FURTHER READING: Small Business Taxes

What are Payroll Taxes?

Simply put, a payroll tax is a tax that an employer withholds from an employee’s salary, wage, or tips. The employer then remits the amount withheld to the government on their employees’ behalf.

In the United States, there are four main types of payroll tax:

• Medicare 

Payroll taxes paid into Medicare are diverted into two separate trust funds. The first fund is known as the Hospital Insurance Trust Fund. The second fund is the Supplementary Medical Insurance Trust Fund,

Before learning each trust fund does, it is important to recognize that Medicare is divided into four different parts, each one helping with different types of medical costs. These parts are known as A, B, C, or D.

–           Medicare Part A helps pay for hospital care, skilled nursing inpatient care, and, in some cases, home care.

–           Medicare Part B helps pay for medical service costs, such as laboratory tests and screenings, outpatient care, x-rays, ambulance service, and more.

–           Medicare Part C helps pay for hospital, facility, and medical costs, but wage taxes are not paid into Part C. Part C plans are only available through private insurance companies.

–           Medicare Part D helps pay for prescription drugs.

The Hospital Insurance Trust Fund pays for Medicare Part A and the associated administration fees. The Supplementary Medical Insurance Trust Fund assists in paying for Medicare Parts B and D and other Medicare program administration costs.

• Social Security

Social Security was signed into law in 1935 to provide a safety net for retirees and the disabled. The Social Security Act of 1935 used to be an exemption for high-income earners, but this exemption has been replaced by a cap that rises and falls relative to wages. This cap is referred to as the Wage Base Limit.

Much like with Medicare, all funds paid into Social Security are diverted into two different trust funds. The first is the Old-Age and Survivors Insurance Trust Fund (OASI), which pays retirement and survivor benefits. The second Social Security fund is the Disability Insurance Trust Fund, which covers disability benefits. These funds are managed by the Secretary of the Treasury, the Secretary of Labor, the Secretary of Health and Human Services, the Commissioner of Social Security, and two public trustees.

• Federal Unemployment

The Federal Unemployment Tax Act (FUTA) imposes a federal employer tax used to help fund state workforce agencies. FUTA covers a share of the cost of administering unemployment insurance and job service programs. It also provides a fund from which states may borrow from, if necessary, to provide unemployment benefits.

Employers pay federal unemployment tax — the IRS explicitly states that employers may not deduct this cost from their employees.

• Federal Income Tax

Federal Income Tax is a progressive tax assessed on an employee’s wages, salary, or tips. Most employers deduct federal income tax payments.

Medicare and Social Security contributions constitute the Federal Insurance Contributions Act (FICA). Employees pay Social Security and Medicare taxes through payroll deductions.

The employee pays a 6.2 percent tax for Social Security expenses and 1.45 percent for Medicare. The employer must match the deduction and send the total amount to the IRS. Self-employed individuals pay 15.3 percent of their wages, which includes both the employer and employee portion of the tax

How Much are Payroll Taxes?

Social Security and Medicare

For the employer and the employee, the current tax rate for social security are both 6.2%. These add up to a total of 12.4%. The current rates for Medicare are 1.45% for both the employer and employee, adding up to 2.9% total. The rates are equal because, by law, employers must match FICA contributions.

If you are a sole-proprietor or otherwise run a business without employees, you must pay the self-employment income tax. This tax is assessed at a rate of 15.3% — equal to the sum of the employer’s share of Social Security and Medicare.

Additional Medicare Tax

According to the IRS, Additional Medicare Tax applies to an individual’s Medicare wages that exceed a threshold amount based on the taxpayer’s filing status. Employers are responsible for withholding the 0.9% Additional Medicare Tax on wages for an individual making over $200,000 per year, without regard to filing status. An employer is required to begin withholding Additional Medicare Tax in the pay period in which it pays wages over $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. Unlike with Social Security or base-level Medicare, there is no obligation for the employer to match employee contributions to Additional Medicare Tax.

Wage Base Limits

The Wage Base Limit is the aforementioned income cap on Social Security; the wage base limit is the maximum wage that’s subject to the tax for that year. The base is $137,700 for all earnings in 2020.

There’s no wage base limit for Medicare tax as all covered wages are subject to Medicare tax.

Unemployment Tax (FUTA)

The total rate at which FUTA is assessed is 6.0%. However, most states have a 5.4% credit. This knocks the rate down to 0.6%.

Federal Income Tax

There are two tax withholding table methods to determine how much to withhold for federal income tax: percentage and wage bracket. Use the information on the employee’s Form W-4 as well as their weekly wages and frequency to figure out their federal income tax deduction.

Payroll Taxes vs. Income Taxes

Many people do not fully understand the difference between payroll taxes and income taxes. However, it is essential for employers to familiarize themselves with the similarities and differences.

For starters, unlike payroll tax, federal income tax is not assessed at a singular flat rate. Instead, it is assessed on a progressive tax rate.  An employee’s wages and pay frequency impact their federal income tax amount. This amount is based on an employee’s Form W-4 information, such as filing status, dependents, and additional withholding requests. When you first hire a new employee, they need to fill out Form W-4, Employee’s Withholding Certificate.

The main difference between federal income tax and payroll tax is that federal income tax that goes to the government’s general fund for public services like defense, education, postal service, and transportation. FICA taxes fund only Social Security and Medicare program.

State income tax works similarly to federal income tax. If there is state income tax, you will give your employee a state income tax withholding form. State income tax can either be a flat or progressive rate.

In addition to federal payroll tax, employers are also responsible for remitting state payroll and income tax on behalf of their employees.

Beneath the federal level, payroll tax rules differ from state to state. To help taxpayers access information relevant to their states, the Federation of Tax Administrators published a list of each state’s taxing authority.

Who Pays Payroll Taxes?

On the surface, it appears that the employee and the employer split the bill for payroll tax. There are arguments to be made about how much each party really contributes due to tax incidence being affected more by markets than laws. Some argue the economic concept of relative price elasticities places the burden on the employee more than the employer. But if you are running a business, these bells and whistles do not matter. It is your responsibility as an employer to have your payroll set up properly and in order — unless you outsource to a third-party, like many businesses choose to do.

Can I Outsource My Payroll?

Having your payroll in order is imperative for any business owner. However, it can also be tedious, complicated, and time-consuming — especially for smaller businesses. Additionally, the IRS can be unforgiving when it comes to mistakes — filing your payroll taxes just one day past the deadline incurs a 2% penalty. These penalties can add up too — to a hefty 15%.

Thankfully, outsourcing payroll to an outside firm is a fairly simple and rewarding process that allows business owners to spend less time worrying over books and more time running their business. Every day, more people are making the switch to outsourced small business payroll services.

The post What Are Payroll Taxes — and Who Pays Them? appeared first on financepal.

Certified payroll is a subcategory of a contractor’s payroll responsibilities. Certified payroll must be filed by companies, typically contractors, who are working on government-contracted projects. While it might sound like your general payroll process, it’s actually a bit more complicated as there are specific wages that need to be paid and a weekly form submittal process you need to adhere to.

But don’t worry, you can use this guide to better understand your certified payroll obligations. That way, you can ensure that you remain in compliance, pay your workers fair wages, and set yourself up for success when dealing with future government-funded projects. If you’re just now being introduced to the concept of certified payroll, read this guide from start to finish; or go straight to specific questions you have by using the links below:

• What Is Certified Payroll?
• What Is Certified Payroll for Prevailing Wage?
  • What Is the Difference Between Prevailing Wage and Certified Payroll?
  • How Is Certified Payroll Calculated?
• How Do I Report Certified Payroll?
  • What Does a Certified Payroll Report Look Like?
  • Where Do I Send Certified Payroll Reports?
  • How Long Do You Have to Keep DIR Certified Payroll Records?
• How to Calculate Fringe Benefits for Certified Payroll
• Who Is Exempt from Certified Payroll?
  • Do I Include Subcontractors on My Certified Payroll Report?
• Why is Correct Certified Payroll Reporting Important?
  • Mistakes to Avoid When Completing Certified Payroll
• Approach Certified Payroll with Confidence

What Is Certified Payroll?

Certified payroll is a weekly payroll report that a company must submit for federally funded (or assisted) projects, such as government-contracted work and public works projects that are over $2,000. Employers are required to submit certified payroll on behalf of all employees who work on these types of projects. A certified payroll report includes:

• Wages
• Hours worked
• Type of work completed
• Benefits worker is entitled to 

Certified payroll is one aspect of construction accounting that can be especially confusing for small business owners. To help you gain a better understanding of this concept, we’ll dive deeper into the basics of certified payroll.

What Is Certified Payroll for Prevailing Wage?

Certified payroll is required as a means of providing government entities with a detailed breakdown of the work completed and pay provided to employees. This is done to ensure that contractors are paying their employees the local prevailing wage. 

The prevailing wage was instituted to protect workers by ensuring they are being compensated fairly and at a rate similar to what they would be paid for similar work. A variety of factors determine the prevailing wage, with the two most important being location (specifically, the county where the work is being completed) and type of work (pay should be comparable to that of similar jobs). As such, the prevailing wage often varies from county to county.

What Is the Difference Between Prevailing Wage and Certified Payroll?

Davis-Bacon Act and Related Acts established labor fairness legislation, which included the prevailing wage system and certified payroll. Prevailing wage is the hourly pay rate that is used to complete certified payroll.

How Is Certified Payroll Calculated?

Certified payroll is calculated based on the prevailing wage, which is considered the standard rate for a government contract in that county. To determine the prevailing wage, the following factors (based on local norms) are considered:

• Job classification (there are many different positions that may work on the same government project)
• Basic hourly rate of pay (you can use this wage determination directory to look up your county) 
• Typical benefits for the position
• Expected overtime

Once you have calculated the proper wages, you will need to subtract any deductions, such as union deductions and state and federal taxes, which will give you the net pay for that employee. Repeat this process for each employee when completing certified payroll for that week of the project (reminder: certified payroll is reported on a weekly basis).

How Do I Report Certified Payroll?

Setting up payroll is a common challenge for small businesses, and this process only becomes more complex if you have to figure certified payroll on top of that. Don’t fret if you feel in over your head—we’ll break down how to report certified payroll, so you can complete this essential process and make sure you’re in compliance when working on government projects.

Here are some guidelines to follow when reporting certified payroll:

• Certified payroll must be submitted weekly (it is best practice to submit weekly to correspond with pay)
• Certified payroll is submitted using Federal Form WH-347 (one form is used for all workers on the project)
• You can find the DIR Project ID (or the “PWC-100”) for the public works project using your state’s DIR searchable database of public works projects (typically found on their website)
• As the business owner, you must also sign a statement of compliance (indicating that you are reporting payroll accurately and paying workers fairly)

In addition to these specific DIR certified payroll details, you’ll need to include basic payroll information like workers’ social security numbers, contractor name (your company’s details), and payroll period.

What Does a Certified Payroll Report Look Like?

Here is an example of what the certified payroll report, known as Form WH-347: 

As you can see, once you have a grasp of the basic components of certified payroll, it’s fairly straightforward to complete the form for each of the employees who are working on the project.

Where Do I Send Certified Payroll Reports?

You will need to submit certified payroll reports to the Labor Commissioner using the DIR’s (Department of Industrial Relations) online system. You can either upload the completed WH-347 form or you can fill it out digitally and submit it through their system.

How Long Do You Have to Keep DIR Certified Payroll Records?

You will need to hold onto certified payroll records for three years. For more guidance on retaining certified payroll records for federal projects, refer to the code for Contractor Records Retention.

How to Calculate Fringe Benefits for Certified Payroll

When working on government-related projects, employees may be paid in wages or a combination of wages and fringe benefits. Fringe benefits include anything provided in addition to basic compensation (the prevailing wage workers are paid by the hour). 

Fringe benefits can be perks such as healthcare, paid time off, and other traditional workplace benefits, or they can be paid in cash. For construction contracts, this is typically the case. When paying cash fringe benefits, this additional hourly pay is a percentage of the prevailing wage.

In order to calculate fringe benefits, you need to first determine the prevailing wage for the project. Once you have that, you will need to provide workers with a basic hourly wage plus fringe benefits that add up to the required prevailing wage for their position and the county the project is being completed in. 

So, together, the cash wages you pay your workers plus fringe benefits provided must add up to the prevailing wage on an hourly basis. 

Fringe benefits must be paid on all hours of work.

Who Is Exempt from Certified Payroll?

Apprentices or trainees may be exempt from certified payroll and prevailing wage requirements if they are participating in an apprenticeship program registered with the Department of Labor or with a state apprenticeship agency recognized by the Department of Labor.

Additionally, salaried employees who serve in executive, administrative, or professional positions may also be exempt from certified payroll.

Do I Include Subcontractors on My Certified Payroll Report?

Yes, however, it works a little differently than with your direct employees. This is because each contractor and subcontractor is responsible for submitting their certified payroll records directly to the Labor Commissioner. To comply with this requirement, the subcontractor will complete a certified payroll report and provide it to you.  This should then be included with your company’s certified payroll reports in order to properly account for their wages related to the project.

If you’re still feeling confused or overwhelmed, you’re not alone. Even payroll professionals have to earn a specific accreditation to become a Certified Payroll Professional. 

Why is Correct Certified Payroll Reporting Important?

Incorrectly processing certified payroll can lead to hefty fines. In fact, if you are found to be purposefully violating the Davis Bacon Act by not paying prevailing wages and submitting certified payroll, your company may face:

• Termination from the project: Landing a government contract is a major win for any construction business. However, if you file incorrect or false payroll records, you may be terminated from the project.
• Being barred from government contracts: In addition to being terminated from your current government project, you may be barred from future contracts of the kind. This could be a huge blow to the viability of your construction company.

• Having payments withheld: If you are falsifying payroll records, the awarding entity may have the ability to withhold payment, meaning you’ll be on the hook for paying your employees what you owe, out of pocket.

• Fines: Monetary fines can take a toll on your business, especially if you have limited liquid assets or poor cash flow management. Not only can owing fines affect you in the month they’re applied, but depending on the amount of the fine, it can throw your operations off for months to come.

• Civil or criminal prosecution: By signing off on certified payroll records, signifying your compliance, you can be held liable for falsifying records, which could include imprisonment.

Mistakes to Avoid When Completing Certified Payroll

We understand that protecting your business’s viability is your top priority (and not to mention every dollar counts for a small construction business), so here are a few reminders to help you avoid making mistakes on certified payroll and remain in compliance: 

• Note that larger contracts may have additional requirements. For work done on projects worth over $100,000, employees must be paid at least one-and-a-half times the regular pay rate when they work over 40 hours in a week. This requirement is in accordance with the Contract Work Hours and Safety Standards Act.
• Employees who fall under certified payroll must be paid weekly. While your company overall might follow a bi-weekly or monthly pay schedule, any employees who are included in certified payroll must be paid on a weekly basis.
• If you submit certified payroll records to your union or another entity, you still have to provide them directly to the DIR. It’s not uncommon for companies to mistakenly report their certified payroll to their union or Labor Compliance Program and think they’re good to go. However, regardless of which other entities you provide these records to, it is imperative to submit them to the DIR to remain in compliance.
• Always review your certified payroll form before submitting it. When you sign off on a certified payroll report, you are saying that all the information provided is accurate. So, if mistakes are found, you will be held responsible.
• As a business owner, you are still required to report certified payroll for yourself if you worked on the project, even if you don’t typically pay yourself wages. For many construction business owners—especially in the early stages of the business—labor is just considered part of the effort that goes into getting a business off the ground, meaning many business owners don’t pay themselves out. However, for these types of projects, you are required to report certified payroll for yourself. 
• Be careful you do not go into autopilot when you complete payroll each month. Employees on the job may change from month-to-month, prevailing wage rates may change from year-to-year, and more. Each week when you complete payroll, be sure to take account of any changes that may have happened to ensure that your certified payroll is completed correctly.

Keep in mind that if you make mistakes on your certified payroll, you cannot make changes. However, you can submit a new record with the correct information, which will take precedence. Note that you only need to submit updated records for the affected employees; the report for the other employees will stand.

Need more help? You may benefit from our payroll services for small businesses.

Approach Certified Payroll with Confidence

Adding any new process to your workflow can be stress-inducing, but growing your business with government-contracted projects is an exciting opportunity. Don’t let the learning curve deter you from taking on these lucrative projects for your firm. Instead, master the process, or get help with your construction payroll and accounting. 

FinancePal has helped many contractors just like you streamline workflows, improve their finances, and take their business to the next level. Our financial services are completely customized to your business, so you only pay for what you need. Simplify your payroll and construction finances, get started today!

The post What Is Certified Payroll? appeared first on financepal.

To ease your worries and ensure you process every paycheck correctly and on time, we’ve created a “how-to” guide to get you started. By following these eight steps on how to do payroll, you’ll be able to leave the office and get back to work with your satisfied, and properly compensated, workers. Use these links to quickly jump through the article or read our guide start-to-finish for a comprehensive overview of how to set up payroll.

• • Step 1: Obtain an Employer Identification Number (EIN)
  • Step 2: Obtain a State Tax ID (If Applicable)
  • Step 3: Collect Your Employee’s Information
  • Step 4: Classify Your Workers
    • Full-Time Employees
    • Part-Time Employees
    • Independent Contractors
  • Step 5: Choose How You’re Going to Pay Your Employees
    • Hourly
    • Salary
    • Commission
  • Step 6: Choose a Pay Period
    • Weekly
    • Biweekly
    • Bimonthly
    • Monthly
  • Step 7: Decide if You’re Going to Offer Benefits
  • Step 8: Determine How to Set up Payroll
    • By Hand
    • Payroll Software
    • Payroll Services
    • Professional Service Organization
  • Wrapping Up: Time to Get Started

Step 1: Obtain an Employer Identification Number (EIN)

Before you learn how to set up payroll, you need to make sure you have all the groundwork in place. This means you need to obtain a business tax ID, which is your employer identification number (EIN). To apply for an EIN, you must have a social security number or Individual Taxpayer Identification Number and apply on the IRS website, through fax, or by mail. An EIN is a nine-digit number assigned to business entities to identify taxpayers who are required to file various business tax returns.

Employers, sole proprietors, corporations, partnerships, nonprofit associations, trusts, estates of decedents, government agencies, certain individuals, and other business entities are required to have an EIN. Along with an EIN, businesses also need proper business licenses issued by local, state, and federal agencies, along with additional paperwork. It is assumed, however, that if you’re looking to set up payroll, you already have your business established. If you’re looking to start a business, you can refer to our entity formation section. Or, if you need assistance starting your business, you can talk to one of our FinancePal professionals to learn about our entity formation services.

Step 2: Obtain a State Tax ID (If Applicable)

Along with your EIN, you may need to obtain a local or state business ID before setting up payroll, if required by the state you’re operating in. Your EIN and state tax ID work like a social security number, but for your business. Obtaining a state tax ID is similar to obtaining a federal tax ID but varies by state. It’s worth researching the tax obligations of your state to determine income tax and employment tax laws, so you know how much you need to pay instate taxes. To find out how to obtain your state tax ID, you can look up your state on the U.S. Small Business Administration website.

Step 3: Collect Your Employee’s Information

The next step in learning how to start payroll is collecting your employee’s information. The information you’re going to need to gather from your employees includes their:

• • Full legal name
  • Employment start date and/or termination date
  • Social security number for tax filing purposes
  • Date of birth
  • Current address
  • FMS-2231, which is used for direct deposit
  • DL Form 1-65, emergency contact form
  • SF-265, Self-Identification of Disability Form

Additionally, you’ll need to collect the following forms from your employees for tax purposes:

• • Form 1-9: This form verifies whether an employee is eligible to work in the United States. The U.S. Citizenship and Immigration Services uses this form to verify the identity and legal authorization to work for citizens and noncitizens in the U.S. As an employer, you must hold onto each employee’s I-9 form for three years in case officials from the Immigration and Customs Enforcement (ICE) perform an inspection.

• • Form W-4: A W-4 is a Withholding Allowance Certificate that allows employees to inform you on how many allowances they are claiming for tax purposes. A W-4, tells you how much money in taxes to withhold from their paycheck. For example, the more allowances or dependents, such as children, an employee has, the fewer payroll taxes you will take out of their paycheck each pay period.

• • Form W-9: If your business relies on independent contractors, you’ll need to collect their W-9 form. You will use this form for accounting purposes at the end of the year. You won’t need to mail your employees’ W-9s to the IRS. Instead, these forms will be used by you to fill out Form 1099-MISC at the end of the tax year, which we’ll cover in the next section.

• • New Hire Forms: When hiring new employees, you will also need to fill out and complete new hire forms. The Office of Child Support Enforcement uses new hire forms to locate parents who are responsible for paying child support. New hire reporting agencies vary by state, which can be found here.

Aside from your employees’ tax forms, you’ll also need to file a variety of tax forms for your business. As a new business owner, investing in small business bookkeeping services will ensure you maximize your tax savings by avoiding liabilities and penalties. When running payroll, you need to ensure your employees and business entity are contributing to Social Security and Medicare taxes. You’ll also need to make sure your business is paying Federal Unemployment Tax. Currently, payroll taxes, mainly put towards Social Security and Medicare Part A, are the second-largest source of revenues, averaging 34 percent of total revenues. This stat shows how important payroll taxes are to contributing to these major federal programs.

To ensure you’re doing your due diligence for the American public, here’s how you can pay these taxes:

• • Social Security Taxes: To pay Social Security taxes, the U.S. Department of Treasury created the Electronic Federal Tax Payment System, that is free to use. Social Security tax is split evenly between employee and employer at 12.4 percent up to a maximum amount of an employee’s wages, which is $132,900 as of 2019. This means you’ll withhold 6.2 percent from the employee’s wages each pay period, and pay 6.2 percent towards Social Security taxes yourself.

If you’re a new employer, you can refer to the IRS’s Employer’s Tax Guide for details on enrollment. You must also deposit federal income tax semiweekly or monthly.

• • Medicare Taxes: Medicare is a federal health insurance program that employees and employers must pay into. Medicare tax is levied at 2.9 percent, split evenly by employee and employer, meaning you withhold 1.45 percent from an employee’s wages per pay period, and pay 1.45 percent in taxes each pay period.

However, there is no wage cap on Medicare taxes like Social Security taxes. So, married filers who earn more than $250,000, married tax filers who file separately and earn more than $125,000, and single filers who earn more than $200,000 are taxed an additional 0.9 percent, bringing the total to 2.35 percent. As the employer, however, you would still only have to pay 1.45 percent in taxes.

Similar to paying Social Security taxes, you can pay your Medicare taxes using the Electronic Federal Tax Payment System.

• • Federal Unemployment Tax: Lastly, you will need to pay Federal Unemployment Tax, also referred to as FUTA, as well as taxes for state unemployment programs. These programs provide compensation to workers who lost their jobs and are now unemployed. FUTA taxes are reported on IRS form 940, and in 2019, the FUTA rate is at 6 percent on the first $7,000 in wages. After that, you no longer need to pay FUTA taxes. However, if you live in a credit reduction state, you may have access to a 5.4 percent credit.

Step 4: Classify Your Workers

The next step for how to do payroll requires just a few more tax forms. When you begin to set up payroll, you need to decide on how you’re going to classify your workers. There are three ways to classify your workers, which includes:

Full-Time Employees

Full-time employees are considered direct hire employees, which means they work for you under your supervision. With full-time employees, you (the employer) will have to complete and issue each employee IRS Form W2. On this form, you report wages paid to an employee and how much money you withheld from their paychecks for tax purposes.

Part-Time Employees

Part-time or seasonal employees are also considered direct hire employees because they work for you under your supervision. The only difference is that part-time employees classify as workers who work less than 35 hours a week, as opposed to full-time workers who work 40 hours a week. Part-time employees will also receive IRS Form W2 at the end of the year. Employees will use their W2 form when filling out IRS Form 1040 to complete their personal federal income tax returns.

Independent Contractors

An independent contractor is a person or business that provides services under a written or verbal contract but are not under your direct supervision. For example, if you’re starting a new business, you may hire a web developer to start up your online store. In the previous section where we talked about IRS Form W-9, we mention you will need it to complete IRS Form 1099-MISC.

If you hire contract employees, you will give them, as well as the IRS, a 1099-MISC Form if you pay them more than $600 during the year. Form 1099-MISC reports miscellaneous earnings, such as from rent, prizes, awards, and royalties. However, it is most popular for payments that were made in lieu of dividends, which applies to contract workers. On the form, the amount of earning will appear as nonemployee compensation.

Because independent contractors are considered self-employed, they are responsible for paying the taxes they owe at the end of the year. When it comes to paying independent contractors, you can decide how to pay their gross wages based on your agreement. For example, you can pay them for hours worked, when they reach certain stages in the project, or at the end of the project.

Step 5: Choose How You’re Going to Pay Your Employees

Now that all that tax stuff is out of the way, it’s time to get to the fun part! The next step in learning how to set up payroll is deciding how you want to pay your employees. These options include:

Hourly

If you have employees who are going to work different hours week by week, it’s best to pay them hourly. For example, if you only need an employee for 15 hours one week, and 33 hours the next week, an hourly pay will suit this schedule best. Hourly workers typically classify as “non-exempt.” Non-exempt is a legal term that means hourly workers are allowed to work overtime and get paid for it. Overtime is when a worker logs in more than 40 hours a week, and the employer pays time and a half, which is 1.5 times the employee’s regular hourly rate.

Salary

If you expect to hire employees who work the same number of hours, week by week, it’s best to give them a salary. Both part-time and full-time workers can be paid a salary. So, whether you hire someone to work 15, 23, 32, or 40 hours a week, they can all be paid a salary if their hours stay the same.

With a salary, there’s no hour-by-hour pay standard. Instead, an employer will create a fixed regular payment that is expressed as a yearly total. For example, a salaried employee can have an annual income of $60,000. With 52 weeks in a year, this employee will earn roughly $1,153 every week before taxes and other withholdings are subtracted.

The difference between salaried employees and hourly employees is their exemption status. Whereas non-exempt hourly employees are subject to overtime pay, salaried employees are not. Salaried employees are typically exempt unless stated otherwise, and cannot receive overtime pay if they decide to work more than 40 hours a week.

Commission

Another popular form of payment is commission. Employees who receive a commission typically receive a low-paying salary but make increased profits based on the number of sales they make. Commissioned employees are usually sales staff. For example, most car dealers receive a base salary but earn a commission for the number of car sales they make.

Minimum Wage Laws

As you decide on how you’re going to pay your employees, it’s important to keep in mind minimum wage laws. Whether you decide on hourly, salary, or commission, all employees must earn the federal minimum wage, which is set at $7.25 an hour. However, some states and even cities have established their own minimum wages, reaching up to $15 an hour. Some states may also establish different minimum wages for specific employees, such as waitresses or barbers, who receive tips.

So, verify your state and local laws to ensure you’re complying with regulations and paying your employees their deserved amount. You can check your state’s minimum wage laws on the Department of Justice Website here.

Step 6: Choose a Pay Period

Once you’ve decided how you plan on paying your employees, it’s time to choose when to pay them. This step in learning how to set up payroll is important because you must comply with the Federal Labor Standards Act and state payday requirements for when and how you pay employees. Typically, employees must be paid on a regular cycle or pay date within seven to thirty days from when they worked and earned their pay. Here are your pay period options:

Weekly

For businesses with part-time or entry-level workers, such as retail stores and restaurants, it common to pay employees each week. This is because these employees are more prone to working overtime, so a weekly pay schedule will allow you to determine if an employee worked more than 40 hours. This also means you will run your payroll 52 times a year, which can become costly if your payroll service provider chargers per payroll run.

Biweekly

A biweekly payroll is the most common method of payroll because it reduces the number of payroll runs to 26 times per year. However, this means employees must be aware they have to budget their expenses, so they don’t run out of money before the next pay cycle. A biweekly payroll is typically used by entities that hire professional staff who are exempt from overtime pay and receive a salary.

Bimonthly

Bimonthly is similar to biweekly, but instead of getting paid for 26 weeks throughout the year, employees will get paid 24 weeks throughout the year. This is because the payroll will only run twice a month, usually on the 1st and 16th of each month. Employers will either calculate the number of hours an employee worked between pay cycles, or if they’re salaried, divide their annual salary by 24.

Monthly

Governmental agencies and large corporations who have all-salaried exempt staff usually set up a monthly payroll. While this is the most straightforward form of payment for these types of businesses and agencies, it’s not preferred by employees because they will have to wait 28-31 days between paychecks. This means employees must budget wisely and efficiently to avoid spending too much money at the beginning of the month.

Step 7: Decide If You’re Going to Offer Benefits

As an employer, you’re not required to offer employee benefits, such as paid-time-off and commuting benefits. However, if you do, you’re more likely to retain employees, have increased employee satisfaction, and an overall enhanced workplace environment. The 2019 Job Seeker Nation Study found that the main benefits U.S. job seekers expect from employers in 2019 include healthcare (72 percent), 401(k) program (52 percent), 401(k) matching (42 percent), and parental leave (30 percent), just to name a few.

Some of the most popular benefits you should decide on when setting up payroll include:

• • Employee Perks
    • Vacation time off
    • Paid sick time (may also be required by your state)
    • Performance bonuses
    • Office perks
    • Remote work
  • 401(k)
  • Health Benefits
    • Dental Insurance
    • Health Insurance
    • Life Insurance
    • Vision Insurance
  • Paid Parental Leave

Step 8: Determine How to Set up Payroll

You made it! Hopefully, these small business accounting tips have served you well so far as you embark on the final step of learning how to do payroll. The last piece to the payroll puzzle is determining how you want to set up your payroll. Setting up payroll can take a few forms, from doing it by hand to hiring a payroll professional. Take a look at the various ways you can set up payroll below.

By Hand

If you want to go the old-fashioned route, you can do your payroll by hand. If you’re wondering how to do payroll manually, all you need is a payroll calculator and an accounting system, such as QuickBooks payroll, and you can calculate it all on your own. However, if you have more employees, it will take more time, pulling you away from your customers, products, and business. There’s also more room for error, which can lead to disgruntled employees and even legal consequences. Knowing how to do payroll manually correctly and efficiently is important as a new business owner to ensure everything goes smoothly during each pay cycle.

Payroll Software

Another option for payroll is using specialized software, such as Square Payroll, Gusto, or QuickBooks Payroll. Using a proven software will give you the tools you need to run your payroll while saving you time and headaches. Using a payroll software that’s labor law-complaint will help you calculate overtime correctly, and process both contracted employees, hourly employees, and salaried employees.

Payroll Services

If you want to outsource all of your payroll duties, you can use online payroll services, such as those offered by FinancePal. An online payroll service can speed up your payroll process by:

• • Running weekly, biweekly, bimonthly, and monthly pay cycles
  • Providing recurring payroll reports with detailed analysis on your company’s payroll expenses
  • Complying with federal and state tax laws.
  • Filing your federal and state tax forms
  • Working with employees, contractors, and subcontractors, and decrease the likelihood that your business is selected for a tax audit by the IRS

Professional Service Organization

The last option, which is also the most expensive, is hiring a professional service organization to run your payroll. These companies will manage all of your HR needs, from benefits and payroll, down to employee onboarding and providing labor law posters.

Time to Get Started

Now that you know how to start payroll, it’s time to get started and hire your first employee! Learning how to do payroll as a new business owner is hard work—from obtaining an Employer Identification Number all the way down to choosing how to set up payroll takes a lot of thought and consideration. With this “how-to” guide on setting up payroll, you’ll be able to streamline your business operations so you can keep your employees satisfied with an accurate and timely paycheck.

Don’t want to undertake this admittedly large task on your own? You don’t have to! Speak with an expert at FinancePal to find out how we can help you make setting up and running your payroll as easy as possible.

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