Every employee looks forward to receiving an accurate paycheck, whether weekly, bi-weekly, or monthly. However, no one thinks about what’s involved behind-the-scenes to make it possible, except those doing the work. The truth is there’s far more than meets the eye. And, if the responsibility is on your shoulders, you’re not alone if you feel stressed trying to juggle all the moving parts.
Because of the intricate detail involved, you need to be hypervigilant and have an in-depth knowledge of wage laws and payroll taxes at the local, state, and federal level, be up-to-date on employee deductions, and know your company’s internal processes. Below are tips to help you navigate through this complex maze.
To make it easier on yourself, make sure that new employees complete the proper paperwork for their status as soon as they come onboard. For example:
- Federal W-4 assures the correct federal income tax is deducted. Also consider having a new Form W-4 completed annually and when your employees’ personal or financial situation changes.
- State withholding forms (these are based on where your employee lives and works).
- Form I-9 verifies the identity and employment authorization of individuals hired in the U.S.
In addition to completing these forms, there’s a list of additional forms that need to be completed, based on the employee’s status:
- Employee or independent contractor? For employees, income tax, Social Security, and Medicare are withheld from paychecks. Independent contractors have no employee or employer taxes withheld.
- Exempt and nonexempt? The difference is how that employee is paid. According to the Fair Labor Standards Act, an exempt employee does not receive overtime pay, nor do they qualify for the minimum wage. However, a non-exempt employee is typically paid based on the number of hours worked. And, if they exceed the standard number of working hours, they will receive overtime pay.
- Calculating your employees’ overtime pay is more complex than basing it on exceeding the 40-hour work week and paying them accordingly. While employers must pay 1.5 times an employee’s regular pay rate to nonexempt employees for all hours over 40 in a work week, there are some exceptions for nonexempt employees who work for emergency services and hospitals.
Also, if your employee works different jobs requiring different pay rates within the same week, this makes the overtime calculation a bit more complicated. Check with the FLSA and your state’s overtime rules to assure that you’re calculating your employees’ overtime correctly.
- Set your pay schedule and note federal banking holidays so you know in advance when to prepare your payroll or move up your processing day to work around those holidays. At the end of each year, it’s also a good idea to set the pay processing day schedule for the following year.
- Keep track of the total number of hours and expense for each payroll period. This process is easier if you only have exempt employees. Nonexempt employees are different in that they can earn overtime, causing their wages to fluctuate. Monitor your nonexempt employees’ overtime closely. This will help you control labor costs and manage cash flow. And, if your nonexempt employees are consistently working longer than 40 hours, you’ll want to review your businesses processes.
- Payroll withholding can fluctuate based on changes in your employees’ lives. This can affect your payroll processing throughout the year. For example, if an employee marries or divorces or changes their number of allowances, this will affect what’s withheld from their paychecks.
Securely Store Documents
Once you’ve collected all the necessary documents on each employee in your business, you’ll need to store those documents in a safe place—whether this means storing digital versions or filing them in cabinets. According to the U.S. Equal Employment Opportunity Commission, all personnel records should be maintained for one year and all payroll records for three. In addition, you should keep Forms I-9 in a separate secure location different from where your employees’ other records are stored so that you can access them if the Department of Homeland Security, Department of Justice, or Department of Labor requests to see them.
Establish an Employment Tax Deposit Schedule
It’s critical to report and deposit your employees’ income, Social Security, and Medicare taxes to the IRS regularly throughout the year. These filings are based on the size of your payroll.
For example, deposit large payroll taxes semiweekly. With smaller payrolls, deposit your taxes on the 15th of the month. However, if the 15th falls on a weekend, you’ll need to pay the taxes on the first working day of the next week. To file these taxes, use IRS Form 941, Employer’s Quarterly Federal Tax Return (https://www.irs.gov/pub/irs-pdf/f941.pdf).
In addition, you’re required to pay federal unemployment taxes, along with state and local tax filings and payments. To help you remember when taxes are due, keep a calendar that features all critical dates pertinent to your business or bookmark the Employment Tax Due Dates page on the IRS website (https://www.irs.gov/businesses/small-businesses-self-employed/employment-tax-due-dates).
Keep Track of Tax Laws/Changes
As a business, you need to keep apprised of tax laws/changes. No one wants to be penalized for failing to keep up with changes and not withholding their employees’ taxes properly.
- Indiana’s state minimum wage is $7.25/hr. Select states nationwide have increased their minimum wage in 2020. To determine the minimum wage for your state, go to: https://www.ncsl.org/research/labor-and-employment/state-minimum-wage-chart.aspx
- Be aware that state and federal payroll tax and withholding rates generally change at the beginning of a year. However, in the instance when changes are made mid-year, they are retroactive to the beginning of that year. This means that you will need to recalculate taxes and make up the difference to the point in the year that this tax change was instituted.
- As mentioned earlier, if the Fair Labor and Standards Act (FLSA) surpasses the state minimum wage, you’ll have to pay your non-exempt hourly employees based on the federal rate. And, note that the FLSA determines which employees are considered non-exempt.
Assess Your Company’s Internal Processes
While it’s vital to know federal, state, and local laws and practices, you must also be familiar with your internal policies that affect payroll. This includes paid time off, sick pay, benefits, 401(k), and commissions.
Your business has its own unique benefits plan. For example, some companies pay their employees’ health insurance, while others withhold funds from employees’ paychecks. Then, depending on the years of service or career level, your employees may be compensated accordingly. Plus, if you have a commission or bonus plan, that needs to be taken into account. If you offer a 401(k), do you match it? What determines who is eligible for the match? These types of factors affect payroll and need to be documented and monitored.
Enlist your department managers to help keep you abreast of changes within their departments. They can also report changes in employees’ status as they come up and pass on policy revisions and other payroll-related actions, accordingly.
Should You Automate?
Are you overwhelmed with all the responsibilities involved with managing payroll and taxes? You might want to consider incorporating automated payroll services or outsourcing your payroll needs.
Whether you outsource your payroll needs or incorporate automated payroll services, here are some benefits to consider.
- Direct deposit and electronic paystubs save you time and paper.
- Track tax changes. You know your withholdings are always accurate.
- Simplifies reporting new hires and onboarding, making adding new staff flawless.
- New employee data goes directly to payroll, while the related documents are stored digitally.
- Eliminates the need for timesheets, thanks to online and mobile time clocks.
- Employees can now make address changes and update their W-4 forms without involving payroll personnel.
Processing payroll can be stressful. It involves lots of detail and must be done right. However, creating a schedule, managing and securing your documents, and keeping up-to-date on withholding rates and tax laws, as well as monitoring your business practices, can help to reduce that stress. For the latest in payroll news, regularly monitor organizations like the American Payroll Association or the Society for Human Resource Management. Consider creating a team of network professionals whom you trust, such as your CPA and other payroll practitioners, and share best practices. Finally, don’t hesitate to ask for help when you’re overwhelmed with the most essential parts of your payroll process. Consider hiring professionals who solely handle all the responsibilities related to managing your payroll. And, remember, handling payroll responsibilities throughout the year will leave you less frazzled at the end of the year.