Payroll administration is a source of stress for many small business owners. It’s a complex process that’s often riddled with inefficiencies when handled in-house. Payroll administration is held to strict compliance standards, so there are significant consequences when it’s not done correctly.
In addition to legal requirements, it’s also critical to have timely, accurate payroll for the benefit of your employees. Paying employees late or miscalculating deductions or hours worked will frustrate your staff and cause morale to drop. If payroll problems happen frequently, your employees may even quit.
Payroll administration is one of the most important functions in your business — and one of the most confusing. We’re here to help you simplify your payroll processes, eliminate inefficiencies, and reduce your potential liabilities. In this article, you’ll learn how to:
- Make timely and accurate tax payments
- Manage employee payroll deductions
- Maintain accurate timekeeping
- Keep accurate and organized tax records
Common payroll terms explained
- Withholdings are the federal and state taxes you take from employee paychecks. Deductions refer to other money you withhold from a worker’s check, such as retirement contributions, health insurance or wage garnishments.
- Gross pay is the total amount of money an employee earns before you take any deductions or withholdings. Net pay (also called take-home pay) is the income amount left after deductions and withholdings.
- A W-4 is an employee’s withholding allowance certificate. Employees fill out their allowances, and you use this information to calculate how much to withhold from their paychecks.
- FICA stands for Federal Insurance Contributions Act and refers to social security and Medicare taxes.
- FUTA stands for Federal Unemployment Tax. Employers pay this tax, and the funds help support workers who have lost their jobs.
- FITW stands for Federal Income Tax Withholding and refers to the amount of income tax withheld from an employee’s pay.
How to make timely and accurate tax payments
Small businesses are responsible for paying federal and state taxes on time, reporting employees’ incomes and taxes withheld and maintaining accurate tax records.
Keep track of tax deadlines
There are many different tax deadlines for filings and payments. It’s easy to get overwhelmed and lose track of these, so the IRS provides a helpful tax calendar with this information. On page five of the 2021 IRS tax calendar, you’ll find the filing and deposit due dates that are important for employers, as well as additional information about each form. The calendar covers:
- Income tax you withhold from your employees’ wages or from nonpayroll amounts you pay out.
- Social security and Medicare taxes (FICA taxes) you withhold from your employees’ wages and the social security and Medicare taxes you must pay as an employer.
- Federal unemployment tax (FUTA) you must pay as an employer.
It’s essential that you file and pay what you owe on time. Failure to deposit your funds promptly will result in penalties of up to 15% of the amount owed.
Important deadlines
- Form 940: January 31
- Form 941: The last day of January, April, July and October
- Form 944: January 31
- Form 945: January 31
- W-2s must be given to employees by February 1
Understand IRS tax forms
As an employer, there are several tax forms you need to fill out and submit each year. You can use the IRS e-file system to save time and stay organized when completing your unemployment taxes.
Form 940: Employer’s Annual Federal Unemployment (FUTA) Tax Return
Employers pay annual federal unemployment taxes. These should not be deducted from employees’ paychecks. The funds collected from this tax supports workers who’ve lost their jobs.
If you’ve paid $1,500 or more to an employee or had at least one employee for 20 or more weeks, you must file a FUTA tax return. Use form 940 to report your FUTA taxes on the wages you paid in the previous year.
Form 941: Employer’s Quarterly Federal Tax Return
Most small businesses that expect to owe more than $1,000 in taxes must file form 941. For this form, you must report the income taxes, social security taxes and Medicare taxes withheld from employees’ wages. You will also use this form to pay the employer portion of social security or Medicare taxes.
Form 944: Employer’s Annual Federal Tax Return
Use for 944 to report the federal income, social security and Medicare taxes you withheld from employee paychecks. This form will indicate what you owe for your social security and Medicare liabilities.
This is the same information that’s reported in form 941, except form 944 is annual rather than quarterly. Small businesses that expect to pay less than $1,000 in employment taxes in a given year can file form 944 instead of the quarterly federal tax return.
Form 945: Annual Return of Withheld Federal Income Tax
IRS form 945 is for reporting the federal income taxes you withheld from non-payroll payments. These include but aren’t limited to:
- Pensions and annuities
- Military retirement funds
- Gambling winnings
- Voluntary withholding on certain government payments
State withholding taxes
State withholding is only done for income taxes and doesn’t include social security or Medicare taxes. Those are only paid at the federal level.
State withholding taxes are subject to variable taxable income rates determined by each state. Some states don’t have income taxes. If your business is located in Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, New Hampshire or Tennessee, you don’t have to worry about state withholding taxes. If your business isn’t located in one of these states, you’ll need to check your W-4 for your state’s withholding guidelines.
How to manage employee payroll deductions
Calculating payroll deductions manually can be a tedious and time-consuming task, especially if you have more than a handful of employees. While social security and Medicare taxes have a straightforward fixed rate (6.2% and 1.45%, respectively), federal income tax withholding (FITW) varies.
The IRS uses a variety of employee-specific factors to determine federal income taxes. This means there’s no set number you can apply to all of your staff. You must take each person’s individual circumstances into consideration, such as the number of dependents, wage bracket and filing status (e.g., single, married, head of household).
As you calculate your payroll deductions, you must know each employee’s total amount of deductions and whether those are taken pre-tax or post-tax. Taking deductions at the wrong time is a common payroll error.
Pre-tax deductions
Take pre-tax deductions from an employee’s gross income before withholding any taxes.
Pre-tax deductions include, but aren’t limited to, the following:
- Health insurance
- Retirement plans
- Health savings accounts
- Short-term disability
- Long-term disability
- Flexible spending accounts
Pre-tax deductions save employees money by reducing their taxable income. This means they will owe less in income taxes. Employers also benefit from pre-tax deductions as they lower the amount owed for unemployment insurance taxes.
Post-tax deductions
Take post-tax deductions from an employee’s net pay after all federal, state, social security and Medicare taxes have been withheld. These deductions do not reduce an employee’s taxable income. Post-tax deductions vary by state but may include:
- Roth 401(k) contributions
- Some life insurance policies
- Employer-sponsored pension plans
- 529 college savings plans
- Union dues
- Wage garnishments
Tips for accurate timekeeping
Accurate timekeeping is a core process of payroll. It determines hourly employees’ total income per pay period, vacation and sick leave accrual and overtime. Good timekeeping practices will help your business avoid violating the Fair Labor Standards Act (FLSA), and it will ensure your employees receive correct and timely paychecks.
Choose a timekeeping method
Determine the best way for your employees to track their time. The way your employees work will guide your choice. If all of your employees work on-site, you may find that the traditional time stamp card works well. However, if you have employees who sometimes work remotely or frequently travel between job sites, it isn’t practical to require them to punch in and out. Your timekeeping solution must work for everyone, otherwise you risk inaccurate time tracking and all the consequences that come with that.
Timekeeping is an area where most employers can reap significant benefits from technology. Using a mobile app or other software to track employee time is flexible enough to work for everyone, and it can help you spot issues immediately.
Did an employee clock out for lunch and never clock back in? Is someone approaching overtime who shouldn’t be? These situations can make payroll messy or even cause conflicts with employees. It’s important to catch them early, and most timekeeping software can send you notifications about issues in real-time.
If a tech-savvy timekeeping solution isn’t in the budget, you can always have employees track their time by hand on a digital or printed timesheet.
Create a timekeeping policy for employees
To reduce inaccuracies and ensure your payroll is always on time, all employees must understand the expectations for tracking, correcting and submitting timesheets.
Tracking time
Make it clear to employees how they must track their time.
- Identify the method (e.g., spreadsheet, app, time card) that employees will use to track their hours.
- Explain what information needs to be included on the timesheet. For example, do you only need to know when they clocked in and out, or do you need specific information about what task they completed from 9:30 to 10:15?
- Clarify what time needs to be tracked. Do they get a paid lunch break, or do they need to clock out for breaks?
- Have a specific policy for overtime. Do they need to get approval first? Is there a different way they need to track overtime hours?
Submitting timesheets
If employees repeatedly submit timesheets late, it may be because they’re not clear on the deadlines or the submission method. Help them help you by clarifying these details.
- When will timesheets be due? Reference your pay period to determine the frequency that works best for your business.
- How will employees submit their time? Do they need to print and sign the spreadsheet? Is there a certain method they need to use in the time-tracking app to submit their information? There should be a clear policy that answers these types of questions.
- Who is responsible for approving submitted timesheets? Having a manager review and approve timesheets before they get to you can greatly improve your payroll workflow.
- What additional information do they need to submit (e.g., receipts for expenses, mileage)?
Remember, as the employer, you are ultimately responsible for tracking employee time and paying them accordingly. If an employee forgets to submit their timesheet, you must still pay them for the hours they worked.
Correcting timesheets
Timesheet mistakes are inevitable. Someone will always forget to clock back in after a lunch break or put off writing down their time and forget what hours they worked that week. It’s a huge headache when these issues pop up as you’re trying to do payroll.
You can avoid this stress by creating a policy for how employees can correct timesheet mistakes and a deadline for making these corrections. Do they need to tell a manager who can log in and make the changes? Should they default to the hours on their schedule if they’ve forgotten the actual time they worked? Asking these types of questions will help you create a policy that will ensure your timekeeping issues are kept to a minimum.
Maintain accurate and organized tax records
Maintaining accurate and organized records is essential to keep your business compliant. It also helps you monitor your company’s growth, prepare financial statements and track deductible expenses.
Your recordkeeping must show your company’s income and expenses, including your payroll and taxes. Payroll records need to be kept for a minimum of three years, and employment tax records need to remain on file for at least four years. Depending on your industry, you may be subject to additional recordkeeping requirements. For instance, healthcare facilities have to keep patients’ medical records for at least seven years.
When the time requirement for your records is up, consider scanning the documents and saving them before destroying the physical copies. It never hurts to have ample documentation, especially if you’re audited. You can store these on your local server or use a cloud-based service such as Dropbox or Google Drive.
Many businesses have moved their record storage to the cloud. Cloud storage allows you to create backups of all your files easily, ensuring nothing is ever lost. It also significantly improves the search process. Instead of slowly digging through physical files, you can type in a keyword and instantly retrieve the records you need. If you prefer to keep paper records (or your industry requires it), you can still get the backup benefits of the cloud by scanning the documents and uploading the files.
Supporting business documents
Create a filing system for the different types of supporting documents you collect. This includes things such as invoices, bank deposit information, receipts for expenses and the purchase or selling price of any business assets, to name just a few.
The best way to deal with these documents is to file them right away. If your desk is currently covered in these types of documents, here is a quick and easy organization system to implement:
- In a file cabinet, label one drawer with the current year.
- Create a hanging file folder for each month of the year and add them to the drawer.
- Whenever you receive a supporting document you need to keep, immediately put it in the current month’s folder.
- Set aside a few minutes at the end of each month to sort the documents into their proper place (i.e., file like items together).
This simple system will keep you from being buried under a mountain of loose receipts and paperwork, and it will ensure nothing important is lost in the process.
Many business owners dread doing payroll. This isn’t surprising considering how important it is to employees and how many complex rules it involves. We hope this guide will help you streamline your payroll process and reduce the stress you feel each pay period.
If you would like more guidance on payroll administration or employee benefits, reach out to us today. We offer a suite of employer services and will work with you to find a solution that’s right for your unique business needs.
