Answering Common Payroll Questions: A Guide for Business Owners

Even when payroll is outsourced, many business owners still want to understand the basics. For those doing payroll themselves, this knowledge becomes crucial. Here's a guide to seven common payroll questions, with practical, jargon-free explanations.

How Do I Classify Workers as Employees or Independent Contractors?

Classification is key. An employee works directly for you, following your schedule and using your tools. They're paid hourly or salaried, with taxes withheld. Contractors are self-directed, using their own tools, often paid per job, with no taxes withheld. Unsure about someone's classification? The IRS provides clear guidelines to help avoid future issues.

What Happens If I Misclassify a Worker?

Misclassifying a worker can lead to penalties, back taxes, and interest. You may owe unpaid payroll taxes or face issues with workers’ comp or labor laws. It’s easier and less risky to get classifications right from the start.

What Payroll Taxes Am I Responsible For?

Employers must withhold and pay federal income tax, Social Security and Medicare taxes, additional Medicare tax for certain incomes, federal and state unemployment taxes, and any applicable local taxes. Remember, Social Security and Medicare taxes must be matched by employers unless the employee has reached applicable wage limits.

How Do I Handle Overtime Pay Correctly?

Non-exempt employees (mainly hourly) must be paid “time and a half” for hours over 40 per week. Exempt employees, typically salaried managers, do not generally receive overtime, but this classification must meet specific criteria to avoid wage claims and penalties.

Can I Offer Benefits Through Payroll?

Yes, you can deduct health insurance, retirement plans, and other benefits through payroll. It's essential to manage pre-tax vs. post-tax deductions correctly, impacting IRS reporting and taxation.

What Payroll Records Do I Need to Keep and for How Long?

The IRS recommends retaining all payroll documents, such as timecards, pay stubs, W-2s, tax filings, and benefit deductions, for at least four years. These help in IRS reviews and addressing employee queries.

Understanding Payroll Coverages and Obligations

While payroll may seem daunting, grasping these foundational elements can prevent costly errors. Review your classifications, tax practices, and documentation regularly. If you're ever unsure, seek professional guidance.

By understanding these basics, business owners can manage their payroll more effectively and avoid common pitfalls. Support is available, so don’t hesitate to reach out for help when needed.