How To Understand Payroll Options

By Dan Handle, 22 Jan 19:21

Managing your payroll is far more complicated than just having enough money in your bank account to pay your employees.

As a business owner, you must understand labor laws, be aware of the constantly changing employee tax regulations, and keep up with reporting requirements.

(Factoid: The first Congress set the president's paycheck at $25,000 a year. The vice president's pay was set at $5,000.)

In addition to that, you need to have a working knowledge of payroll tax deposits and returns, understand the various kinds of workers you may employ, know what "wage and compensation" actually means, and which taxes are employee-paid taxes vs. employer-paid.

Ready to run screaming? Fear not! Most of this information is covered under the Fair Labor Standards Act (FLSA), which sets the federal minimum wage requirement, defines what wages are, and establishes regulations for overtime pay and equal pay for equal work. It also establishes laws governing gratuity wages for employees who rely on tips as part of their compensation.

The good news with payroll management is that you have options available that may make your life (or at least managing payroll) easier. But first, the payroll basics.

Payroll Basics
In terms of payroll taxes, employees can fall into either one of two categories.

Common Law Employee: the average worker, someone who performs a service for the employer and the employer controls what he does and how he does it.

Statutory Employee: someone who works for the employer but does not fall under the guidelines of common law rules for federal withholding. A freelancer could be considered a statutory employee.

(Factoid: The first state minimum wage law went into effect in Massachusetts in 1913 - nearly 25 years before it went into effect nationally.)

Make certain you know which category each employee falls under, as the laws surrounding payroll (not to mention other legalities, including working with competitors) can be quite disparate.

Wages: You probably already know that a wage is the payment an employee gets for work rendered. But did you know that wages can include not only cash, but commissions, bonuses, vacation pay, sick pay and other fringes? Make certain your wage compensation package is spelled out in your employment agreement.

While we all know that employees are responsible for paying their own taxes (our take-home salary often bears little resemblance to the one we initially negotiated), you may not be aware that employers also carry a tax responsibility. Employee-paid taxes include federal income tax, social security and Medicare taxes (otherwise known as FICA), state and local income taxes and state unemployment insurance. Employer-paid taxes usually include federal and state, and possible some others. Each state varies, so make sure to check on the laws in your area. The employer is also responsible for deducting taxes from employees and depositing those taxes according to deposit schedules. See also How-To Understand Employee And Employer-Paid Taxes

(Factoid: The first nationwide minimum wage, established in 1938, was 25 cents/hour.)

Reports: In most small companies, especially start-ups, the employer usually handles the payroll, quarterly reports and annual reports in-house. This is usually done manually or on a payroll software program. Many large companies outsource payroll to streamline the tax process and ensure consistency.

Regardless of the size of your business, this can be very time-consuming. However, more and more small companies of 1-25 employees are beginning to realize the benefits of payroll outsourcing, which frees up valuable time that can be spent on furthering your business. Online payroll, in particular, can also be a wonderful timesaving option. Read more in How-To Understand Online Payroll.

See also How-To Choose A Payroll Service Provider.

Tags: payroll adp