Small business owners often have a lot of questions about payroll administration and how to handle it. This doesn’t just go for new startups, either. Ever-evolving regulations can leave even the most seasoned entrepreneur at a loss when it comes to dealing with payroll compliance issues.
Let's dive in to answer fifteen of your most commonly-asked payroll questions.
An EIN is an Employer Identification Number. If you have employees at all, you will need to apply for an EIN. You also need one if you operate as a corporation or partnership and in a few other circumstances. You get an EIN from the IRS, and you can apply online, by fax, or by mail. The IRS prefers that you use the online form if possible, which will get your EIN immediately.
The I-9 form is used to verify an employee's identity and eligibility to work in the United States. You need to fill one out for all employees, including U.S. citizens, and retain the forms for a designated period.
Most people have completed a W-4 form at some point in their lives. This is the form filled out by employees during onboarding, which tells you how much income tax to withhold from their pay. This form includes the number of dependents and allows employees to ask you to withhold a higher amount. In some cases, employees may want extra withholding to get a larger refund or because they have income from a hobby or side hustle and don't want to mess around with estimated tax. Tax-exempt status can also come into play here.
W-4 forms should be updated if employees have a life change such as marriage, divorce, or the birth of a child. They can also update their W-4 at any time to increase or decrease extra withholding.
In addition to the W-4 form, employees need to fill out the following during onboarding:
This publication includes tables for calculating federal income tax. You will also need to calculate state withholding, which is generally a lower percentage. Every state and even some municipalities and regions have extra taxes. A professional employer organization (PEO) uses a payroll system to calculate payroll taxes for you while ensuring compliance.
W-2s and 1099s need to be filed and sent to employees and relevant contractors by January 31 for the previous tax year. You can request a 30-day extension, but these are seldom granted. You can request a single extension of 15 days for W2 forms, which is a little more lax, but you still need to provide a reason.
Direct deposit is convenient for both parties, saves money and resources, and is generally faster and more secure. However, it is not required, and you can also choose to pay employees by check, cash, or using a payroll card, a prepaid card that wages are transferred to automatically.
A pay stub or payslip generally goes out to employees each pay period. What goes on it is very nuanced, depending on where you do business. In California, you are required to provide an itemized pay statement that includes a myriad of items, and there are steep penalties for non-compliance. A PEO partner can help you stay up to date with the latest requirements.
Under federal requirements, you must pay non-exempt employees overtime for any hours worked over 40 per week. There is no requirement to pay overtime on a daily basis at the federal level, but some states do require overtime for shifts longer than 8 hours.
California has strict overtime laws that are especially tricky to navigate. Employees are required to receive overtime pay for all hours worked over eight in a single day. An employee should receive 1.5 times their normal hourly rate for shifts that last between eight and 12 hours in a day, and double pay for time worked in excess of 12 hours. There are also weekly overtime requirements, and additional overtime if your employee has worked for seven consecutive days. Of course, there are exemptions from overtime laws, which we’ll discuss in more detail next.
The primary difference between exempt and non-exempt status is an employee’s eligibility for overtime pay. Exempt employees are not entitled to overtime. However, non-exempt employees are covered by the Fair Labor Standards Act (FLSA) and entitled to overtime by federal law. Multiple factors come into play when determining exemption status, such as:
Of course, state laws may also have specific criteria for classifying employees. California exemptions for overtime laws are especially nuanced, and it’s important to remember that the job must meet the requirements of the exemption. That is, employers may not override the exemption requirements simply because they do not wish to pay overtime.
You are legally required to withhold payroll taxes each pay period. This includes:
These must be deducted from your employee's gross pay along with voluntary deductions, such as health insurance premiums, if applicable. You are also responsible for paying your share of social security and Medicare taxes and federal and state unemployment taxes.
Unemployment tax is a tax paid by employers to cover unemployment compensation to workers. This tax is paid by the employer and not deducted from the employee check. You owe federal unemployment tax on the first $7,000 paid to each employee per calendar year, at a rate of around 6%, depending on your state. State unemployment insurance rates vary from state to state as well, and your PEO will know how to calculate your payments and ensure compliance. For example, California currently charges rates from 1.5 percent to 6.2 percent.
There are major differences between working with a payroll service provider or a PEO when it comes to third-party arrangements. When you work with a PEO, they are solely liable for paying your employment taxes, filing returns, and making deposits and payments for the taxes reported.
However, if you are outsourcing payroll to a payroll service provider and they fail to make tax deposits, you are still liable for that tax, although you can file a complaint against them. PEOs reduce your tax liability and help you stay compliant in the process.
At least four years after the due date of the employee's income tax return for the year the payment was made. This date is almost always April 15. This includes terminated employees.
A PEO is responsible for all payroll administration matters, including taxes. It's vital to partner with a trusted and reputable PEO with the expertise to handle your payroll matters. They use a Human Resources Information System to manage the process, which you can try and do yourself, but a tool is only as good as the person using it. With a PEO, you get a team of experts.
To learn more about what outsourcing payroll can do for your business, check out our blog.