Top 5 Small Business Payroll Questions Answered

Once an entrepreneur becomes an employer, payroll becomes a crucial component of their business operations. After all, getting paid is, by and large, the most important reason employees come to work—even more important than free snacks, casual Fridays and ping pong tables in the breakroom.

While many inexperienced small and medium-sized business (“SMB”) owners may assume payroll is merely a matter of plugging in numbers and cutting checks, they often quickly find that processing payroll is not that simple. And not being diligent with the payroll process can cost so much more than what it takes to cover employees’ wages. Fines, penalties, employee confidence, time spent correcting mistakes, claims, litigation, and (in extreme cases) jail time can destroy a business.

That is why we recommend not only leaving this critical job to the payroll professionals but also making sure you have HR experts on your side who can guide you through the entire process, for the life of your company.

Here are some expert responses to the top payroll questions from SMB employers.

What does a payroll services provider do?

A payroll services provider is an organization that assists employers with the complex and detailed requirements of processing employee payroll. You have several options when looking to hire a payroll services provider for your business, including an HR services provider such as a professional employer organization (PEO) that offers payroll processing services, an accountant or an in-house payroll manager in addition to other HR administration services. Of course, when trying to decide how to proceed with professional payroll services help, you’ll want to look at your budget, the overall complication level of your payroll needs and the value you’d be getting from your service provider.

A PEO, for example, may offer payroll processing as part of a comprehensive HR solution that includes other aspects of HR administration such as access to benefits, risk mitigation, HR compliance guidance, human capital expertise and HR technology capabilities.

That being said, you’ll likely want to make sure the following offerings are included as part of your payroll service:

• Payroll processing with direct deposit (to your employees) and debiting (from your employer account).
• Payroll tax preparation that includes not just Form W-2 preparation and delivery but help navigating complicated payroll tax requirements for locations in which your business operates.
• Self-service technology that allows you to add or remove employees from your payroll and make other necessary changes to your employee roster or employees’ compensation.
• The ability to track paid time off, bonuses, commissions payments, and any payroll discrepancies.
• An option of paperless paystubs and tax forms.
• Help maintaining compliance with regulations and requirements governing wages and payroll taxes at the federal, state, and local levels. These include the federal Fair Labor Standards Act requirements, such as deciding if an employee is exempt from overtime compensation, among other requirements, and compliance with the federal Equal Employment Opportunity Act, as well as a host of federal, state and local requirements affecting pay and payroll taxes and your business.

What are payroll deductions?

Payroll deductions are wages withheld from an employee’s total earnings (gross pay) for the purpose of paying income or payroll taxes, garnishments and benefit costs. Payroll deductions can be either voluntary or involuntary. Common voluntary deductions include amounts taken out to cover the employee’s share of employer-sponsored benefit costs such as health insurance or to contribute to a retirement plans. These deductions are considered voluntary deductions because an employee can “opt in” to them by choosing to participate and have the applicable amounts deducted from their paycheck.

Involuntary deductions are mandatory deductions an employee has no choice on. These deductions are usually imposed for payment of income and payroll taxes owed or garnishments for responsibilities such as child support.

The important thing to know about payroll deductions is that it is the employer’s responsibility to manage these deductions accurately and consistently and make sure they get paid out promptly and correctly to the appropriate agency or benefits provider.

What are payroll taxes?

Payroll taxes are wages withheld from an employee’s pay and paid to a government agency. Like with many financial activities, payroll taxes are arguably one of the more complicated aspects of managing payroll. You may want to click on our blog on tax compliance for businesses before reading this section.

Payroll tax requirements change frequently and vary based on work location. It gets even more complicated once your business starts growing nationally or even internationally.

Payroll taxes fall into two categories—those paid by the employer and those paid by the employee. It is up to the employer to make sure both types are accurately calculated, withheld and paid to various taxing jurisdictions for each and every paycheck on a timely basis.

Payroll taxes, are important as they help to fund governmental programs such as Social Security, Medicare, unemployment benefits, and some state paid family leave programs.

Because the types of payroll taxes vary by location, it is important to work with a payroll advisor familiar with the payroll tax laws in the locations where you operate your business.

Here are some other common questions about payroll taxes that businesses may have when starting to hire employees:

• Which payroll taxes are the employer’s responsibility?

On the federal level, employers are responsible for paying their portion of FICA (Social Security and Medicare) and FUTA taxes. Similar employer liabilities, such as state disability insurance and state unemployment tax, or SUTA, may be found on the state and local levels as well. In addition, while employers are not responsible to pay employees’ taxes, they may have a responsibility to withhold federal, state and local income taxes from employees’ paychecks (see income tax withholding question below).

• How do I calculate payroll taxes?

The calculation of payroll taxes depends on the type of tax, the jurisdiction, subjectivity rules, any applicable taxable wage base and cap, and the rate at which the tax is to be calculated. The calculation of payroll taxes is complicated and you should seek the help of a tax professional.

• What is income tax withholding and how does it help my employees?

Income tax withholding is essentially the U.S.’s pay-as-you-go system for paying and remitting federal, state, and local income taxes.

This means that as wages are earned and paid to the employee, the taxes based on that compensation must be withheld by the employer and remitted to the applicable taxing jurisdictions. This is beneficial as it alleviates, with regards to wage income, = the need for employees to have to plan and save for the eventual personal income tax bill.

How does taking PTO impact payroll processing?

Paid time off (PTO) is an employee benefit, offered by most employers, that gives employees the opportunity to receive their regular compensation while taking time away from work. How and when PTO is provided is usually up to the employer, while the requirements around PTO (for example, PTO pay out upon separation of employment and rollover from year to year) vary by state. In addition, some states and localities have requirements about paid sick and safe leave.

As part of the payroll process, it is important to have PTO, and paid sick and safe leave if applicable to your employees, managed so that not only can the employer and employee keep track of their time off, but to also maintain compliance with payment of such hours.

For additional information on payroll or to find out about payroll services for your business, reach out today!

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