Successfully managing payroll can be challenging and questions are bound to arise during the process. While it’s impossible to cover every aspect of this important responsibility, here are some of the most common queries fielded by payroll experts:
What are some valuable payroll terms to know?
- Deductions: Wages withheld from an employee's earnings for the purpose of paying taxes, benefits and other mandatory items (e.g., garnishments) or voluntary contributions (e.g., charitable donations)
- Gross pay: Total pay before taxes and deductions
- Net pay: Take-home pay after taxes and deductions are subtracted from earnings
- Compensation: All monetary and non-monetary payments, including the value of benefits, received by an employee
- Pay stub: A summary document that demonstrates the factors – number of hours worked, the rates paid for those hours, deductions for taxes and benefits, etc. – that were used to calculate an employee’s pay for a designated period of time
How often should I run payroll?
State laws and collective bargaining agreements with unions may dictate how often a business must run payroll. If such requirements don’t apply to them, employers may choose a payroll calendar that works best for them and their employees. The most common are weekly, bi-weekly and semi-monthly.
How should I pay my employees?
Payment options include paycheck, direct deposit and paycard. However, some states have strict rules regarding electronic and alternative forms of payment, which must be followed.
What is an EIN and where do I find my company’s EIN?
An Employer Identification Number, otherwise known as a Federal Tax Identification Number, is necessary for businesses to pay taxes. After they apply for one, employers receive a confirmation letter from the IRS with their specific number. EINs also commonly appear on business loan applications and credit reports.
What tax forms do I need to submit that are related to payroll?
Reporting requirements vary based on the size of the business and how it’s structured. Some examples include:
- Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return
- Form 941, Employer's Quarterly Federal Tax Return
- Form 944, Employer's Annual Federal Tax Return
- Form W-2, Wage and Tax Statement
What are pretax deductions?
Pretax deductions are generally employee contributions to employer-sponsored benefits, such as group health insurance, group term life insurance, some types of retirement savings plans, etc. They are advantageous because they lower an employee’s taxable income.
What is the difference between exempt and nonexempt?
Under federal law, employees who are non-exempt from the Fair Labor Standards Act (FLSA) are entitled to at least minimum wage and overtime pay at a rate of 1.5 times their regular rate of pay if they work more than 40 hours in a workweek. Exempt employees, on the other hand, are not protected by the FLSA. They typically earn a salary and work in administrative, executive or professional roles that pass the Department of Labor’s duties test. Note, however, that some states require overtime to be paid if a certain amount of hours are worked each day and at rates exceeding 1.5 times the employee’s regular rate of pay. Learn more about the differences between exempt and non-exempt employees.
What is unemployment tax?
The Federal and State Unemployment Tax Acts (FUTA and SUTA, respectively) fund the unemployment programs that provide temporary income to employees who lose their job through no fault of their own. FUTA is not a payroll deduction; it is paid for only by employers. The same goes for SUTA, except for a few states where employees must also contribute to the program.
What taxes need to be withheld from employee wages?
Employee tax withholdings vary based on state jurisdictions. Examples include, but are not limited to:
- Federal income tax
- Federal Insurance Contribution Act (FICA) taxes
- State and local income taxes (if applicable)
- State unemployment tax (some states)
What is supplemental pay?
Supplemental pay is compensation paid in amounts that differ from an employee’s regular hourly, daily or similar periodic rate. Bonuses, commissions, overtime pay and severance pay are just a few examples. This type of compensation may be taxed differently than an employee’s base wage and salary, so it’s important to know the latest federal and state supplemental tax rates, withholding methods and requirements.
What is the difference between overtime, holiday and regular pay?
The difference between regular, overtime and holiday pay is as follows:
- Regular pay – A non-exempt employee’s regular rate of pay must not be less than the highest federal minimum wage, state minimum wage or local minimum wage in effect when work is performed.
- Overtime pay – As defined by the FLSA, overtime pay is 1.5 times the employee’s regular rate of pay for each hour worked over 40 in a workweek. States may have their own overtime standards, which employers must follow.
- Holiday pay – Although not a federal requirement, some employers will offer their employees paid time off for holidays or pay them at higher rates for time worked on a holiday.
What tax forms do I need to enter an employee into my payroll system?
When onboarding a new employee for payroll, employers need the individual’s Social Security Number, as well as completed and signed copies of Form I-9, Employment Eligibility Verification and Form W-4, Employee’s Withholding Certificate.
How do I calculate payroll taxes?
Federal payroll taxes are calculated as follows:
- Social Security – Both employers and employees pay 6.2% up to a wage base limit of $142,800 (as of 2021).
- Medicare – Both employers and employees pay 1.45% of all taxable wages.
- Additional Medicare – Employees who make over $200,000 as an individual or $250,000 as a married couple are subject to an additional 0.9% tax for Medicare.
- Federal Unemployment – Employers pay 6%, or 0.6% with credit reduction, of the first $7,000 that each employee earns.
States may have additional payroll taxes that employers and/or employees must pay.
How long do I keep payroll records?
The FLSA requires employers with non-exempt employees to keep payroll records for at least three years and retain timesheets and other documents that show how wages were calculated for at least two years. What’s more, the IRS mandates that businesses keep payroll tax records for four years and some states have payroll recordkeeping requirements with longer lengths of retention than the federal government.
How can I avoid having to do all this myself?
Organizations that need help managing payroll have several options available to them, ranging from basic payroll software to more comprehensive solutions, like payroll outsourcing and co-employment. Such services help employers improve payroll compliance and save time so they can focus more attention on growth-related business objectives.
This article is intended to be used as a starting point in analyzing an employer’s payroll obligations and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.