Small Business Payroll – Part 2

How to Do Payroll

Do it yourself: If you have more time than money, this might be your only choice. This is the most time consuming option and also most like to result in penalties.

Do it yourself (with help): Most commercial accounting software offers a payroll add-on. The time saved on calculations and tracking and reminders about deadlines should more than offset the fee. You still have to make sure the forms get filed on time, but the software should at least complete them for you.

Outsource: Pay someone else to do it for you. This is the option I recommend (and use myself). It will cost a little more than the other choices, but the time savings and peace of mind is definitely worth it. All you do is submit time or salary information and the payroll company does almost everything else. If you offer direct deposit, you don't even need to pass out checks!

Catch Mistakes Early

Because of the serious and complex nature of small business payroll, you should double check everything on a quarterly basis. This is an example of the spreadsheet

I use: Quarterly Payroll Worksheet.zip (right click to download)It compares the payroll related general ledger balances with the payroll and unemployment tax returns. If your books match the tax returns, then you are probably in good shape. If not, then go back and find the difference. Another nice thing about outsourcing is that you can usually assume the tax returns are accurate and that you are either missing a transaction or need to reclassify something on your books.

• Additional Small Business Payroll Resource
• Be sure to keep these on hand for each of your employees

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Small Business Payroll – Part 1

Small business payroll is a very important and potentially time consuming task.

Why is small business payroll so important?

Employees don't stay very long if they aren't being paid on a timely basis

Payroll tax penalties can be substantial

The penalties on federal payroll taxes are especially harsh. If your employees don't get paid on time, they'll probably just quit, but the IRS doesn't mess around when they go after unpaid Social Security and Medicare taxes. They'll go after the owner personally and anyone else who was a signer on the checking account, and the penalties can sometimes be as much as the taxes owed in the first place. If money is tight, federal payroll taxes are the one bill you don't want to miss. Employee turnover can be expensive too when you consider the cost of recruiting and training a new employee. Since you have to pay them anyway, you might as well make sure they get their checks on time.

Why does it take so much time?

Small business payroll services aren’t technically difficult, but there are A LOT of moving parts and that's where people get in trouble. Here is a list of things you have to do for each employee every payday:

• Calculate gross wages
• Calculate federal income tax withholding
• Calculate state income tax withholding (if applicable)Calculate employee Social Security and Medicare withholding
• Write a check for the net pay (Gross wages - Withholding)Prepare a legal pay stub that shows year to date wages and taxes
• Calculate employer Social Security and Medicare
• Calculate employer federal and state unemployment taxes
• Track all off these items for government reporting
• Then...Pay the FICA and federal withholding taxes (either monthly or semiweekly depending on your assigned deposit schedule)
• Pay state withholding (usually monthly - check with your state for details)
• Pay state unemployment taxes (again, check with your state for payment frequency, but this is probably a quarterly tax)
• Pay federal unemployment taxes (annually, unless you owe more than $500, then you pay quarterly)File Form 941 for federal payroll taxes every quarter
• File your state unemployment tax return every quarter (and possibly a wage detail report as well)
• File the annual Form 940 for federal unemployment taxes
• Prepare annual W-2's for you employees
• Mail copies of the W-2's with Form W-3 to the government
• If you withhold state income tax, there is probably an annual form that too
• Once you have the appropriate tax tables, forms and a calculator, none of these items are difficult or time consuming on their own. The challenge is tracking everything over the course of year and keeping the deadlines straight, and when you add them up, you can easily spend over an entire working week on payroll compliance every year.

For more detail about Small Business Payroll click part 2 article

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