Payroll refers to the various tasks and responsibilities businesses must perform to pay their employees accurately and on time. It encompasses calculating wages and salaries; preparing checks or paying employees via direct deposit; withholding taxes and other deductions from employees’ pay; reporting and paying taxes to the appropriate federal, state, and local agencies; and more.
Businesses must handle payroll correctly because it impacts their net income and can result in additional fines, fees, and penalties if not managed according to federal, state, and local rules. Because payroll has legal and financial implications, it’s wise for business owners to seek guidance from professionals who can advise them on their obligations and the laws they must comply with.
How Payroll Differs from Human Resources and Accounting
So, what’s the difference between payroll, human resources, and accounting? They’re all related and overlap to some extent, but their purpose and functions are distinct in some ways.
Payroll is focused on issuing paychecks (or another method of payment) to employees for the work they perform. Part of the process is accurately calculating wages (regular and overtime) for workers who are paid an hourly rate (non-exempt employees) or salaries for workers who are not eligible for overtime (exempt workers). Payroll also involves calculating and withholding money for federal, state, and local income taxes, FICA (Social Security and Medicare) tax, and other employment-related taxes and benefit contributions. Other components in payroll processing are managing holiday, vacation, and sick pay according to the company’s policies and accurately paying employees for their paid time off.
Accounting encompasses tracking and reporting on the money going in and out of a business. It involves ensuring all income and expenses are appropriately categorized and all bank, cash, and credit accounts are reconciled. Where payroll is concerned, accounting classifies money withheld from employee paychecks as liabilities until the company pays those funds to tax agencies and benefits providers. This may also involve tracking employees’ unused paid time off as a liability so that it can be paid to workers when they exit the company (some states, like California, require that). In larger companies, payroll specialists are often part of a larger accounting department.
Human resources (HR) is concerned with labor and employment laws, ensuring that a company abides by all federal, state, and local regulations when hiring employees and maintaining a workforce. HR is also responsible for establishing company policies regarding benefits like health insurance, 401K plans, paid time off, etc.
What Employers Need to Process Payroll
Different state and local government agencies have different payroll rules. Below are some of the common payroll components.
Tax Identification Numbers
Any business that hires employees must have a federal tax ID number (known as an employer identification number, EIN) from the IRS. It must also obtain any required state or local tax ID numbers related to the jurisdictions where it will conduct payroll activities.
Employee Information and Tax Documents
Employers must request certain forms from employees before placing them on payroll and from contracted workers before issuing them payment for their services.
- Form W-4, Employee’s Withholding Allowance Certificate – Employers must request individuals who will be classified as employees to complete a W-4 form. The W-4 form collects personal information used for tax reporting purposes. It also determines the federal income tax the employer should withhold from an employee’s pay. Note that some states also have their own version of the W-4.
- Form I-9, Employment Eligibility Verification – Documents that each new employee (citizen and noncitizen) hired is authorized to work in the United States.
- Form W-9, Request for Taxpayer Identification Number and Certification – Businesses must request a completed W-9 form from individuals performing work on an independent contractor basis to whom they paid $600 or more during the tax year. The W-9 form collects personal information from contractors and freelancers and is used for reporting compensation to non-employee workers. W-9 workers do not have taxes or other deductions withheld from their pay. Those workers must report and pay all tax obligations independently via their tax returns.
Employee Salary and Wage Information
Employee payroll includes wages, salaries, overtime pay, paid time off compensation, tips, bonuses, tuition reimbursements, and commissions. To process payroll, employers need to calculate and report employees’ gross pay and net pay (after deducting tax withholdings and benefits contributions). Workers classified as independent contractors are paid according to the contracted rates agreed upon between a company and the contractor. No taxes, benefit contributions, or other deductions get withheld from compensation made to independent contractors.
Health Insurance and Retirement Plan Documentation
These documents verify the desired deductions and authorize the employer to withhold money from the employee’s pay.
Documentation Examples:
- Health insurance – Section 125 plan document
- SEP Plan – Form 5305-SEP
- Simple IRA Plans – Form 5304-SIMPLE
- 401K and profit-sharing plans – Plan document, plan amendments, or an adoption agreement
- Participant records – account balances, earnings and contributions, loan documents, compensation data, and statements and notices to participants
Employee Bank Information
Businesses must obtain workers’ banking information if they direct deposit pay into employees’ bank accounts. Information required includes:
- Bank name
- Account type (e.g., checking or savings)
- Account number
- Bank routing number
Some states require that employees sign a consent form before their employer may deposit funds into their bank accounts.
Workers’ Compensation Insurance
Workers’ compensation (“workers’ comp”) is a form of insurance that employers, in most states, are required by law to purchase. A workers’ comp policy covers costs resulting from employees’ work-related injuries and illnesses. Employees that collect workers’ compensation benefits may not sue their employer for lost wages or injuries. However, employees may be able to sue a business for things not covered by the workers’ comp insurance policy.
For most employers, workers’ comp is administered through a state-mandated program. For federal government employees, workers’ compensation insurance and claims are handled through the Federal Employees’ Compensation Act (FECA).
Understanding Payroll Withholdings and Deductions
Here’s an explanation of various types of withholdings and deductions that may be subtracted from employees’ net pay.
Federal Income Tax
The federal income tax an employer should withhold from an employee’s pay is based on the information provided on the employee’s IRS Form W-4, Employee’s Withholding Certificate. The federal income tax withholding amount varies based on the employee’s marital status, dependents, and Form W-4 adjustments.
State Income Tax
In states that levy state income tax (SIT), employers must also withhold that tax from employees’ pay. Nine states (as of this writing) do not have state income tax on employees’ wages and salaries, which include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Keep in mind, if employees are paid bonuses, that income might be taxed differently from how wages are taxed. What if a business has an employee who lives out of state? Generally, state taxes are withheld for the state where the employee performs their work. Some states have reciprocal agreements whereby taxes are withheld for the employee’s state of residence, even if they work in a different state. When in doubt about which state income tax must be withheld and paid, employers should consult a tax specialist who can advise on the rules and requirements.
Local Income Tax
Not all counties charge local income tax, but employers must withhold local taxes from employees’ pay in the areas that do.
Payroll Taxes
- FICA – Payroll taxes are withheld from employees’ pay to the federal government to fund its Social Security and Medicare programs. FICA tax is a flat percentage of an employee’s wages (12.4 percent Social Security tax and 2.9 percent Medicare tax). The IRS generally requires employers to withhold half of Social Security and Medicare taxes from their employee’s wages and salaries, and the employer pays a matching amount. While there is a cap on how much of an employee’s compensation is subject to Social Security tax ($147,000 in 2022), all gross income is subject to Medicare tax.
- Unemployment Taxes – Through the FUTA (Federal Unemployment Tax Act) and state unemployment systems, workers who lose their jobs through no fault of their own can receive unemployment compensation. FUTA tax is a cost to the employer; it is not deducted from employees’ wages. The threshold at which employers must file federal unemployment taxes is if they paid wages of $1,500 or more to employees during any calendar quarter in the current year or the one before. The six percent FUTA tax applies to the first $7,000 paid to each employee during a calendar year (after subtracting any FUTA-exempt payment amounts). Many states have their own unemployment insurance programs and require employers to pay a State Unemployment Tax, or SUTA. Some states also require employees to contribute to SUTA. The SUTA (State Unemployment Tax Act) in a state establishes the taxable wage threshold and the unemployment tax rate in the jurisdiction. Employers pay SUTA to the state where an employee’s work is taking place. So, if all of a business’s employees work in the company’s home state, it will pay SUTA only to that state government. If employees work in different states, the business must pay SUTA to each state where employees work.
- State and Local Payroll Tax – In some states and municipalities, other payroll taxes may also exist. Employers should check with their state’s department of revenue and local tax authorities about whether they must pay (or withhold and pay) additional taxes to fund programs like short-term disability and family medical leave.
Wage Garnishments
Court-ordered wage garnishments like the examples below must also be withheld from employees’ compensation and submitted to the proper agencies.
- Child support
- Alimony
- Loan payments
- Bankruptcy payments
Benefits Deductions
Employers also withhold money from workers’ pay for employee benefits and then submit those funds to the appropriate vendors and providers.
- Retirement fund contributions (e.g., 401K)
- Health and life insurance premiums
- Union dues
Steps to Processing Your Payroll
Register a New Business for Payroll
To withhold, report, and file employment-related taxes, businesses need to register for accounts with, and obtain tax ID numbers from, the tax authorities they must comply with. Registering for payroll taxes isn’t overly complicated, but it can be confusing because different states have different requirements and processing policies.
Calculate Payroll Pay and Deductions
The math to calculate payroll involves factoring several elements into the equation.
- Gross Pay – Employers must calculate employees’ gross pay. For non-exempt employees, this involves tracking workers’ time and calculating their pay according to their hourly wage. For exempt employees, gross pay is their salaried amount. Gross pay also includes bonuses, reimbursements, and commissions earned by employees.
- Pre-Tax Deductions – Next, pre-tax deductions should be subtracted from gross pay. Examples include 401K contributions, medical insurance premiums, and HSAs (health savings account contributions).
- Tax Deductions – Employers should then deduct taxes (e.g., federal, state, and local income taxes; FICA tax (Social Security and Medicare); and possibly state and local payroll taxes from that adjusted amount. It is important to calculate them accurately according to the employees’ W-4 forms and state and local income and payroll tax rates.
- Other Deductions – Any additional voluntary or court-ordered deductions should be subtracted from that adjusted amount. Examples include Roth IRA contributions, charitable contributions, and court-ordered wage garnishments.
- Net Pay – Ta-da! The end result is the employee’s net pay. That’s the amount the employer should pay the employee.
Process Payroll
So what’s next after calculating payroll?
- Pay Employees – Employers must pay their employees what it owes them (their net pay) by issuing a paper check or via a direct deposit into employees’ bank accounts.
- Report Taxes – Employers must complete tax filings for federal tax withholdings to the IRS. They must also report state tax withholdings to the state’s department of revenue (or other agencies in charge of state income and payroll taxes) and local income tax withholdings to the appropriate local tax authority.
- Remit Withholdings to Tax Agencies and Benefits Providers – Monies withheld from employees’ pay must be sent to the appropriate tax authorities and providers of benefits such as retirement plans and health insurance. Employers pay their federal payroll taxes online using the Electronic Federal Tax Payment System (EFTPS). The methods for paying state and local taxes vary.
Important Federal Forms
When reporting and paying taxes, here are some important federal forms employers must prepare and file.
- Form W-2, Wage and Tax Statement – Reports the employee’s annual wages, salaries, and any taxes withheld from that compensation.
- Form W-3, Transmittal of Wage and Tax Statements – Provides a summary of the annual compensation and deductions the employer reported to its employees via W-2 forms.
- Form 940, Employer’s Annual Federal Unemployment Tax Return – Reports the employer’s annual FUTA liability.
- Form 941, Employer’s Quarterly Federal Tax Return – Used to report the income, Social Security, and Medicare taxes withheld from employee’s pay and pay the employer’s portion of Social Security and Medicare taxes; filed quarterly.
- Form 944, Employer’s Annual Federal Tax Return – Used by businesses that will have an annual employment tax liability of $1,000 or less; employers must contact the IRS by April 1 of the current year to request to file Form 944 instead of Form 944.
- Form 1099-NEC, Nonemployee Compensation – Reports payment made to each non-employee person or entity a business paid at least $600 for services.
- Form 1099-MISC, Miscellaneous Income – Reports payment made to each person or entity a business has made in royalties ($10 or more) or rents, medical, health care, and certain miscellaneous forms of payment ($600 or more).
- Form 1096, Annual Summary and Transmittal of U.S. Information Returns – Collectively summarizes information from the 1099-NEC and 1099-MISC forms that a business issued to persons and entities.
- Forms 1095-C, Employer-Provided Health Insurance Offer and Coverage – Provides information about the employer’s health coverage offered to employees; required to be sent to all of a business’s employees when the employer has 50 or more full-time employees.
- Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns – Collectively summarizes the information reported on the 1095-C forms that an employer issued to its employees.
Options for Processing Payroll
Do It Yourself Manually
Many small businesses gravitate to this route to save money. This method requires calculating, processing, and tracking many details manually in-house. It also requires that the business owner (or whoever handles a company’s payroll) understands all of the rules, is detail-oriented, and has the time to complete tasks accurately and on time.
Outsource to an Accountant or Bookkeeper
Another method for handling payroll is outsourcing the work to an accounting firm, bookkeeper, or payroll services provider. This option comes with the peace of mind that someone with specialized expertise is carrying out all or most payroll tasks. For that reason, it may cost a business more than doing payroll manually or using payroll software.
Use Payroll Software
There are many employers and business owners who simply don’t have the time and expertise to manage the payroll process. For these businesses, using payroll software can be the best option.
Using a trusted software package for payroll will provide consistency to the process, it will help you avoid costly mistakes, your data will be secure from both data breaches and hardware issues, you’ll improve compliance with federal and state laws, and probably most important of all, it will save you a ton of time.
Payroll software and processing companies are designed to efficiently manage wages, benefits, deductions, and other necessary documents. Payroll solutions will help optimize the process of data entry, benefits management, tax filing, direct deposits, and reporting.
Popular Payroll Software Options
| Gusto | BambooHR | Paychex Flex | Paycor | Patriot Payroll | OnPay | Workday HCM | Zenefits | |
|---|---|---|---|---|---|---|---|---|
| User Size | 1-50 | 1-1000 | 1-1000 | 2-1000 | 1-50 | 1-500 | 11-1000+ | 1-1000+ |
| SaaS Based | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
| App Available | Yes | Yes | Yes | Yes | Yes | Yes | ||
| 24/7 Support | Yes | Yes | ||||||
| Multi-State | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
| Multi-Country | Yes | |||||||
| Benefits Management | Yes | Yes | Yes | Yes | Yes | Yes | Yes | |
| 401(k) Tracking | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
| Check Printing | Yes | Yes | Yes | Yes | Yes | Yes | Yes | |
| Direct Deposit | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
| Payroll Reporting | Yes | Yes | Yes | Yes | Yes | Yes | Yes | |
| Self Service Portal | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
| Tax Compliance | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
| W-2 Preparation | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
| Vacation/Leave Tracking | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
| Sick Leave Tracking | Yes | Yes | Yes | Yes | ||||
| Wage Garnishment | Yes | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
| COBRA Administration | Yes | Yes | ||||||
| Disability Insurance Administration | Yes | Yes | ||||||
| Health Insurance Administration | Yes | Yes |
Best Practices for Processing Payroll
Know How to Classify Employees and Contractors
Follow the rules for classifying individuals as employees vs. independent contractors (they require different IRS forms, and individuals classified as independent contractors do not have payroll taxes withheld from their payments from a business). Some states (like California) have rules for classifying workers that are more stringent than the IRS, so business owners must educate themselves on the nuances they must consider.
Also, employers should avoid misclassifying exempt (salaried) and non-exempt (wage-based) employees. Non-exempt employees are protected by the Fair Labor Standards Act (FLSA) and are entitled to a minimum wage not less than $7.25 per hour and overtime pay at a rate of not less than 1.5 times their regular rate of pay for any hours worked over 40 hours in a workweek.
The FSLA provides an exemption for employees who meet specific job duties and salary criteria. “Exempt” employees do not get overtime pay and are excluded from minimum wage requirements. To qualify as an exempt employee, the individual must receive a salary of not less than $684 per week ($35,568 per year), with no more than 10 percent of that salary level coming from commissions, bonuses, and incentive payments.
Understand Payroll Liabilities
Payroll liabilities are the payroll expenses a company owes but has not paid yet — such as employee wages and salaries, unemployment insurance, paid time off, the employer’s share of FICA taxes (Medicare and Social Security), and other withholdings.
Withholdings and payroll deductions are considered liabilities until the money is transferred to the agencies to which they are due.
It’s critical that business owners make sure that their business income and cash flow can accommodate payroll.
Pay Attention to the Fine Details
Small mistakes can become costly errors. Make sure to calculate pay correctly, including overtime pay for nonexempt employees and any paid time off. Also critical is to report and administer tax withholdings and other deductions accurately. Processing payroll accurately and on time is essential for employee morale and ensures the business complies with tax and labor laws.
Know Your Filing Dates
Some states have frequency requirements for when employers must pay their employees. Businesses must pay attention to those laws when determining their pay period and payroll schedule.
Setting up a payroll schedule is only part of the equation. Employers must also report information to various agencies, including the IRS. Generally, most businesses with employees must report wages, tips, and other compensation to the IRS quarterly via Form 941, Employer’s Quarterly Federal Tax Return. Most employers must also submit Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, to report wages subject to federal unemployment tax.
When the tax year concludes, employers must complete and file a Form W-2, Wage and Tax Statement that reports an employee’s compensation. That form goes to the Social Security Administration and the employee should also receive a copy from their employer so that they can accurately complete their tax returns.
Make Tax Other Withholdings Deposits On Time
The federal government has two deposit schedules for making income and FICA tax deposits: monthly and semi-weekly. Employers should check with the IRS or talk to a trusted payroll tax advisor to determine which schedule they must use.
Monthly depositors must deposit employment taxes by the 15th day of the month after payments were made to employees. Semi-weekly depositors must deposit employment taxes for employee pay made on Wednesday, Thursday, or Friday by the following Wednesday. Those who paid employees on Saturday, Sunday, Monday, or Tuesday, must deposit employment taxes by the following Friday.
If an employer accumulates $100,000 or more in taxes on any day during their deposit period, they must deposit the tax by the next business day.
A business’s FUTA deposit schedule will depend on the amount of its quarterly tax liability. An employer with a FUTA tax liability of less than $500 in a quarter may carry its deposit over to the next quarter. When an employer’s FUTA tax liability in a quarter (including any undeposited FUTA tax money from a previous quarter) reaches $500, the entire FUTA tax must be deposited by the last day of the first month that follows the end of the quarter.
Stay Organized and Up to Date
Employers can make every step of the process (including tax reporting and filing) easier by keeping up with tax law changes and maintaining payroll records in one central place where they can retrieve them conveniently.
Generally, the IRS requires that some payroll records be kept for at least three years. But employers may have to keep some sensitive employee documents — like employee wage, tax, and retirement account records — for longer periods. States also have rules for how long employers must maintain payroll records. Some human resources experts advise keeping payroll records for at least seven years to cover all federal and state record-keeping minimum requirements adequately.
Electronic payroll data storage solutions can make staying organized and compliant with record maintenance rules less daunting.
Set Up Notifications and Reminders
Business owners can avoid missing critical payroll filing and payment deadlines by setting up automatic reminders of tasks and due dates. This can be done via whatever method works best for the employer. Many payroll software platforms have built-in notification tools that make it easy to keep on top of payroll to-dos.
Payroll FAQs
How often should I pay my employees?
The frequency of paying employees is driven by state requirements and an employer’s preferences. Depending on the state’s laws, employers may have several options to choose from such as weekly, bi-weekly (every other week), bi-monthly (twice per month on specified days, e.g., the first and the 15th of the month), and monthly.
What is payroll tax?
Payroll taxes are the taxes paid on employees’ wages and salaries to fund public programs. Some payroll taxes (like Social Security and Medicare) are partially deducted from employees’ pay while others (FUTA and State Unemployment Insurance tax) are usually paid entirely by the employer.
While income tax is also withheld from employees’ pay, it is by definition an “employment tax” rather than a “payroll tax.”
How do I calculate my payroll tax?
After determining each employee’s gross pay and subtracting any pre-tax deductions, employers must calculate FICA (Social Security and Medicare) taxes owed by each worker. Social Security tax due is 12.4 percent and Medicare tax due is 2.9 percent of an employee’s gross taxable income. Half of those tax obligations will be withheld from employees’ pay, and the employer must pay the other half to the federal government. For example, if an employee’s gross taxable income for a pay period were $1,000, the Social Security deduction on the employee’s paycheck would be $62 ($1,000 x 6.2%). The employer would need to pay a matching amount. The wage base limit for Social Security tax is $147,000. Similarly, an employee with gross taxable income of $1,000 for a pay period would see $14.50 withheld from their paycheck for Medicare, and their employer would pay a matching amount. There is no wage limit for Medicare tax.
Federal unemployment tax (FUTA) is paid by employers — 6 percent on the first $7,000 that each employee earns. State unemployment tax follows suit, except in a few states employees must also contribute. The tax and wage base limits vary from state to state. Note that employers who pay their state unemployment taxes in full and on-time may get up to a 5.4% credit on their FUTA tax (except in credit reduction states) when filing their Form 940.
Additionally, some states and local governments require employers to payroll tax to fund programs like short-term disability and paid family medical leave for employees in their jurisdictions. In most states, employers pay these taxes; they generally are not deducted from employees’ pay.
Employers must also withhold federal income taxes from employees’ pay. How much to withhold from each employee’s wages or salary is determined by the information they provided on their W-4 forms (withholdings chosen and any additional tax amounts they requested to be deducted). It’s important to use the current IRS tax rates to calculate the tax due accurately.
State and local income taxes, where applicable, must be calculated (by multiplying an employee’s gross taxable wages by the state’s income tax rate) and withheld from employees’ pay, too. Employers should confirm the appropriate tax rates to use when calculating their employees’ tax responsibilities.
How do I find out what payroll taxes are required in my state?
Employers should check with a trusted tax advisor or their state’s department revenue and local tax authorities about the payroll taxes they must pay.
What is payroll withholding?
Payroll withholding is the money (for taxes, healthcare premiums, health savings plans, retirement plans, and charitable contributions) that employers deduct from their employees’ pay and then remit to the appropriate government agencies and providers.
What does FUTA stand for?
FUTA stands for Federal Unemployment Tax Act. It is a federal payroll tax paid by employers on employee wages. Tax monies collected from employers for FUTA go into a fund that provides compensation to employees who qualify for unemployment benefits. Employers must pay the 6 percent FUTA tax on the first $7,000 of each employee’s pay in each calendar year.
Businesses that pay their state unemployment tax (known as SUTA or SUI) on time and in full may receive a credit of up to 5.4 percent on their FUTA tax, bringing their FUTA liability to just 0.6 percent.
What is SUI?
SUI stands for State Unemployment Insurance. It is another name for SUTA (State Unemployment Tax Act). Each state has its own tax-funded SUI program that provides short-term benefits to workers who have lost their job. In most states (except for Alaska, New Jersey, and Pennsylvania), employers must pay the entire SUI amount. SUI tax is a percentage of the employee’s wages or salaries.
Employers pay SUI tax to the state where an employee’s work is taking place. So, if all of a business’s employees work in the company’s home state, it will pay SUI only to that state government. If employees work in different states, the business must pay SUI to each state where employees work.
How do you get a SUTA number?
Business can get their SUTA (or SUI) account number by following their state requirements for registering as an employer in the jurisdiction. Some states require registration as soon as a business employs one or more workers. Other states require employer registration after a business has paid out the minimum amount of wages at which SUTA goes into effect. It may take anywhere from one day to several weeks to get a SUTA number depending on the state. Some states issue a SUTA account number immediately when a business e-files to register as an employer.
Can I run my own payroll?
Business owners can manage their own payroll. However, it’s critical that they have a firm understanding of what’s required, including how to calculate employees’ pay, what deductions and withholdings must be made, and what deadlines they must meet for reporting and paying withholdings and payroll taxes to the appropriate agencies and providers.
Running payroll requires a great deal of time and specialized knowledge. Payroll software can help make the process more efficient. However, after considering everything involved, employers may find value and peace of mind by enlisting the help of a payroll services provider.
Do I need a payroll specialist?
As a business grows, it may benefit from having a specialist on staff to manage payroll-related details and administrate payroll through the company’s chosen payroll software. It’s crucial that a company execute payroll correctly and on time. So, if the business doesn’t outsource its payroll management to a resource with that expertise, an in-house payroll specialist can offer peace of mind.
What companies can help me with payroll?
Business owners have many payroll services and software companies to choose from. Payroll software vendors like Gusto and Paychex provide cloud-based systems businesses can use to manage payroll on their own. And many also offer full-service payroll assistance. Most accounting firms and bookkeepers provide payroll services, too, giving businesses an opportunity to put their payroll activities into the hands of professionals they may already know and trust to handle their financials.
What are the benefits of using a payroll system?
Cloud-based payroll systems can help save businesses time when managing their payroll. Self-service payroll software solutions also cost less than using an accountant, bookkeeper, or other full-service solution. Most online software platforms are easy to use and offer many automated features that make calculating employee wages, salaries, paid time off, withholdings, and net pay efficient and accurate. They also streamline preparing and filing reports and managing the regulatory aspects of payroll.
Which payroll software is best?
That depends on several factors and considerations. Some things to consider are the size of the business (how many employees), ease of setup, ease of use, available features, automation, reporting features, third-party integrations with other HR software, and cost.
What are the consequences for not doing payroll correctly?
Miscalculations could result in inaccurate tax payments, leading to late fees and other financial penalties. Also, failure to pay taxes could result in a business losing its status of good standing with the state. That could lead to the involuntary dissolution of a company’s business entity (e.g., LLC or C Corporation) and loss of the personal liability protection the registered entity provides to the business owners.
Also, if a company has not complied with the federal and state laws for paying employees (e.g., meeting minimum wage and salary requirements, pay frequency rules, paying overtime correctly, etc.), it will face penalties and other consequences (possibly even imprisonment).
Payroll Roundup
I’ve covered a lot of information about what goes into payroll. Hopefully, this info has helped give you a sense of the considerations employers must think about. Every business is unique, though, so it’s helpful for entrepreneurs to consult with trusted accounting and legal professionals familiar with employment and tax laws when hiring employees and setting up payroll for the first time.
Want to Make Your Payroll Tax Registration Hassle-free?
Contact us to handle your state unemployment tax and state income tax withholding registrations. No matter the state where your company is located, we can take care of this critical step of the payroll process and free up your time to do what you do best — grow your business!
