Payroll Explained: FAQs for Business Owners

What Payroll Taxes Am I Responsible For?

As an employer, you’re responsible for withholding and paying several types of taxes. These include Federal income tax, Social Security and Medicare taxes, Additional Medicare tax (required for income over a specific threshold), and Federal and state unemployment taxes. You also need to handle state and local taxes if applicable. It's important to note that Social Security and Medicare taxes are withheld from employees' paychecks, and as an employer, you must match these amounts unless the employee reaches the annual Social Security wage limit. Reporting deadlines vary, so ensure timely filings.

Do I Classify Workers as Employees or Independent Contractors?

A common question with crucial implications for your business. Employees work directly for you, with their schedule, work methods, and tools largely controlled by you. They're either salaried or paid hourly, with taxes withheld from their checks. In contrast, independent contractors are self-directed, deciding the work process on their own and typically using their own tools while working with multiple clients. Their pay is often on a per-job basis without withheld taxes. If classification is unclear, consulting IRS guidelines or seeking professional advice is prudent to avoid costly mistakes.

What Payroll Records Do I Need to Keep and For How Long?

The IRS recommends that all payroll-related documents — such as timecards, pay stubs, W-2s, tax filings, and benefit deductions — be kept for at least four years. These records not only aid in possible IRS reviews but are also essential for addressing any employee inquiries.

What Happens if I Misclassify a Worker?

Misclassifying a worker can result in penalties, back taxes, and interest. It can also complicate payroll tax obligations and potentially result in violations of workers’ compensation or labor laws. Setting classifications correctly at the start is a far easier approach and mitigates risk.

How Do I Handle Overtime Pay Correctly?

For non-exempt employees, who are frequently hourly workers, any hours worked over 40 in a week should be compensated at “time and a half.” Exempt employees, such as salaried managers, might not be covered by overtime pay, dependent on specific criteria. Misclassification here could lead to wage claims and penalties.

Can I Offer Benefits Through Payroll?

Yes, payroll can incorporate deductions for various employee benefits, including health insurance and retirement plans. Ensuring the accurate handling of pre-tax versus post-tax deductions is vital since it impacts how benefits are taxed and reported to the IRS.

Understanding the Basics Helps Prevent Errors

While handling payroll might feel daunting, grasping these foundational elements is crucial to preventing costly errors. Business owners should review their worker classifications, tax practices, and documentation policies regularly. Remember, support is available if you're unsure or need assistance.