COVID-19 has changed how small businesses operate, from applying for relief such as the Paycheck Protection Program (PPP) to updating payroll processes. Payroll—comprised of complex processes including garnishments and unemployment claims, payroll taxes, and classifying workers—doesn’t have to be confusing. By understanding payroll changes, payroll technology, and the ebb and flow of time and attendance, you can improve and simplify your payroll processes. WeWork Business Solutions, powered by VensureHR makes professional services simple, so you can revitalize your small business during this time.
At first glance, the payroll process seems cut and dry: Employees clock in and out daily, a program converts their hours worked into dollars, and the employer pays the employee. It seems like a simple system of logging time and attendance, distributing funds, and recordkeeping.
What many employers and entrepreneurs eventually discover is that there are a fair number of details required to ensure an employee is paid not only on time but accurately. From start to finish, payroll is one of the main business areas where employers cannot afford to take shortcuts or get by with minimal effort. Payroll is a complex aspect of any business, because mistakes can lead to employee dissatisfaction as well as payroll and tax penalties. By familiarizing yourself with the basics, you can find the payroll management system that works best for your business.
What is payroll?
The term payroll is straightforward, describing the people on the list (roll) paid by a company. Today, this broad term is understood to refer to the salary paid to an employee based on assigned wages and services performed or job duties executed on behalf of the business. Wages paid to both part-time and full-time employees include hourly tips, bonuses, commissions, and any reimbursements or stipends for cell phones, travel, or tuition.
But payroll is more than an employee’s standard pay and taxes. Business owners are tasked with identifying how much employees are owed, calculating the percentage and total amount of owed taxes per employee, providing employees with regular access to paystubs and physical paychecks (when needed), confirming that proper forms (like W-2, W-4, and 1099) have been filed with the Internal Revenue Service (IRS), and ensuring that all aspects of the process are within federal, state, and local compliance.
Collecting wage and hour information
Tracking employees’ hours worked is a key component in gathering payroll data, and is also critical to the functioning of any organization. In addition to ensuring employees receive regular, accurate pay, a business relies on this information for budgeting, forecasting, scheduling, and compliance. Time and attendance requires a robust and comprehensive tracking and reporting system that accounts for paid time off (PTO) accruals, sick leave, and other benefits.
In a company with a small number of employees, tracking hours and labor can be a simple process. But as a business gains traction and begins to grow, a manual approach may quickly lead to issues over time, such as over- or under-payment, a decrease in employee morale, and the inability to accurately forecast business demand and resources.
Investing in a time and attendance platform will help business owners and leadership spend less time on payroll, prevent time theft, eradicate human bookkeeping errors, and help maintain organization compliance. Look for a time and attendance platform that has scalable software, which will allow you to match the growth of the business and effectively manage a larger number of employees over time.
Types of withholdings
Employers are not necessarily responsible for paying taxes on behalf of their employees. However, they are responsible for withholding taxes from employee paychecks and sending them to the proper government agency. The most common types of payroll withholdings include federal income tax, state income tax, Social Security and Medicare tax, various insurance policies, and retirement.
- Federal income tax deductions are set by the employee on a W-4 form.
- State income tax, set at the state level, is completely dependent upon lawmakers to decide the percentage of income to tax on resident paychecks. There are currently seven states in the U.S. without a state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Each of these states makes up for their lack of income tax in other ways.
- The Federal Insurance Contributions Act (FICA) includes Social Security and Medicare tax contributions that are made from every employee paycheck. This amount is based on an employee’s taxable income. These funds apply to retirement, disability, and family and survivor benefits. The federal government requires employers to withhold 1.45 percent of an employee’s annual wages or salary, regardless of how large or small they may be.
In the case of most small businesses, four common tax errors can lead to high fees and penalties from the IRS. These include underpaying taxes, incorrect employment tax deposits, filing late business taxes, and inaccurately differentiating business and personal expenses. These fees and penalties can add up, especially when business owners add in the amount of time and energy spent digging into each of the scenarios and rectifying each item.
At the time of employee onboarding, it is the employer’s responsibility to ensure the employee has properly and completely filled out specific forms to establish the correct payroll process from the beginning. Employers must ensure employees have filled out:
- Employee tax withholding forms (W-2, W-4). This is a form issued by the IRS to indicate the employee’s tax situation (single or married, number of allowances, and additional withholding) to the employer. The IRS revamped the 2020 W-4 to make it easier to fill out. According to the IRS, the updated design “reduces the form’s complexity and increases the transparency and accuracy of the withholding system.”
- Employment eligibility verification (I-9). Often available in a digital format, this is the form used to confirm the employee’s eligibility for employment in the United States, and to verify their identity.
- State-specific employment forms. Each state has its own set of forms that employers are mandated to file for new hires, which they must fill out within 20 days of employment.
- Direct deposit form. Employers are often asked to provide employees with a direct deposit form as part of their general new hire and onboarding paperwork. This form is required to deposit funds into an employee’s bank account.
- Hourly vs. salary. Employee time and pay structure is a fundamental element of employer-processed payroll. Distinguishing between two classifications (hourly or salary) is reflected in payroll reporting and other forms specific to the organization. Hourly employees receive an hourly rate for work, and if they work more than their standard hours (part-time or full-time), they are eligible to receive overtime pay. Salaried employees do not qualify for overtime pay, but the company benefits they receive, and are eligible for, are often far superior to those of hourly employees.
The U.S. Department of Labor offers a full list of forms for new employees, rehires, and temporary appointments, including demographic and administrative forms, benefits, and retirement.
Additionally, as part of payroll best practices, the employer should ensure that they have the following employee details recorded accurately, to ensure compliance and simplify the remainder of the employee onboarding process:
- Social Security number. This information helps to confirm the employee is who they claim to be.
- Date of birth. This is another piece of information to help confirm an employee’s identity.
- Home address. Not only can this information be used on an “in case of emergency” internal form, but the employee’s address acts as another way to verify their identity. This information is also useful in determining local tax calculations, especially for a business owner with employees in multiple states or municipalities.
Before an employer can process payroll, they need to specify a few details.
- Employer Identification Number (EIN). Each business entity is provided an EIN by the IRS. This number is required prior to hiring employees and is a vital element in tax and employee reporting to state entities.
- Job classifications. Business owners may choose to allow both employee and independent contractor classifications, or they may opt for one or the other. The primary difference between the two comes with taxes. For example, the employer is not required to manage withholdings for independent contractors as they would for regular employees.
- Pay periods. Employers must identify the frequency in which payroll is disbursed on a recurring basis. Weekly and biweekly are the most common lengths of pay period, with nearly 43 percent of employers opting to pay employees biweekly.
- Document compensation terms. Business owners should create job descriptions for each position and plan to perform a full pay grade or market analysis to ensure competitive compensation every other year, at minimum.
Adjustments are often used to modify the gross pay of a single employee or a group of employees by adding to or deducting from their pay amount. There are four primary types of payroll adjustments:
- Addition. This is an amount or percentage added to an employee’s gross pay.
- Deduction. This is an amount or percentage deducted from an employee’s gross pay, including primary and/or supplementary insurance options or employee benefits (e.g., health insurance, pet insurance, 401(k), etc.).
- Contribution. An amount or percentage contributed by the employer and is listed as an expense to the organization.
- Life insurance. An amount or percentage that is included as wages, tips, Social Security wages, and Medicare wages on an employee’s W-2. This amount is subject to state withholdings, but not federal withholdings.
Deductions and withholdings
Employees are required to fill out certain forms to ensure that taxes and withholdings are executed properly. If completed incorrectly, an employee may end up owing taxes when they file their tax returns the following year. For this reason, it is imperative that employees understand the different withholding and deduction options and are able to make decisions on their pay for the coming year.
For example, form W-4 (the employee’s withholding allowance) lets an employee indicate the number of exemptions they are claiming for income tax withholding. Once completed, this form is used for the duration of the employee’s employment. However, employees have the right to submit a new form W-4 at any time, including if personal circumstances change due to marriage, divorce, death of a spouse, a new child in the household, a spouse entering or exiting the workforce, or any other reason that would compel them to change their exemptions.
Additionally, employees are asked to identify deductions during their onboarding process. These deductions are identified clearly on each paystub and can include different programs, such as a flexible spending account (FSA), 401(k), commuter benefits, etc. Mandatory payroll deductions include FICA tax, federal income tax, state and local taxes, and wage garnishments. Voluntary deductions include health insurance premiums, retirement plans, life insurance premiums, and job-related expenses, such as union dues, uniforms, or a cell phone stipend.
At the time of hire, new employees are asked to decide if they want to receive their paycheck funds through direct deposit or via a paper check. Direct deposit, or electronic funds transfer (EFT), deposits an employee’s wages directly into a bank account of their choosing. If the employee opts to receive a paper check, it might be hand-delivered on payday or mailed home. There are pros and cons to each option.
Paper checks give an employee more privacy and control over their money, since they don’t have to share their personal bank account information with their employer. However, paper checks are easy to lose and can be stolen. Additionally, instant available funds may not be available if you deposit a paper check on a holiday or weekend.
Direct deposit saves time for employees and employers. Employees can choose to deposit the full amount into one account, or split the deposit across two or more accounts based on a pre-set percentage, without making multiple trips to the bank or handling manual fund transfers online. Direct deposit also eliminates the chances of losing a paper check or having it stolen. That said, some bank accounts charge a direct deposit start-up fee. In addition, if the employer neglects to plan for bank or federal holidays, employees could experience delays in receiving their funds.
Making payroll easier for everyone
When it comes to establishing payroll for any business, the responsibilities lie mainly with the employer. They need to decide whether to process payroll manually or with a cloud-based software platform, hire an accountant or manage the reporting on their own, and what pay period schedule to use to pay employees. Employers must also fill out the right forms to maintain business compliance.
The simplest and most convenient option is to lean on a professional employer organization (PEO) to help manage and administer these processes. Payroll processing and tax services are offered by a number of PEOs, and with a PEO managing the complex payroll process, it eliminates the hidden costs of compliance and subsequent risks to the business. This gives both employers and employees real-time access to the payroll-related information they rely on most. WeWork Business Solutions powered by VensureHR can provide these services and more for your growing business or startup, allowing you to focus your attention where it matters most. In the first episode of the Business Solutions webinar series, experts from Vensure and WeWork discuss more small business recovery best practices.
Julie Dower is a marketing and communications manager working for Vensure Employer Services, in Chandler, Arizona. A mother of infant twin girls, she holds a master of science in technical communications from Arizona State University and a master of arts in English from Northern Arizona University.