Payroll Basics: FAQs Answered for Business Owners

Managing payroll, whether done in-house or outsourced, still requires a solid understanding of the fundamentals. For many business owners, this knowledge is vital to ensure compliance and efficiency. Here, we tackle seven common payroll questions with easy-to-understand explanations.

What Payroll Taxes Am I Responsible For?

As an employer, you are responsible for withholding and paying several taxes. These include federal income tax, Social Security and Medicare taxes (and the additional Medicare tax if applicable), federal and state unemployment taxes, and any state or local taxes. Social Security and Medicare taxes must be matched from the employer unless the employee reaches the yearly Social Security wage limit. Reporting deadlines vary, so timely filing is crucial.

How Do I Handle Overtime Pay Correctly?

For non-exempt employees, typically hourly workers, “time and a half” pay is required for hours worked over 40 in a week. Exempt employees, like salaried managers, may not qualify for overtime, but their classification must meet specific criteria. Incorrect handling of overtime can lead to wage claims and penalties.

Do I Classify Workers as Employees or Independent Contractors?

Proper classification of workers is a common and important question. An employee works for you directly, with controlled schedules and provided work tools, being paid salary or hourly with taxes withheld. An independent contractor is more autonomous, using their own tools, getting paid per job without tax withholding. If in doubt, it’s wise to consult the IRS rules to avoid issues later.

Can I Offer Benefits Through Payroll?

Yes, you can include deductions for benefits like health insurance and retirement plans in payroll. It’s important to handle pre-tax versus post-tax deductions correctly as this impacts tax reporting to the IRS.

What Happens If I Misclassify a Worker?

If a worker is misclassified as a contractor instead of an employee, it can result in penalties, back taxes, and interest. You may also face liabilities related to unpaid payroll taxes, workers’ comp, or labor laws. Correct classifications from the start minimize risks.

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

The IRS advises keeping all payroll-related documents, such as timecards, pay stubs, and tax filings, for at least four years. These records should be available for IRS review and can assist with any employee inquiries.

Understanding these payroll basics helps avoid costly mistakes. Consider reviewing your classifications, tax practices, and documentation policies. Remember, support is available if you need guidance.