It probably doesn’t come as a surprise to new business owners that growing your business takes a lot of work. And while it doesn’t surprise anyone, the sheer magnitude of that work routinely does. But don’t get us wrong—if you’ve started a business recently and you feel a little overwhelmed right now, you probably shouldn’t worry that you just weren’t cut out for the job. Instead, and veteran business owners can back us up here, there are just so many things that come with running a business. And even with a good business plan, you may not anticipate them right away. For example, payroll.
As a function of business, payroll is pretty standard. Meat and potatoes stuff. Some might even call it boring! (Not us, of course. We live for this.) And for many small, upstart businesses, payroll might not actually factor in too heavily to your day to day work. When running your business involves just you, or you and a partner, you might not have anyone to pay.
But as your business grows, so will the need for infrastructure and systems you didn’t need before. It’s kind of like when you finally start selling enough of your product that you need to upgrade from using your garage for storage and start renting a small warehouse space. It just comes with the regular growth of your business. And you need to prepare yourself for it.
We may file business tax returns for clients, but we also provide turnkey solutions for a whole host of business needs, like payroll and bookkeeping. And we’ve seen firsthand the issues that tend to crop up when you don’t have a good understanding of payroll. Or when you do have a good understanding, but just not enough time to handle the payroll needs of your business! We get it, and that’s why we’ve taken it upon ourselves to serve up the info you need to get started.
So, start here for your complete guide on payroll. We’ll walk you through the basics, the very basics, and everything else—from classifying workers to paying health insurance. Then we’ll answer a few of the common questions we find ourselves answering now and then.
If you own a business and you’ve found yourself reading this guide, you probably already have a good sense of what “payroll” means. And we don’t want to bore you, because we get it—overall it’s a pretty straightforward business term. But if you’ve recently started a business and you’re looking to add some extra hands to your team, you may need a primer. So consider this section as the basics.
At its narrowest definition, a company’s payroll is the list of employees that the company needs to pay and how much to pay them. More broadly, payroll comprises all the infrastructure to support that: company records of past payments, salaries, wages, bonuses, withheld taxes, and the like. Payroll encompasses timesheets, wage calculation, printing pay checks, and ending an ACH or other direct deposit. Payroll also includes the department that handles these processes, which could include an accountant or HR professional.
Depending on the size of your business, you may have an internal team handling payroll. Or, you may outsource some or all of these tasks to a payroll company. We’ll go over how you can make the right determination for your business later on. For now, let’s move on to classifying your workers.
You don’t want to make mistakes when it comes to classifying your workers for payroll. Because mistakes can cost you—big time.
You need to make several considerations when deciding whom you consider an employee or a contractor, and further, who gets exempt and nonexempt status. Here are some factors that come into play when determining whether a worker is an employee or a contractor.
Generally, the more flexible that work, the more likely you should classify that worker as a contractor. That will mean your payments to them will not carry any tax considerations at all—the contractor must estimate, withhold, and pay their own taxes. Your “payroll” responsibilities start and end when you write the check or make the direct deposit.
Generally, the term “exempt” refers to whether or not an employee is covered by the Fair Labor Standards Act (FLSA). This act establishes minimum wage, overtime pay, record keeping, and youth employment standards. An exempt employee will not be covered by (aka will be “exempt” from) the FLSA, while non-exempt employees fall under this coverage.
What coverage applies to non-exempt employees? Namely, overtime. Per the FLSA, subjected companies must compensate these covered employees at a time-and-a-half rate when they work over 40 hours in a workweek. So, one way to help determine whether an employee counts as a non-exempt employee: whether they need to clock in and out. (That isn’t a hard and fast rule, however.)
For exempt employees, this overtime pay doesn’t kick in. While many exempt employees are salaried, the two terms aren’t synonymous. Non-exempt employees can be salaried and also earn overtime.
Here’s a video from the Department of Labor that goes over the FLSA and how to determine whether it applies to your business or not:
Sometimes classifying workers correctly represents a genuinely challenging puzzle for employers! While you can gain certain financial advantages depending on how you classify your workers, we need to circle back to what we mentioned earlier: Mistakes can cost you. Err on the wrong side, and you could end up defending yourself against wage claims for underpaid or missed overtime, for example. You might end up on the receiving end of a class action lawsuit! Or, you might just end up with a damaged reputation on review sites like Glassdoor—where former employees can dish on how you shorted them their hard earned money.
However, we’re a full-service tax representation firm. And we’d be remiss if we didn’t go over the tax implications of employee misclassification. Specifically, fines, penalties, and potential tax debt.
Misclassifying a worker doesn’t just impact the worker. It also impacts the federal and state governments, who take a piece of the pie through payroll taxes. Under certain classifications, you may have a responsibility to pay things like payroll taxes, Social Security taxes, and Medicare taxes on your employees. If you haven’t already paid them, you may end up audited, which could result in you owing those taxes anyway. Add on top of that penalties for the delay, and that’s the beginnings of a business tax debt that could threaten the future of your company. (Not to mention the potential criminal prosecution if the IRS determines you intentionally misclassified your workers.)
If you’re getting started with payroll, you may not actually be aware of where every cent needs to be counted. And unfortunately, this can lead some small business owners who have just started dipping their toes into payroll to run into tax issues down the line.
Although it may seem surprising, when you budget for payroll, you have more to contend with than just the hourly or salaried wages you pay your employees. Far from it! Nope, you need to ensure you budget in your payroll taxes, too. So what do we mean by that?
Well, depending on your state, you may need to pay some employment taxes. And regardless of your state or business or industry, you need to budget for those taxes. If you fail to budget for these additional, more localized taxes, you may find yourself in trouble with state tax authorities. And that kind of tax debt can permanently impact your business, despite how good your intentions might be.
So, when you budget for your payroll, don’t leave it at the hourly wages. Make sure to add in—and redirect—the appropriate employment taxes.
One of the perks (or drawbacks) of having employees is being responsible for making their federal and state deposits for them. You read that right! It may not come as too much of a surprise to you, but as an employer, you hold responsibility for withholding the allotted taxes as dictated by your employees. And you must also take the extra step of paying these deposits to the IRS when they come due.
Trust us, you don’t want to fall behind on payroll tax deposits. Not only are they expensive, but they can get seriously more expensive when you don’t send them to the government by the due date. How much more expensive? Well, when you don’t pay by the due date, the IRS may subject you to a 100% penalty.
And that kind of penalty can seriously derail your financial plans for your business. Even worse, it can plunge your business into serious tax debt, from which it may never fully recover. Save yourself the hassle and the doom and gloom. Instead, make sure to stay on top of all the appropriate payroll tax deposits for your business.
Don’t make the mistake of thinking that you only need to stay on top of paying checks to your workers. For any full-time employee who can receive benefits through their employment, you’ll also need to provide healthcare.
Now, this rule may not apply to your business. For example, the government may not legally require you to provide health insurance for your first full-time, salaried employee. However, according to the Affordable Care Act, if you have more than 50 employees, you must provide health insurance to them.
There may be benefits to providing health insurance even if the law doesn’t technically require it. For example, businesses with fewer than 25 full-time employees can receive tax breaks when you pay for at least 50% of your employees’ premiums, as long as their annual wages don’t exceed $50,000 per year.
So, now you know the different sides of the employer-covered health insurance coin. What might break the tie? Well, helping sponsor your employees’ health insurance can make your business much more attractive as an employment option. Especially in today’s world, the perks your business offers can attract the best talent. And attracting the best talent in your area (or beyond it) can mean the difference between keeping your business going and keeping your business growing.
Compensation doesn’t have to include only an employee’s paycheck. Instead, much like your company’s health coverage, you can shore up your compensation package through various retirement and savings programs. And you might just save on your own business taxes along the way.
Specifically, setting up and funding a qualified retirement plan can help you take advantage of tax savings through the IRS. You need to ensure the program you choose is recognized by the IRS. So, think of plans like IRAs, 401(k)s, or 403(b)s. These types of programs will allow your employees to defer taxes on their earnings until they withdraw those earnings.
This doesn’t necessarily require you to match contributions, but simply contributing in some way to these programs (as laid out by the IRS) can help you save on your taxes come tax time. And much like the health plans you offer, can serve as an attractive perk for prospective hires. The better the talent you can attract, the stronger the team you can build.
When you’re just starting out building your business, you get quite used to the DIY method. And payroll is included. You’ll probably have to manage your books, procuring new clients, payroll, and everything in between. Unless you have a business partner set to handle all that payroll goodness, you’re likely in the position of dealing with it yourself once you bring on employees.
In this case, a payroll software may just be your best bet. And you may find it easiest to roll it into—or use it alongside—other business management software. Picture things like bookkeeping, project management, or other financial planning software.
As a solution to your potential payroll woes, software can save you time and money while scaling up (somewhat) with your employees. Giving yourself the ability to work on the macro elements of your day-to-day business needs can free up additional time for you to work on other aspects of your business. But make no mistake: As long as you are the one responsible for handling your business finances, you’ll still need to invest quite a bit of time between learning the ropes and best practices, as well as putting the work in to make sure you handle everything well and without error. Software can save you time, but only so much.
Running a business is hard enough as it is. It shouldn’t get any harder just because you have to take on payroll tasks that pull your focus away from where it should be. Instead, you should have the freedom to land new clients, manage team morale, and look to the future of your company.
Hopefully, after reading this you’ve got a sense for what payroll might require of you. Perhaps you now know how to manage payroll for your first employee—or that the employee is actually a contractor! Maybe you’ve learned what you needed to finally pull the trigger on hiring a dedicated professional to manage payroll and your books. Or you might realize that outsourcing payroll to an external team might save you money compared to a dedicated hire and save you time compared to handling yourself.
If you fall into that last camp, take a look at our Payroll page or give us a call. We handle everything from W-2s and 1099s to direct deposits for employees and Federal deposits. Our payroll specialists tailor our work to your business—whether big or small.
Now’s the time to get your payroll on a roll. It’s all downhill from here.