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Payroll Tips and Resources
Payroll 101
As an employer, you have specific payroll responsibilities that are required by government agencies. These
agencies can be federal, state or local. Some of these responsibilities include, but are not limited to, withholding amounts from your employees' compensation to cover income tax, social security, Medicare, and other payments. This section is designed to help familiarize you with the basic concepts of payroll management and introduce options to help make the process easier. Consult with a tax professional or accountant to address all of
your business' specific needs.
What is Payroll?
Payroll is the total amount of money paid by a business to its employees over a set amount of time.
What Are Payroll Taxes?
Any tax levied by a government agency on employees' wages, tips, and other compensation. The amounts
withheld by employers from employees' pay for federal income, social security, and Medicare taxes are
considered as trust fund taxes. They are referred to as trust fund taxes because the money is held in a special
trust fund for the U.S. government. Amounts withheld for state and local income taxes are held in trust for the
state or local government.
Your Responsibilities
Reporting and depositing payroll taxes to the appropriate agency in an accurate and timely manner is vital to your
business. Late or inaccurate deposits may result in penalties and interest charges. These complex payroll tax
requirements may seem intimidating but by learning a few simple concepts, you will be able to understand your
payroll responsibilities and choose the best method for meeting them.
Payroll Management Overview
Payroll Management generally includes activities in two major areas, Payroll Accounting and Payroll
Administration.
- Payroll Accounting consists of: 1) calculating the earnings of employees and the related withholding for
taxes and other deductions, 2) recording the results of payroll activities, and 3) preparing required tax
returns. The definition includes the task of reporting the results of payroll activities to the federal, state
and local tax agencies.
- Payroll Administration deals with the managerial aspects of maintaining a payroll, many of which are distinct from the accounting aspect of payroll. Payroll administration includes:
- Managing employee personnel and payroll information
- Compliance with federal, state and local employment laws
Understanding Payroll Management
There are several basic principles to good payroll management.
Generally Accepted Accounting Principles (GAAP)
Generally Accepted Accounting Principles represent the accounting standards that a payroll accountant must
follow. These standards play a major role in how the payroll professional accounts for business and payroll
transactions.
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Employers must comply with a number of employment tax rules and procedures contained in the Internal Revenue Code (IRC). The IRC addresses the following issues:
- Determining whether the federal tax coverage rules apply.
- Computing an employee's taxable wages.
- Calculating the amount of employment taxes to be withheld and paid by the employer.
- Depositing the correct amount of employment taxes with the government.
- Filing employment tax returns.
Employers who fail to comply with these requirements may be subject to civil and/or criminal tax penalties
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State and Local Requirements
Most of the 50 states require that state income taxes be withheld on employee earnings in the state in which they
work. States which do not have state income tax are:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Calculating and reporting tax withholding amounts requires familiarity with the laws of the state(s) in which your company operates. Check with your state for exact withholding requirements.
Some local entities (city, county,
parish or school district) also have withholding and reporting requirements. Like the states, most local entities that require reporting and withholding have patterned their laws after federal tax codes.
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Whether you calculate your payroll yourself, have it done by an accountant, or use an outside service, federal and
state laws dictate that reporting and payment of all payroll taxes are the employer's responsibility. Timeliness and
accuracy are of utmost importance, so the method you choose for doing payroll is a vital business decision.
Reliable software will help you make accurate calculations, but you still have to ensure that deposits are ade on
time. A reputable payroll service will generally make deposits for you and will share your liability for penalties if
errors occur.
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Hiring your first employee: Step-by-Step Guide
As your small business becomes successful, you may need to consider hiring one or more employees, and taking
on the responsibilities of payroll tax withholding and reporting.
Hiring an employee is fairly straightforward. However, if you're unfamiliar with the process and applicable laws,
you may find yourself subject to significant monetary penalties.
Below are the steps to follow when hiring your first employee:
Determining the Cost of Your Employee
Every hiring decision balances the benefits to your company in terms of increased capabilities, with the costs of
salary, benefits and payroll taxes for each employee. If you're ready to hire an employee, you have already
identified the benefits, but to make a practical business decision, you need to know exactly how much it will cost
to pay the employee's wages and benefits, as well as associated payroll taxes. Depending on your state and local
laws, payroll taxes can add for 20% or more to the total cost of hiring an employee.
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As soon as you have reached an agreement on pay and hired a new employee, there are several forms that need
to be filed with the federal and, in many cases, state governments. Each new employee must complete a W-4
form. The information on the W-4 form is the basis for calculating the amount of withholding for that employee.
Generally, employers do not need to send a copy of the W-4 to the IRS or state or local tax organization unless
the employee claims exempt from withholding or claims more than ten exemptions. You must keep the form W-4
on file for each active employee and retain these documents for four years after an employee is terminated.
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It is the employer's responsibility to remit trust fund taxes to the appropriate taxing agencies. Two key
components of this responsibility are accuracy in the dollar amounts of the deposits and timeliness in making
these deposits.
Money withheld from employees' paychecks should be deposited in an account separate from the account(s) that
the business uses for day-to-day operations.
Tax deposits must be made according to the IRS timetable. If an employer does not follow this timetable, the employer may be subject to penalties and interest for making late payroll tax deposits. The IRS does not treat the
matter of late payroll tax deposits lightly, given that the employer is a trustee of these employee taxes
The deposit schedule for federal payroll taxes is either semi-weekly or monthly depending on the size of the employer's total payroll. The size of an employer's payroll tax liability is based on the total amount of payroll taxes
paid during the 12-month period ending on June 30 of the prior year. This is called the lookback period. If the total payroll tax liability during the lookback period is greater than $50,000, then the employer must make deposits on a semiweekly basis. If it is less, then the employer must make deposits on a monthly basis.
Deposit requirements can be calculated using a worksheet. The following worksheet can be used to calculate
deposit requirements for the year 2001. Please note that each year the lookback period changes for determining
a company's deposit schedule.
| 2000 Lookback Period |
| Period |
Ending Date |
941 Return |
Tax Liability |
| 3rd Quarter 1999 |
September 30, 1999 |
Line 11 |
|
| 4th Quarter 1999 |
December 31, 1999 |
Line 11 |
|
| 1st Quarter 2000 |
March 31, 2000 |
Line 11 |
|
| 2nd Quarter 2000 |
June 30, 2000 |
Line 11 |
|
| TOTAL TAX LIABILITY |
| IMPORTANT: If the liability amount is zero (0), enter zero (0). |
| Semiweekly Depositor: |
*If the total tax liability is greater than $50,000 for the lookback period * You have processed a
payroll that incurred an accumulated tax liability of $100,000 or more from July 1, 1999 through the
present date. |
Other situations may impact the frequency in which employers must file their payroll taxes. For example,
whenever an employer has accumulated withholding of $100,000 or more on any one day during a deposit
period, the full amount must be deposited by the close of business on the next business day. The employer is
also then required to follow a semiweekly deposit schedule for the remainder of the year. Beginning 1/1/01, if an
employer's tax liability for the return period is less than $2,500 (line 13 of Form 941) the employer is not
required to make deposits and may pay the taxes with the return. For more information about special deposit
requirements, consult the IRS publication Circular E.
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Whether you calculate your payroll yourself, have it done by an accountant, or use an outside service, federal and
state laws dictate that reporting and payment of all payroll taxes are the employer's responsibility. Timeliness and
accuracy are of utmost importance, so the method you choose for doing payroll is a vital business decision.
Reliable software will help you make accurate calculations, but you still have to ensure that deposits are ade on
time. A reputable payroll service will generally make deposits for you and will share your liability for penalties if
errors occur.
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In addition to depositing money withheld from employees' pay and transmitting it to federal, state and local
governments, payroll tax amounts must be reported to the appropriate agencies. The employer must report the
earnings and withholding of each employee, payments made to contract workers, total withholding amounts and
other information. As with payments and deposits, there are penalties for late or incorrect reporting.
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Federal Forms
Forms Libraries
- State Forms Library
- IRS Forms and Publications Note: This link takes you to the IRS Web site.
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