Everything Small Business Owners Need to Know About Payroll

Let’s explore payroll in detail and provide the information you need to tackle it head-on.

Your employees are a valuable asset, and you want to compensate them accurately and reliably for their hard work. As an extension, payroll is a crucial part of operations for your small business.

When you hire your first employee, you’re now responsible for making payroll. But what does that mean and how do you make sure you take on this new responsibility in the right way?

On the surface, the payroll process is simple. You either pay employees a fixed salary or hourly.

The process, however, is much more complicated. There are tax considerations, new hire procedures, and local, state and federal laws to comply with.

And then, you need to decide if you’re going to do it in-house or outsource the payroll process. Many small business owners outsource due to the complexity of it all.

While complex, the payroll process doesn’t have to give you a headache. Here’s what small business owners need to know about payroll.

What Exactly Is Payroll (and Payroll Taxes)?

When you bring on an employee and pay them, you’re not just writing them a check at the end of the week for their hard work. You pay them through your company payroll.

Payroll isn’t as simple as cutting a check every week or month. A lot of what makes payroll complicated are the taxes that need to be paid and withheld each pay period. As an employer, you’re responsible for paying and withholding payroll taxes from your employee’s paycheck.

Payroll taxes include:

FICA Taxes

Federal Insurance Contributions Act (FICA) taxes are social security and Medicare taxes that both the employee and employer pay. The government deducts and remits these taxes from every paycheck regularly throughout the year. Social security tax is 12.4% and Medicare tax is 2.9% of the earnings, split evenly between employer and employee.

Federal, State and Local Taxes

An employee also has other taxes to pay, aside from FICA taxes. Your employee is responsible for paying federal, state and local income taxes. These taxes are a percentage of their income, based on how much they earn.

Even though you don’t have to pay these taxes on behalf of your employee, you still have a job here. As an employer, you’re responsible for withholding these taxes from their paychecks and remitting them to the correct government agency. Your employee will fill out a form W-4, which should provide you with the information you need to determine how much should be withheld from each of their paychecks.

Federal and State Unemployment Taxes

Both federal and state unemployment taxes are collected to fund unemployment insurance—a safety net fund out-of-work employees can use while they are looking for a new job. As an employer, it’s your job to pay these taxes. They aren’t taken from your employees’ paychecks, though the amount of tax you have to pay depends on how much your employees earn.

Each state has a different unemployment insurance tax rate. While the federal rate is the same for most states, businesses in some states can take a credit that lowers the federal unemployment tax that they need to pay.

Payroll for Small Business Owners: DIY or Payroll Service

Payroll is something you can manage yourself

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