Even when businesses outsource their payroll functions, understanding the basics remains essential for owners. For those handling payroll tasks independently, this knowledge proves even more crucial. In this blog post, we explore seven common payroll questions and provide straightforward answers to help navigate this critical area.

Can I Offer Benefits Through Payroll?

Yes, payroll can be used to manage deductions for health insurance, retirement plans, and other benefits. It's important to handle pre-tax versus post-tax deductions properly to ensure accurate taxation and reporting to the IRS.

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

The IRS recommends maintaining all payroll-related documents — such as timecards, pay stubs, W-2s, tax filings, and benefit deductions — for a minimum of four years. These records not only provide vital information for IRS audits but also assist in resolving employee inquiries.

How Do I Handle Overtime Pay Correctly?

Non-exempt employees (usually hourly workers) must receive “time and a half” for any hours worked beyond 40 in a week. Exempt employees (like salaried managers) may not qualify for overtime pay, contingent upon meeting specific criteria. Errors in handling overtime can lead to wage claims and penalties.

Do I Classify Workers as Employees or Independent Contractors?

Classifying staff correctly is crucial. An employee works under your direct supervision with a set schedule and tasks, is paid a salary or hourly rate, and has taxes deducted from their checks. On the other hand, independent contractors have more autonomy, set their own schedules, provide their tools, and typically aren't taxed through payroll.

What Payroll Taxes Am I Responsible For?

As an employer, you're responsible for withholding and paying several taxes:

• Federal income tax
• Social Security and Medicare taxes (matched by the employer)
• Additional Medicare tax on income over a certain threshold
• Federal and state unemployment taxes
• State and local taxes, where applicable

Meeting varied reporting deadlines is crucial in this area.

What Happens If I Misclassify a Worker?

Misclassifying an employee as a contractor can result in penalties, back taxes, interest, and possibly unpaid payroll taxes. It might also cause issues with workers' compensation and labor laws. Getting classifications right from the start is simpler and avoids these risks.

Although payroll can initially seem daunting, understanding these critical areas minimizes costly errors. Regularly reviewing classifications, tax practices, and documentation policies is beneficial. Remember, support is available if you need assistance.