This article is for educational purposes and does not constitute legal or tax advice. For specific advice applicable to your business, please contact a professional.
You’ve hired your first employee. Now you need to make sure he or she gets paid. If you’re new to payroll, you might find yourself in some uncharted waters, navigating a sea of new terminology — pay periods, unemployment tax, something called Form 941.
If you’re feeling overwhelmed, we’ve got you covered. Here’s a quick guide to walk you through the basics as you set up a payroll system for your business. Note that this in no way attempts to cover all of the rules employers are exposed to, so be sure to consult with a professional if you have specific questions regarding your obligations as an employer.
1. Pay periods and paydays
One of the first decisions you have to make is your pay schedule, which is essentially when your employees are paid for certain days of work. The beginning and ending dates of this schedule is your pay period, which represents the period in which your staff logged work time or earned wages. Examples of pay periods include weekly, biweekly, and semi-monthly.
Payday is the date on which employees are paid. It’s usually a fixed number of days after the end of the pay period. For tax purposes, your payday is used to determine the period in which you need to pay and file payroll taxes.
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2. Collecting employee and employer taxes
On to the fun part (we kid): taxes. When it comes to payroll taxes, there are two parties — employees and employers — who are required to pay taxes on wages. These taxes are usually owed to both the federal government and the state, and in some cases to cities and municipalities as well.
Generally, employers are responsible for collecting federal income tax, Social Security, and Medicare tax from employees’ paychecks based on what employees marked in their Form W-4 (which all your employees should fill out before they begin work at your business). Employers must also pay a matching amount of Social Security and Medicare tax as well as Federal Unemployment Tax (FUTA). Employers pay for unemployment through FUTA, which is a federal employer tax that, along with state unemployment tax (if applicable), provides unemployment compensation to workers who have lost their jobs. Depending on your state, employers may also be required to collect and pay state income tax.
Check out this Employment Tax Guide provided by the IRS for more information.
3. Paying and filing taxes
So when do you have to pay these taxes? Generally, you need to pay federal and state income taxes on a monthly basis. Other types of taxes, like FUTA, are usually paid quarterly. However, how often you need to pay these taxes depends on the size of your business. Most employers need to pay taxes on a monthly basis and receive notifications from the state and federal government if they need to pay taxes more frequently. Full-service payroll providers usually withhold these taxes each pay period and pay them to the government when they’re due.
Now for filings. If you’re paying employees, you also need to file some forms. Federal Form 941 (quarterly federal tax return) must be filed each quarter, and Form 940 (FUTA tax return) must be filed yearly. You may also have to file similar forms to the state. Employers are also required to send Forms W-3 and W-2 to the Social Security Administration (SSA) each year. Again, most payroll services handle these filings for you electronically. If you do them yourself, read more about these forms here.
4. Federal, state, and local laws
Then there are employment laws. As you set up payroll, you must adhere to federal, state, and local labor and employment laws, even if the laws have different standards. For example, although the federal minimum wage is $7.25, in California it’s $10.00, and in San Francisco it’s $12.25. At the minimum, the federal Fair Labor Standards Act (FLSA) establishes minimum wage, premium pay for overtime, and protections for children who work. You should be aware of FLSA requirements as well as state and local wage and hour laws, and always follow the provisions more favorable to your employees (i.e., pay $12.25 per hour if you’re located in San Francisco). Most states have informative websites to help you figure out which laws apply. It’s a good idea to start there and then talk with a professional to make sure you’re following the right set of laws.
One more thing. As an employer, you must keep track of hours worked for hourly, nonexempt employees. Most workers are classified as either exempt or nonexempt employees depending on their salary and the type of work they do. You can read more about these and other classifications in the FLSA and your state’s wage and hour laws. This fact sheet by the Wage and Hour Division of the Department of Labor can help you better understand timekeeping requirements.
We hope this helps you get started. Contact the IRS or local and state tax authorities to inquire about registration, reporting, and and other compliance requirements. Publication 15, better known as Circular E, has a wealth of information as well.
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This article was updated on January 22, 2018