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.

Introduction to Payroll

To the small business owners out there, you must be scratching your heads and asking what is Payroll?

Payroll are wages or salaries paid to employees for their service of work for a certain time frame (weekly, bi-weekly, semi-monthly, monthly, etc.) with a total sum amount usually given to them as a check or direct deposit.

There are three things that you need to know in processing payroll:

1. Paying your employees – this involves the calculation of wages/salaries and withholding all the necessary taxes (Federal and state taxes) for the pay period of how much the employee earned.

2. Paying Taxes – the taxes withheld from the employees and the employer portion of the taxes need to be sent to the Federal or State agency on the designated deposit schedule

3. File Tax Forms – Did you know there are forms due every quarter and on an annual basis?  Besides sending in the tax funds to the government, they also want a summary of what you paid so they can reconcile the wages and taxes being reported.

If you can master the three steps for payroll, then you’ll be able to avoid most of the penalties from the IRS.  There are still other rules and regulations that you need to know including Social Securtiy limits and Federal Unemployment limits, these limits may change every year.  You have to keep current with all the publications by the IRS (Employer’s Guide Publication 15).

In the next few days, I will explain each step in depth, so you get an idea of what needs to be done on each payroll. 

Welcome to the Payroll Tips & Advice Blog

Welcome to the Payrolll Tips & Advice Blog!

I created this blog to educate small businesses in understanding the payroll process in the United States.  The process is similar in other countries as well, so you may find some of the information here useful.  I worked in the payroll industry for 6 years now and I’m a Certified Payroll Professional (CPP) since 2005.  I majored in computers in college, but somehow got into the payroll industry as my first full-time position and been stuck here since and loving every minute of it.  I would like to share my knowledge and provide you with some tips especially small business owners on how to process an accurate payroll. 

All the tips and advice posted here gives you a summary of what the payroll process is and how it works; however, you are still responsible to follow all the rules and regulations within the federal, state, city, and local jurisdictions.

If you have any questions or concerns, please feel free to leave a comment on this blog and I will try my best to answer your questions immediately.

Regards,

Certified Payroll Professional (CPP)