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Payroll is one of the most critical functions of your business. It is a part of your business that has to be absolutely accurate, timely and reliable.
As such, it is also a function you should not take on yourself unless you already have experience, or you are very accurate with math. There are just too many potential areas for making serious blunders if you are trying to learn on the job so to speak.
Too many new business owners make the critical mistake of thinking they can learn as they go with payroll. The risk for errors is great in this case. If you are in this camp, it might be a good idea to look at other options for handling this chore.
We offer some insights below which may be useful for determining how you need to best address this central business function.
Payroll is the process of paying your employees and deducting taxes on that income according to their individual tax classifications. You be must be adept with math, and you need to know where to find and how to use tax preparation information.
Use the 2019 Internal Revenue Service Publication 15-A to complete payroll taxes for the current year. These are the tax
withholding tables. You can use: https://www.irs.gov/pub/irs-prior/p15a--2019.pdf.
You use these tax tables to find withholding according to the amount of money earned and the number of dependents claimed.
For example, look at the top line within the chart on page 49. This is the weekly payroll period for single employees. The wage range is $0 to $73.
Now, look at the columns 0 through 10. This represents the number of dependents claimed. The tax rate is 7.65% for every column.
The amount of combined taxes withheld from 0 to $73 is none. The amount withheld from the next level down, $73 to $84 for someone with no dependents is $7.01.
The withholding amount for someone with 1 dependent is $6.01. Notice how those claiming no dependents pay more than those claiming dependents.
That is the government’s way of encouraging you to get married and have children. Yeah, I don’t like that either, but it is how we grow a labor force.
To use the chart, look at the tax information you have on file for each employee. Match the number of withholding claims to the earning level.
If the employee you are calculating taxes for is single, with 0 dependents, and has earned between $73 and $84, he owes $7.01.
If he is single, with 1 dependent, and has earned between $73 and $84, he owes $6.01. Write down the amount of withholding for each employee according to his tax form he has filed with you.
To use the table for single employees earning larger amounts, simply scroll down the table to the income range.
Locate the number of dependents claimed on the form he completed as part of his employment packet. Enter the amount listed where these two factors meet on the chart.
For instance, let’s say your single employee earned $510 for the week. He claimed 3 dependents. Look down the table roughly 2/3 of the way.
You will see the range, 502 to 513. Scroll across the chart at the 502-513 level to the 3 dependents column. The combined withholding amount is $57.82.
You subtract that $57.82 from $510 to get $452.18. His paycheck for the week, before making other deductions is $452.18. Do the same for every other single employee.
Notice I keep saying ‘single employee’. There are different tables for married employees. Make sure you switch tables when you start your married employees. Otherwise, you are entering the wrong amounts, and that will have to be corrected.
Use a Form 941 to file and pay your employee payroll taxes. Complete the form with all your employees and their tax information.
Total all taxes paid by all employees. Write the check, and mail it. You pay the tax quarterly according to the calendar.
For example, first quarter is January, February and March. Your payroll tax payment is due the last day of April for the first quarter, end of July for second quarter, end of October and end of January.
For most jobs with normal working hours, a full work week is 40 hours. Employees pay the agreed upon rate for those 40 hours per week.
When work time exceeds 40 hours, the company must pay overtime. Literally, the time you worked over the required 40 hours. If you worked 50 hours in one week, you are owed 40 hours regular pay plus 10 hours overtime.
If your employer operates under federal labor laws, or if the company grosses over half a million in annual sales, he is under the federal guidelines for how he pays employees.
The accepted overtime pay rate is 1.5 times your regular salary. If you normally earn $10 per hour, your overtime pay is $10 (1 time your salary) plus $5 (.5 times or half your salary). Your total overtime salary at $10 per hour is $15 per hour.
Here is how you are supposed to calculate overtime. Say the worker with the above hourly pay of $10 per hour works 50 hours in one week. He has worked his normal work week of 40 hours plus 10 hours overtime.
Do the math. $10 times 40 hours is $400. His 10 hours of overtime is calculated at 10 hours times $15. That totals $150. Add the $400 plus the $150, and you get $550.
Depending upon individual circumstances too confusing to go into with this short article, he then must pay taxes at the $550 level on the tax table discussed earlier.
Also, California counts overtime hours slightly differently. California requires the employer to pay overtime for any day the worker works more than 8 hours. This applies whether the worker works for more than 40 hours per week or not.
FICA stands for Federal Insurance Contributions Act. It consists of two taxes: Medicare and Social Security. This is the money you pay into the retirement system.
It is a split payment system. The employee pays 6.2%, and the employer pays the same for a total of 12.4 percent. To calculate it, multiply the gross amount earned (that is before other taxes).
If the salary is $50,000 annually, multiply 50,000 times 12.4 percent. That equals $6,200 per year. The employee share of that is $3,100.
Divide $3100 by 12 months and get 258.33 per month. Divide 258.33 by 4, number of weeks in a month and get $64.58 per week on a $50,000 annual salary.
This is yet another payroll deduction that must be calculated for each employee. There are additional payroll deductions too numerous to explain here.
This is a sampling of three common components to all payroll completions. Health insurance, IRA and voluntary deductions are others just to name a few.
Computer software can drastically reduce payroll preparation. It can save time and improve accuracy. Perhaps it can help you.
Here are three options for handling tax preparation for your small business. These are for those who have already decided that you do not want to take on this part of operating your new business.
If you classify the people who work for you as independent contractors, payroll taxes are their responsibility. You simply calculate total hours worked and pay them that amount. Send them a 1099 at the end of the year.
A 1099 is a tax form that simply states the amount of pretax income earned for the year. The independent contractor uses it to calculate his own taxes or have them done for him.
Another option is to hire a bookkeeper. You can even hire him or her part-time. You give them the figures and they complete the payroll process for you.
The last alternative is to purchase payroll software. Once you learn it and get it set up, it cuts payroll prep time substantially. QuickBooks and Intuit are two popular examples of payroll software for small business.
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