Payroll The Nuts & Bolts

Transcription

1 Payroll The Nuts & Bolts A BASIC OVERVIEW OF THE PAYROLL PROCESS FOR SMALL BUSINESSES 2012 EDITION

2 2012 by Wyoming Entrepreneur Small Business Development Center 1000 E. University Ave., Dept Laramie, WY (307) This publication is based on So You ve Hired Your First Employee: A Basic Overview of the Payroll Process for the Small Business Owner, originally written by Lori Durden, Lynn Vos and Michelle Wright, of The University of Georgia, Small Business Development Center, 1180 E. Broad Street, Chicopee Complex, Athens, GA , (706) The content of So You ve Hired Your First Employee is intended for general information purposes only, and is not intended to constitute advice. Wyoming Entrepreneur SBDC tries to provide content that is true and accurate as of the date of writing; however, we give no assurance or warranty regarding the accuracy, timeliness, or applicability of any of the contents. For further assistance, seek appropriate, qualified professional advice. Wyoming Entrepreneur SBDC assumes no responsibility for the information contained herein and disclaims all liability with respect to that information. Wyoming Entrepreneur is funded in part through a cooperative agreement with the US Small Business Administration. Additional support comes from the Wyoming Business Council and the University of Wyoming. All opinions, conclusions or recommendations expressed are those of the author(s) and do not necessarily reflect the views of the SBA. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of the publisher. Printed in the United States of America by Wyoming Entrepreneur SBDC. Compiled and designed by Margie Rowell and Cindy Unger. 1

3 Payroll--- The Nuts & Bolts A BASIC OVERVIEW OF THE PAYROLL PROCESS FOR SMALL BUSINESSES TABLE OF CONTENTS Step 1: Obtain Necessary Federal & State Identification Numbers... 3 Federal Employment Identification Number Wyoming Unemployment and Workers Safety and Compensation Registration Step 2: Obtain Necessary Information from Employee Federal Form W-4 Federal Form I-9 Wyoming New Hire Form Step 3: Pay the Employee Determine Gross Pay Determine Net Pay Step 4: Pay and Report Taxes Federal From 941 Federal From 940 Wyoming Employment Taxes Step 5: Other Options Addendum: Doing Payroll with QuickBooks

4 Step 1: Obtain Necessary Federal & State Identification Numbers FEDERAL EMPLOYER IDENTIFICATION NUMBER (EIN) Employers are generally required to withhold, deposit and report employment taxes. To file Federal employment tax returns, you need an Employer Identification Number (EIN). Your EIN is a nine-digit number assigned by the IRS to identify the tax accounts of employers and certain other entities with no employees. Any company that has employees other than the owner must have an EIN. The EIN is specific to a business, just like the Social Security number is specific to an individual. If you have an EIN, that is your Taxpayer Identification Number (TIN). If you do not have an EIN, then your Social Security Number is your TIN. If you have more than one business, a separate EIN is required for each. Use your EIN on all items that you send to the IRS and the Social Security Administration (SSA). There are three ways to apply for an EIN. 1. The easiest/preferred way to apply for an EIN is to visit the IRS website and apply online, Your EIN will be issued and can be used immediately. However, it may take up to two weeks for the number to become part of the IRS electronic database if you are filing any electronic returns. 2. You may obtain an EIN immediately by telephone, Monday - Friday between 7:00 am and 10:00 pm Eastern time by calling the IRS at You may use this EIN immediately to file a paper return or make a tax payment. 3. You may obtain an EIN by completing Form SS-4, Application for Employer Identification Number at, and faxing or mailing it to the IRS for processing. See SAMPLE SS-4 on page 5. The IRS Fax numbers and service center addresses are listed in the Form SS-4 Instructions at EINs applied for by FAX will be issued within 4 business days. If you choose to mail your form, the number will be issued within 4 to 5 weeks. WYOMING UNEMPLOYMENT AND WORKERS SAFETY AND COMPENSATION ACCOUNT REGISTRATION To establish a required Wyoming Unemployment and Workers Safety and Compensation business account, register online at You can obtain the paper form to mail in (See SAMPLE WY1C1WC on pages 6-10) online at or by calling Unemployment at (307) or Workers Comp at (307)

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11 Step 2: Obtain Necessary Information from Employee MAINTAIN EMPLOYEE FILES THAT INCLUDE THE FOLLOWING INFORMATION: FEDERAL FORM W-4 Employees must fill out a Form W-4, Employee s Withholding Allowance Certificate when hired, so that the employer can withhold the correct amount of federal income tax from the employee s pay. A new Form W-4 is necessary whenever an employee s personal or financial situation changes. The form can be found online at See SAMPLE FORM W-4 on page 12. FEDERAL FORM I-9 All U.S. employers must complete and retain a Form I-9 for each individual hired in the United States. This includes citizens and noncitizens. The employer must examine the employment eligibility and identity document(s) presented by each employee to determine whether the document(s) reasonably appear to be genuine and relate to the individual, and record the document information on the Form I-9. This form is not filed, but must be retained by the employer either for three years after the date of hire or for one year after employment is terminated, whichever is later. We recommend that employers copy the documents used for the determination and retain those copies in the employee s personnel file. The form and detailed instructions can be found online at 9.pdf. See SAMPLE FORM I-9 on page 13. WYOMING NEW HIRE FORM In 1996, Congress enacted a law called the Personal Responsibility and Work Opportunity Reconciliation Act, or PRWORA, as part of Welfare Reform. This legislation requires employers in all states to report new hires and re-hires to a state directory. The purpose of new hire reporting is to speed up the child support income withholding order process, expedite child support collection from parents who change jobs frequently, and quickly locate non-custodial parents to help establish paternity and child support orders. New hire reports must be filed within 20 days of hire. Employers and/or labor organizations doing business in the State of Wyoming must report the following employees: New Employees: All employees who reside or work in the State of Wyoming to whom the employer anticipates paying earnings. Report employees, even if they work only one day and are terminated. Re-hires or Re-called Employees: Report re-hires, or employees returning to work after being laid off, furloughed, separated, granted a leave without pay, or terminated from employment. Employers must also report any employee who remains on the payroll during a break in service or gap in pay, and then returns to work. This includes teachers, substitutes, seasonal workers, etc. Temporary Employees: Temporary agencies must report any employee who they hire to report for an assignment. Employees need to be reported only once, upon hire; they do not need to be re-reported each time they report to a new client. They should be reported as a re-hire, if the worker has a break in service or gap in wages from your company. The form and detailed instructions can be found online at See SAMPLE Wyoming New Hire Reporting Form on page

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15 Step 3: Pay the Employee DETERMINE GROSS PAY In our example, John Jones is paid by the hour and receives his paycheck weekly. To determine his gross pay, we take the number of hours worked and multiply by his pay rate. Note: this example is based on the assumption that John has not worked over 40 hours per week, and is not eligible for overtime pay. John Jones hourly rate is $13 per hour and he works 40 hours per week. DETERMINE NET PAY 40 hours X $13.00 = $ (Gross Pay) All employees are subject to withholding of federal income taxes. Wyoming has no state income tax. Previously, employees and employers each paid half of the total Social Security (SSI) and Medicare (MC) taxes due. Due to the Temporary Payroll Tax Cut; however, the employee portion of the Social Security tax has been reduced to 4.2% for The employer is responsible for withholding both the employer and the employee contributions to SSI and M/C (13.3%) from the employee s paycheck. See SAMPLE EMPLOYEE PAYROLL WORKSHEET on page 17. Federal Withholding To determine the correct amount to withhold for Federal income taxes, you must refer to the Form W-4 originally completed by the employee. In our example, John Jones is married and claiming four allowances. Go to the latest version of IRS Publication 15, Employer s Tax Guide, (obtain from You must then find the correct withholding table, based on the pay period. You can choose from weekly, biweekly, semi-monthly, monthly and daily/miscellaneous pay periods. In our example we used the Married Persons - Weekly Payroll Period. With gross weekly income of $520 and three allowances, John is subject to $8 Federal Income Tax withholding for this pay period. See SAMPLE WITHHOLDING TABLE on page 16. FICA Taxes ***NOTE: 2013 Employee responsibility for social security tax goes to 6.2% from 4.2% beginning January 1, 2013**** Social Security and Medicare comprise FICA taxes. Total Social Security tax is currently10.4% of gross wages. The employer is responsible for paying 6.2%, and the employee is responsible for paying 4.2%(2013=6.2%) of this amount. Up to $110,100 of an employee s gross wages is subject to this tax. Total Medicare tax is currently 2.9% of gross wages. The employer is responsible for paying 1.45%, and the employee is responsible for paying 1.45% of this tax, with no wage limit. Thus, for most employees, 5.65% is the standard percentage for combined FICA taxes. John Jones employer-paid FICA taxes are as follows: Social Security: $520 X 6.2% = $32.24 Medicare: $520 X 1.45% = 7.54 TOTAL FICA $

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17 EMPLOYEE PAYROLL WORKSHEET NAME: John Jones SOCIAL SECURITY #: ADDRESS: 821 Chestnut Street, Casper, WY FILING STATUS: Married ALLOWANCES: 4 DATE HIRED: 5/7/2012 PAY RATE: $13/hour PHONE NUMBER: (307) DA T E CHE CK # HOURS GR OS S FE D E R AL EM PL O YEE EM PL O YEE NE T W A GE S WA G E S W/ H SSI 4. 2% M/ C % 5/11/ $ $8.00 $21.84 $7.54 $ /21/ $ $8.00 $21.84 $7.54 $ Monthly Total 80 $ $16.00 $43.68 $15.08 $

18 Step 4: Pay and Report Taxes To correctly pay and/or report your federal tax liabilities, create a monthly recap sheet of your employees gross wages and withholding amounts. The following table is an example of a monthly employee recap sheet, including calculations for the monthly tax liabilities owed by the employer. In the preceding section, we explained how to determine employee net pay. The employer must match the employee 4.2% of gross wages contribution to Social Security with 6.2%, and both employer and employee must contribute 1.45% of gross wages to Medicare. In addition, the employer has to pay 100% of State and Federal Unemployment Taxes and Workers Compensation Insurance for each employee. These taxes will be explained in more detail on the following pages. EMPLOYEE PAYROLL WORKSHEET SBDC Landscaping Company Payroll Recap May 2012 Monthly Employee Recap FICA TAXES MATCHING FICA Monthly Employer Taxes Employee 2013=6.2% Total Gross Federal SSI M/C Net SSI M/C SUTA* FUTA* W/C* Employer Wages W/H 4.2% 1.45% Wages 6.2% 1.45% 2.5%.6% 4.77% Taxes John Jones $1, $24.00 $ $28.65 $1, $ $28.65 $49.40 $11.86 $94.26 $ Tommy Rowe Sharon Parker $1, $44.00 $ $15.08 $ $ $15.08 $26.00 $ 6.24 $49.61 $ $ $53.00 $ $ 7.54 $ $ $ 7.54 $13.00 $ 3.12 $24.80 $ MONTHLY TOTALS $3, $ $ $51.27 $3, $ $51.27 $88.40 $21.22 $ $ *FUTA Federal Unemployment Tax. Funds state workforce agencies. *SUTA State Unemployment Tax. *W/C Workers Compensation Insurance FEDERAL FORM 941 As described above, Federal Tax Deposits (FTDs) reported on Form 941 are composed of the employee s total federal income tax withholding and both the employee and employer portions of Social Security, and Medicare taxes (13.3% of gross wages). The employee portion (5.65% of gross wages) consists of funds deducted from the employee s wages, held in trust by the employer for payment to the Federal government. Generally, most start-up small business owners will be required to deposit these taxes on a monthly basis via the Electronic Federal Tax Payment System (EFTPS) on manually with the 941V Form that is attached to that report. The 941 form reconciles your monthly deposits with your total payroll, and is due quarterly, by the last day of the month following the end of the quarter. EFTPS enables businesses to make all federal tax payments electronically, via the Internet or phone. For information about enrolling in the EFTPS system, visit The IRS advises that you can access the system to make tax payment instructions by 8:00 PM, at least one calendar day in advance of the tax due date to instruct EFTPS to move the funds from your account to the Treasury s account for payment of your federal taxes. We suggest scheduling the payment at least 2 full banking days prior to the payment deadline. If the 15th of the month falls on a Monday, or if there is a holiday between your scheduling date and the payment date, be very careful that there are at least 2 full BANKING DAYS available between your scheduling date and the due date to have your payment accepted. The funds will not move from your account until the date you schedule the transfer. You can initiate your tax payment anytime and schedule tax payments in advance. Scheduled payments can be 19

19 changed or changed or cancelled up to two business days in advance of the scheduled payment date. Per our recap worksheet above, the SBDC Landscaping Company owes $ for the month of May. These taxes should be paid by the 15th of the month. The company will make monthly deposits each month of the 2nd quarter, April, May and June. Then, employers must file a Quarterly 941 Return, due by the last day of the month following the end of the quarter (July 31 for this quarter). If your annual Federal tax liability is $1,000 or less, the IRS will notify you in writing that you are allowed to report on Form 944, Employers Annual Tax Return, changing your reporting requirements from quarterly to annually. The information used to calculate the figures on the 941 return is based on the quarterly totals of the Monthly Employee Recap Sheet (see page 21). Because SBDC Landscaping Company made all monthly deposits correctly and on time, no payment is due with the 941 return. The return is mailed to the Internal Revenue Service. You can find the address of the IRS center for your area in the instructions for Form 941. See SAMPLE FORM 941 on page Total gross second quarter wages are $11,648. Total federal income tax withheld is $ Check your total Social Security Tax and Medicare withholding (employer + employee contribution) to be sure your total equals 13.3% of gross wages. Total quarterly deposits should equal total FICA withheld, plus federal income tax withheld on your recap sheet. Additional information about Federal tax deposits can be found in IRS Publication 15, FEDERAL FORM 940 The Form 940 Annual Return is used to compute your Federal Unemployment Tax (FUTA) liability and report any deposits made during the year. Together with state unemployment tax systems, the FUTA tax provides funds for paying unemployment compensation to workers who have lost their jobs. Most employers pay both a federal and a state unemployment tax. To be eligible for the reduced rate of.06%, your Wyoming unemployment taxes must be paid by January 31 of the following year, and all wages subject to the FUTA tax must also be subject to state unemployment tax. Only employers pay FUTA tax. Do not collect or deduct FUTA tax from employee wages. The FUTA tax applies to the first $7,000 you pay to each employee during a calendar year, after subtracting any payments exempt from FUTA tax. Federal Form 940 is the only employment tax report that is due annually, on January 31 of the year following the tax year. Normally, employers must remit the annual payment of the FUTA tax with that report. The only exception to this rule is if your cumulative FUTA tax liability reaches $500. At the point where you owe $500 or more, you must deposit at least one quarterly payment. Deposit any quarterly FUTA tax payments by the last day of the month after the end of the quarter. If your FUTA tax for the fourth quarter (plus any undeposited amounts from earlier quarters) is more than $500, deposit the entire amount by January 31, If it is $500 or less, you can either do a quarterly deposit for the entire amount by January 31, 2013, or pay it with your Form 940 by January 31, Many employers choose to deposit FUTA taxes on a quarterly basis to insure that they are always in compliance. We recommend that you pay quarterly, as well. A sample of the 940 annual report is located on pages of this manual. Deposit your FUTA taxes via EFTPS or manually with Form 940V attached to the Form 940, just as you deposit your other federal withholding taxes. The SBDC Landscaping Company would owe $69.88 in FUTA taxes for the 2nd quarter. NOTE: At the time of publication, the 2012 Form 940 was not yet available. Thus, the 2011 version is enclosed. Businesses can subscribe to or print the IRS 2012 Tax Calendar at 20

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22 EMPLOYEE QUARTERLY PAYROLL WORKSHEET SBDC Landscaping Company *FUTA Federal Unemployment Tax. Funds state workforce 2 nd Quarter Payroll Recap Worksheet agencies. Applies to first $7,000 earned per employee Per year. Maximum tax is $56/employee. *SUTA - State Unemployment Tax. Applies to first $21,500 earned only. *W/C Workers Compensation Insurance APRIL 2012 PAYROLL Monthly Employee Recap Monthly Employer Taxes FICA Taxes Matching FICA Employee Gross Wages Federal W/H SSI 4.2% M/C 1.45% Net Wages SSI 6.2% M/C 1.45% SUTA* 2.5% FUTA*.06% W/C* 4.77% Total Employer Taxes Tommy Rowe $ $22.00 $21.84 $7.54 $ $32.24 $7.54 $13.00 $3.12 $24.80 $80.70 Sharon Parker $1, $ $43.68 $15.08 $ $64.48 $15.08 $26.00 $6.24 $49.61 $ Monthly Total $1,560 $ $65.52 $22.62 $1, $96.72 $22.62 $39.00 $9.36 $74.41 $ MAY 2012 PAYROLL Monthly Employee Recap Monthly Employer Taxes FICA Taxes Matching FICA Employee Gross Wages Federal W/H SSI 4.2% M/C 1.45% Net Wage SSI 6.2% M/C 1.45% SUTA* 2.5% FUTA*.06% W/C* 4.77% Total Employer Taxes John Jones $1, $27.00 $ $28.65 $1, $ $28.65 $49.40 $11.86 $94.26 $ Tommy Rowe $1, $44.00 $ $15.08 $ $ $15.08 $26.00 $ 6.24 $49.61 $ Sharon Parker $ $53.00 $ $ 7.54 $ $ $ 7.54 $13.00 $ 3.12 $24.80 $ Monthly Total $3, $ $ $51.27 $3, $ $51.27 $88.40 $21.22 $ $ JUNE 2012 PAYROLL Monthly Employee Recap Monthly Employer Taxes FICA Taxes Matching FICA Employee Gross Wages Federal W/H SSI 4.2% M/C 1.45% Net Wages SSI 6.2% M/C 1.45% SUTA* 2.5% FUTA*.06% W/C* 4.77% Total Employer Taxes John Jones $2,184 $ $ $31.67 $2, $ $31.67 $54.60 $13.10 $ $ Tommy Rowe $2,184 $ $ $31.67 $1, $ $31.67 $54.60 $13.10 $ $ Sharon Parker $2,184 $ $ $31.67 $1, $ $31.67 $54.60 $13.10 $ $ Monthly Total $6,552 $ $ $95.01 $5, $ $95.01 $ $39.30 $ $1, ND QUARTER TOTALS Monthly Employee Recap FICA Taxes Monthly Employer Taxes Matching FICA Employee Gross Wages Federal W/H SSI 4.2% M/C 1.45% Net Wages SSI 6.2% M/C 1.45% SUTA* 2.5% FUTA*.06% W/C* 4.77% Total Employer Taxes John Jones $4,160 $ $ $60.32 $3, $ $60.32 $ $24.96 $ $ Tommy Rowe $3,744 $ $ $54.29 $3, $ $54.29 $ $22.46 $ $ Sharon Parker $3,744 $ $ $54.29 $3, $ $54.29 $ $22.46 $ $ Quarter Total $11,648 $ $ $ $10, $ $ $ $69.88 $ $1,

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25 WYOMING EMPLOYMENT TAXES Unemployment Insurance pays temporary benefits to workers who lose a job through no fault of their own, are seeking work, and meet definite requirements. Worker s Compensation Insurance covers employee expenses if injured on the job. Both programs are administered by the Wyoming Department of Employment and are financed entirely by employers. Wyoming Unemployment Taxes and Worker s Compensation Insurance premiums will generally be submitted quarterly for most start-up businesses. Both payments can be submitted on a simple form that will be sent to employers after they have registered with the Department. New employers will be issued both an Unemployment Insurance and a Worker s Comp rating, which may be revised yearly by the Department, depending on the claim history of the business. See sample form on pages Note that both sides of the form should be completed. Once an employer has filed manually the first quarter, he can upload employment information from an Excel template to the online WIRE system, which will automatically calculate your payment. Employers can then print the payment coupon to mail in with payment. If you are a Corporate Officer, LLC Member, Sole Proprietor, or Business Partner, you can request Worker s Compensation Insurance coverage, provided that you are registered with the Department of Employment and have employees. WC coverage for an owner must be requested IN WRITING on an affidavit of coverage provided by the Division. Call (307) to request an affidavit of coverage. 26

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28 Step 5: Other Options The preceding pages should provide a general understanding of what your payroll obligations are as an employer, how to calculate them, and to whom and when to pay them. Your next decision will be whether to do your own payroll manually, use accounting software, use a payroll service, or have a CPA or bookkeeper handle the task for you. Hiring an Accountant/Bookkeeper If you already use either an accountant or bookkeeper to do your tax returns, you may want to discuss the idea of having them do your payroll. These professionals can offer you a number of different levels or service. You may decide to have them calculate the payroll checks and taxes, and process the tax returns. Alternatively, you may decide to have them process the tax returns only. Charges for these services will depend on the level of service and the number of employees. Using a Payroll Service There are many companies who offer payroll services. Referrals from other business owners are a good way to find a reliable service. These payroll services will process the payroll checks, make all employment tax deposits, and file all the employment tax returns. You are still legally responsible for the taxes, and government agencies will contact you regarding any problems. Always verify the hours, gross pay and net check amounts before the payroll checks are cut by the service, in case of mistakes. Rates are usually based on the number of employees. There may also be a monthly administrative fee. Be sure you are aware of all the costs of using the service before signing any contract. Using an Employee Leasing Service With an Employee Leasing Service, you hire and fire the employees and determine the pay rate for the employee, unlike with a temporary service. The employee is then turned over to the leasing service and becomes their employee. You submit the time sheets for each employee to the service and are then billed for the total payroll, taxes, worker s compensation insurance and the administrative fee. The leasing company pays the employees, pays all associated payroll taxes, and files all payroll returns and forms. They are responsible for the timely submission of payments and reports. You should; however, still verify the payroll reports before the checks are cut. Rates for this type of service are usually based on the number of employees, worker s compensation rates, and will include an administrative service fee. Using Accounting Software There are many accounting software packages available and most include a payroll module. If you want to have the taxes calculated by the software and access the forms through the software, there is usually an annual subscription fee. Most software packages will allow you to calculate the taxes manually, with no additional cost. The more popular accounting software packages include QuickBooks and Peachtree. 29

29 Addendum: Doing Payroll with QuickBooks Please note, the following instructions are intended for individuals using QuickBooks software. If you are using QuickBooks Payroll Online, the procedure is somewhat different. 30