Key Payroll FAQs: Answered

Even when outsourcing payroll, it's essential for business owners to grasp the basics. For those handling payroll themselves, understanding these fundamentals is even more crucial. Let's explore seven common payroll questions with practical, jargon-free answers.

Do I classify workers as employees or independent contractors?

Determining whether a worker is an employee or an independent contractor is vital. An employee is someone you directly manage, controlling how their work is done, and they typically receive a salary or hourly wage with taxes withheld from their paychecks. Independent contractors, on the other hand, are self-directed, use their own tools, decide how to complete tasks, and aren't subject to tax withholdings by the hiring business. Misclassification can lead to penalties, so understanding these definitions is crucial.

What happens if I misclassify a worker?

Incorrectly classifying an employee as a contractor can result in significant consequences, including penalties, back taxes, and interest. Ensuring accurate worker classification from the start can prevent these issues.

What payroll taxes am I responsible for?

Employers must withhold and pay several types of payroll taxes, including federal income tax, Social Security and Medicare taxes, and potentially state and local taxes. It's also important to match Social Security and Medicare taxes for employees, except when employees reach the annual Social Security wage limit.

What payroll records do I need to keep and for how long?

According to the IRS, employers should maintain payroll documents like timecards, pay stubs, and W-2s for at least four years. Keeping these records ensures compliance and provides information for any potential employee inquiries.

How do I handle overtime pay correctly?

Non-exempt employees are entitled to “time and a half” pay for hours worked over 40 in a week. It's essential to distinguish correctly between exempt and non-exempt employees to avoid wage claims and penalties.

Can I offer benefits through payroll?

Yes, payroll can incorporate deductions for benefits like health insurance and retirement plans. Proper handling of pre-tax and post-tax deductions affects how benefits are reported to the IRS.

Understanding these payroll elements can prevent costly errors. Business owners should review their practices and, if needed, seek professional advice to ensure compliance and efficiency.