Building a business can be tough! Especially when it may start as a side hustle…
What is Payroll?
Payroll is the list of employees your company pays on a regular basis. This usually includes the amount of money received for time work/tasks completed and may also include benefits distributions or even accrued time off. Payroll can be weekly, bi-weekly, bi-monthly, monthly or at some other regularity. There is also no official payroll “pay day” and every industry and every company may have different preferences.
Payroll can be done for salary-based employees or for hourly employees. It can be applied to full time workers, typically described as 40/hours per week for 50 weeks per year or parttime workers. Payroll is not done for contractors. Not sure the difference between an employee and a contractor? Read this post.
Payroll does not always include—but may include—benefits such as health care, transportation credit benefits, bonuses, commissions or other payments outside of direct wages.
In the United States, payroll always includes any withheld payroll tax.
What is Payroll Tax?
Payroll tax isn’t one single tax but represents several different taxes (depending on jurisdiction) on all wages for all employees at the local, state and federal level. Payroll taxes as a whole are paid both by the employee and by you, the employer. Read the below descriptions to see which taxes are paid by which group. The employer is in charge of accurately collecting and remitting all taxes even those the employer doesn’t pay directly.
Payroll taxes include:
- Federal Insurance Contributions Act (FICA): this tax includes social security and Medicare. This cost is shared by employer and employee 50/50. Even though the employee pays their 50%, you as the employer are required to collect and remit the funds. This tax is a percentage which may change due to government regulations.
- Federal Unemployment Tax Act (FUTA): employers pay into unemployment on a federal level that then pays for state-level unemployment filings.
- Federal Income Tax: the employee pays an income tax based on their income and withholding. Withholding amounts are specified typically when an employee is first hired on a W-4 form which asks the employee questions about if they file as single or married and if they have allowances or dependents. As the employer, you collect and remint the employee funds.
- State and Local Taxes: depending on your jurisdiction, you may be required to pay state, county, city or other municipality designation taxes. Similar to federal payroll taxes, the employee and the employer both pay a portion of this tax. As the employer, you are responsible for collecting and remitting the employee funds. These taxes are a percentage which may change due to various government regulations.
- State Unemployment Tax (SUTA): similar to FUTA, but at the state level. In most cases, the employer pays SUTA but, in a few states, some of this tax is paid by the employee.
Submitting Payroll Taxes
Most payroll tax payments along with corresponding payroll tax reporting documents are submitted on a quarterly basis to the various government agencies either via a hardcopy check or an online portal. Some government entities may require monthly or other frequencies. Check with your jurisdictions to confirm. Managing and correctly implementing payroll is often a function for a finance or human resources department.
Submitting payroll taxes late will usually incur a late fee and may incur additional penalties.
Online Payroll Software as a Service
While it is possible to file your own payroll returns with your local and/or state government as well as the federal government, most small businesses opt to use a service to assist. There are several online options that provide payroll services that do everything from onboarding new employees with their W-4 form to submitting payments and documents on your behalf.
Here are a few options:
Most online tools are easy to use and offer a variety of support levels for payroll and benefits administration. These will have corresponding payment options depending on your needs that generally range from ~$20-$150 per month depending on the number of employees.
If having employees is the best choice for your business, save yourself some time and potential hassle with missing deadlines or filing the wrong forms, and use a payroll software as a service. This is a much cheaper and easier alternative for a small business than doing it yourself or hiring an accountant or other finance/HR professional to help.