You may be saying, “Why is she writing about payroll? I don’t have any employees!”
If you are a corporation, you do have an employee – yourself!
And perhaps you will have one or more employees sometime, no matter what your form of business is!
So what is an employee? Anyone who performs services for you is your employee if you can control how, when, and where the work will be done. Almost any person you hire is an employee. Even if you hire someone as a “temporary” or on a “trial basis,” they are an employee, and payroll tax, unemployment, worker’s compensation, and labor laws apply.
A person may qualify as an “independent contractor” if they have their own office, equipment, supplies, and insurance, holds themself out to others for work, and determines how and when the work will be done. A good example of an independent contractor is a plumber – you don’t tell them when or how to do their work, nor do you supply their tools and pay their insurance. Independent contractors used by an office include C.P.A.s, attorneys, and computer consultants.
If you do have employees, including yourself, you need to acquaint yourself with Federal labor laws and the labor laws of your State. This is particularly important for overtime, unemployment, worker’s compensation, and employees under the age of eighteen. You also need to understand the use of Form W-4, Income Tax Withholding, and Form I-9, Employment Eligibility Verification, to verify that each employee ids legally eligible to work in the United States. You also need a Federal and a State employer identification number.
It is imperative that you talk to your accountant before you hire an employee or incorporate yourself. (See Chapter 5, Forms of Business.)
Payroll Calculation
You have probably been an employee at some time in your life, so you know that the employer is required to withhold Social Security and Medicare from the employee’s gross pay, plus Federal and State income taxes, and possibly County and City income taxes, per the published withholding rates and tables.
Following are the definitions of various payroll terms and how these items are calculated.
Gross payroll – The total earnings of the employee, including employees paid a
salary (the same amount each pay period), hourly (including regular and overtime),
or by commission, during a certain period of time.
Social Security – A percent of gross payroll as dictated by the Federal government,
up to a maximum amount determined by the Federal government, deducted from the
employee’s gross pay.
Medicare – A percent of gross payroll as dictated by the Federal government,
deducted from the employee’s gross pay. At the time of the writing of this guide,
there is no maximum.
Federal withholding – Federal income taxes deducted from the employee’s gross
pay per the tables and schedules published by the Federal government.
State withholding – State income taxes deducted from the employee’s gross pay
per the tables and schedules published by the individual State governments.
Miscellaneous deductions – Various deductions not covered in this guide, including
health insurance, retirement and savings plans, and garnishments.
Net pay – Gross payroll less all of the deductions. It is the amount that the check is
actually written for.
Accurate and detailed payroll records are a critical part of your business. They are needed for payroll reports and for employees’ Forms W-2 at year end.
Owner’s Pay
As discussed in Chapter 5, Forms of Business, cash payments to owners are handled differently depending on the form of business. Owners of sole proprietorships and partners in partnerships withdraw cash as needed, and net income per person is based on the net income of the business, regardless of the owners’ withdrawals.
Owners, or stockholders, of corporations are paid a salary, handled like any other employee. Stockholders in S-corporations may withdraw amounts up to their share of the net income of the business as reported on their individual income tax returns, with no tax effect on the business or individual.
Payroll Reports
There are a number of payroll reports and tax payments that are required on a regular basis. The detail of the preparation of these reports will not be presented here, but the major reports will be listed to give the user of this guide the basic information needed on payroll reporting.
Quarterly – March 31, June 30, September 30, December 31
Federal Form 941 – Employer’s Quarterly Federal Tax Return. It reports the total
payroll for the quarter, Social Security due, Medicare due, and Federal income tax
withholding.
The Federal Form 941 requires payment by the employer of the employees’
Federal withholding, Social Security, and Medicare for the quarter. In addition, the
employer must pay an amount equal to the employees’ share of Social Security and
Medicare. If these amounts are over a certain amount, deposits must be made
monthly and sometimes more frequently.
State Form 941 – States that have income tax withholding have a State return
similar to the Federal Form 941. It is also filed at least quarterly and payment is
made. Some states require monthly returns and payment.
Federal unemployment tax – A quarterly payment is required of a percent of
gross payroll as dictated by the Federal government, up to an amount determined
by the Federal government. This is an expense to the employer, not the employee.
A quarterly report is not filed; Form 940 is filed annually.
State unemployment tax – Most states require a quarterly payment of a percent
of gross payroll as dictated by the State government, up to an amount determined
by the State government. This is usually an expense to the employer, although in
some states it is paid by the employee. A quarterly report may be required.
Annually
Federal Form 940 – Annual Federal Unemployment Tax Return. This return
reports the gross payroll and taxable payroll, and the Federal unemployment tax
liability for the year. It is due January 31. Some tax may be due also.
Forms W-2 – Wage and Tax Statement. These are the forms given to your
employees at the end of the year, summarizing their gross payroll and tax with-
holdings. They must be given to the employee by January 31; the Federal Copy
is due to the Federal government February 28; the State Copy is due per each
State’s schedule. No tax is due with this form. The cover page to the Federal
government is Form W-3, Transmittal of Wage and Tax Statements; each state
has its own cover form.
Forms 1099 – These forms are for non-employee compensation, interest, and
numerous other types of non-employee income that are out of the scope of this
guide. It should be noted that the form is due to the payee on January 31, and
to the Federal government on February 28. The cover page to the Federal
government is Form 1096, Annual Summary and Transmittal of U.S. Information
Returns.
Janet Redick | www.MicroBusinessBookkeeping.com
Janet Reddick graduated with high distinction from Iowa State University in 1972 with degrees in Accounting and Spanish.
She worked in public accounting for two years at a local C.P.A. firm where she had the opportunity to specialize in bookkeeping, accounting, and tax for family owned micro businesses.
She received her C.P.A. Certificate from the State of Nebraska in 1975.
Janet joined Northern Natural Gas Company in 1975, where she worked in internal auditing, financial planning, and contract administration.
In 1987 she formed her own accounting firm to provide accounting consultation to microbusinesses.