of the following year. For more information, please click on the following link:

http://www.irs.gov/pub/irs-pdf/i943.pdf

 

Form 944 (Employer’s Annual Federal Tax Return) – Starting with 2006, this form was introduced to the small employers to reduce the burden on them.  The IRS has simplified the rules for filing employment tax returns for small businesses.  As an employer, you either file form 941 or 944 for a specific year.  If you file the wrong form, the IRS will notify you in writing to change it.

Due date is January 31 of the following year 

For more information, please click on the following link:

http://www.irs.gov/instructions/i944/index.html

 

W-2 Copies (Wage and Tax Statement) – These forms (Copies B, C, and 2) are given to the employees by January 31 of each year; it summarizes all the wages from the prior year and tax deductions.  This is what the employee used to file their own personal tax return (1040, 1040A, 1040EZ) by April.  Employer files copy A by February 28 (if filing by paper) or by March 31 (if filing electronically) and keeps copy D for their own records.

W-3 Copies (Transmittal and Wage Tax Statements) – These forms are only filed along with the W-2 if you are filing the forms by paper only; if you are filing the W-2s electronically, then the W-3s are not required.

Due Date is February 28 if filing by paperDue Date is March 31 if filing electronically 

For more information, please click on the following link:  

http://www.irs.gov/pub/irs-pdf/iw2w3.pdf

***Note: There are some state forms also that are filed on a quarterly basis or an annual basis, so please check with your state agency regarding specific forms and due dates. 

Paying Taxes (Part II)

Let’s continue with the second segment of paying taxes, last time I explained what the taxes are in payroll.  As the employer, you need to send the taxes to the appropriate Federal and State agencies.  You can send in the payments electronically or send it by mail with a coupon.  The federal coupon is known as Form 8109 (Federal Tax Deposit Coupon).  Please contact your state and local government on how to send the taxes to them. 

You become liable for payroll taxes on the date you pay your employees regardless of when they did the work for that paycheck.  This is known as constructive receipt.  For example, if you paid an employee on the first of each month and it covers the pay period of the previous month.  All the IRS cares about is the actual paydate and that determines when your liability is.

These are the Federal Tax Deposit Schedules for Federal Withholding, Social Security (FICA,OASDI), and Medicare:

Monthly Depositors: If your company’s federal tax liability during the lookback period (7/1/05-6/30/06) was less than $50,000, then you’re a monthly depositor.  Taxes are due by the 15th of the following month.  For example, January taxes are due by February 15th; however, if the 15th falls on a bank holiday, it will be due the next banking day.

Semi-weekly Depositors: If your lookback period was more that $50,000, then you are a semi-weekly depostior.  Taxes are normally due three banking days after the end of the period.  The IRS determines the due dates as follow:  1)  If the pay date falls on Wednesday, Thursday, Friday, then taxes are due on the following Wednesday.  2)  If the pay date falls on Saturday, Sunday, Monday, and Tuesday, then taxes are due on the following Friday.

Next Day Deposit Rule: If you accrue $100,000 or more in federal tax liability at any point during a deposit period.  The taxes must be sent the next banking day within regardless if you were a monthly depositor or a sem-weekly depositor.  This may happen if you issue bonuses at year end to your employees and the tax liability amounts are greater than $100,000.

Quarterly Depositors: If you know your company will owe less than $2500 in federal taxes for a quarter, you can choose to pay the taxes at the end of the quarter. 

Annual Depositors: The IRS will sent you a written confirmation informing you that you are an annual filer Form 944 and your total annual federal tax liability is less than $2500 for the entire year.

Now let’s approach the other taxes of when Federal Unemployment Taxes (FUTA) and State Unemployment Insurance (SUI) Taxes are due.  The due dates for these taxes are different compared to the regular federal taxes. 

FUTA – These taxes are due at the end of the quarter April 30 for Quarter 1, July 31 for Quarter 2, October 31 for Quarter 3, and January 31 for Quarter 4.  If the FUTA tax hasn’t reach the $500 threshold, then taxes do not need to be sent in until the following quarter.  (Note: if the $500 FUTA threshold is not met for the entire year, then it’s not due until January 31 of the following year).  Payments can be made electronically or using the 8109 Federal Tax Deposit Coupon.

SUI- These taxes are due at the end of the quarter.  April 30 for Quarter 1, July 31 for Quarter 2, October 31 for Quarter 3, and January 31 for Quarter 4.  Please verify with your state of how these payments can be sent?

Paying Taxes (Part I)

Let’s continue the second segment of the payroll process, which involves paying taxes.  I guess the question on your mind is why do employers go through the process of paying employees and paying taxes for them?  The answer is simple, it’s because you are doing the right thing for both the employee and yourself (the employer).  I seen many employers that bypass this entire step and simply pay the employee cash without deducting any taxes.  This may be a simple way to pay your employees, but if I’m the employee I would not work for an employer that’s only paying me cash.  Here are my reasoning:

1. If the employer doesn’t deduct any of the taxes, the employee will be responsilble to pay for all his or her own taxes in April which means that taxes will be owed and you may have to cough up a larger amount during that time.  I prefer to pay my taxes throughout the year, so that way I know it will reduce my tax liability during April.

2. If the employee is unemployed for whatever reason, the employee can not collect unemployment benefits because the employer has not paid any of the Federal Unemployment Tax (FUTA) or State Unemployment Tax (SUI).  These are actually employer taxes, so it doesn’t get deducted from the employees checks in most states.  It’s one of the best benefits for working for a company that gives you a paycheck with the tax deductions.

3. If the employee retires and assuming the Social Security Funds will still be available, he or she can not claim any of it because the Employer hasn’t been paying any of those funds while the employee was employed.  Remember Social Security and Medicare are paid by the employees and the employers. 

The next time you want to pay the employee cash only without deducting taxes, you may want to reconsider because the employee really ends up losing in the long run.  All these taxes deducted are really to benefit them and it’s also a way of thanking your employees for their service while they’ve been employed with you. 

Let’s get back on track here and let me explain to you what are payroll taxes?  The following taxes will be covered here:

• Federal Withholding
• Social Security (FICA, OASDI)
• Medicare
• State Withholding
• Other State Taxes
• Federal Unemployment
• State Unemployment

Federal Withholding – This amount shown on the paystub reflects what the individual employee claims on the W-4 form which includes the marital status, number of allowances, income, and pay frequency.  There are no fix rates here, so all the employees that have different allowances will have a different amount deducted on their paychecks.

Social Security – It’s also known as FICA or OASDI, this tax is taken out at a 6.2% rate, the employee pays this portion and the employer matches that rate.

 Medicare – It’s also a fixed rate required by the federal government, which is tax at a 1.45% rate.  The employee and employer pays that amount.

State Withholding – Similar to the Federal taxes.  It varies based on the marital status and number of exemptions from each employee and projected annual income.  Only nine states do not have a state withholding tax, which includes AK, FL, NH, NV, TN, TX, SD, WA, and WY. 

Federal Unemployment Tax Act (FUTA) – This benefit provides payments of unemployment of compensation to workers who lost their jobs.  The FUTA tax rate is usually 0.8% and is based on the first $7000 in wages per employee; therefore, the maximum tax liability for each empployee would be $56.00. 

State Unemployment Insurance (SUI) – This is similar to the FUTA, but the state controls this portion of it.  The state funds unemployment through this tax and is usually paid by the employer; however, some states such as Pennsylvania and New Jersey also require the employees contribute to this tax.

There may also be other state taxes or local taxes within your county, city, or jurisdication, so please check with local government to determine if there are any other taxes that needs to be paid. 

I’ll cover the second segment on paying taxes next time.  Thank you for reading.

Paying Your Employees

Paying your employees can be a challenge if you never done payroll personally or this is your first time hiring an employee.  There are several ways to pay your employees:

1. Hire a Bookkeeper/CPA and let him/her prepare the checks for your employees.  Some of you may choose this option because your Bookkeeper/CPA is knowledgeable to handle all your payroll needs and answer all your questions related to payroll.  Did you know that just because you pass on your payroll function to your Bookkeeper or CPA, it does not exempt you from all the mistakes that was done by him or her.  According the IRS and state government, no matter who is handling your payroll function, it’s still the SOLE Responsibility of the employer.  Even if you end up firing your CPA/Bookkeeper, the Employer will get slapped with all the fines and penalties.  This is the reason why you must educate yourself at least in understanding the basic process of payroll, so you can avoid all of these penalties, etc. 

2. Outsource your payroll duties (e.g. ADP, PayChex, Intuit, etc.).  This option has become quite popular in recent years because many small business owners usually have fewer than 5 employees in the first several years of operations.  Many of you will outsource this payroll function because you are too busy doing what you do best, which is running their business, making sales, etc.  One piece of advice for you, even though you’re handing off the function to a big name payroll company, you should definitely take 15-20 minutes to review the payroll reports on a monthly basis.  This is to ensure that the payroll company is processing all the necessary checks and filing the forms accurately.  If you find an error, you can contact your payroll company to adjust it immediately.  I seen many employers that don’t review their reports and relying solely on the payroll company, they often find many of the errors at the end of the year or when it’s time to provide the w-2s to the employees.  That can cause a major headache to the employees who wants to receive their w-2s on time.  When the employer finds the error, it may be too late and penalties are already coming to them.  It would have been too late do anything except amended returns, which can be a pain if you never done it before.  My only advice here is to REVIEW, REVIEW, REVIEW all the reports.

3. Process and prepare the checks in house or by yourself – Many small business owners want to do this function themselves usually during non business hours; however, they don’t have the basic knowledge to complete this process.  They go to a retail store Office Depot, Office Max, etc. and ends up buying a payroll software off the shelves.  The software ask them to setup the company profile, deductions, Federal Employer Identification Number and the State Employer Identification Number, State Unemployment Number and rate, etc.  As you go through the setup, there are many unknown terminologies and some of the information are setup incorrectly.  Please read all the details in the software or get assistance from the software provider to see if they’ll be able to assist you with the initial setup before you process the first payroll.  This will eliminate some of the problems in the long run.  There are many stand alone softwares out there including Quickbooks and Peachtree and Internet Payroll Services that are becoming very popular.  My advice is to make sure you understand the entire payroll process before attempting to do this by yourself or make sure the software you purchase has a LIVE payroll customer service agent with a phone number, so you can contact them for questions.  If there are no phone numbers on the software box for customer support, then you’re just asking for trouble.