Payroll FAQs: Common Questions Clarified

Even when outsourcing payroll, many business owners want to grasp the basics. This understanding becomes essential for those managing payroll themselves. In this blog, we walk through seven of the most common payroll questions with practical, jargon-free explanations.

Can I Offer Benefits Through Payroll?

Yes! Payroll can include deductions for health insurance, retirement plans, and other employee benefits. It’s crucial to handle pre-tax versus post-tax deductions correctly, as this impacts how benefits are taxed and reported to the IRS.

What Payroll Taxes Am I Responsible For?

As an employer, you're responsible for withholding and paying several taxes, including:

• Federal income tax
• Social Security and Medicare taxes
• Additional Medicare tax (on income over a certain threshold)
• Federal and state unemployment taxes
• State and local taxes, if applicable

You must withhold Social Security and Medicare taxes from your employees' pay and match those amounts yourself unless the employee reaches the Social Security wage limit. Reporting deadlines vary making timely filing essential.

What Payroll Records Do I Need to Keep and for How Long?

The IRS suggests keeping all payroll-related documents such as timecards, pay stubs, W-2s, tax filings, and benefit deductions for at least four years. These records are essential for IRS reviews and addressing employee inquiries.

How Do I Handle Overtime Pay Correctly?

Non-exempt employees (typically hourly workers) must be paid "time and a half" for any hours over 40 in a week. Exempt employees (like salaried managers) may not be entitled to overtime, but the classification must meet certain criteria. Mistakes can lead to wage claims and penalties.

What Happens If I Misclassify a Worker?

Misclassifying a worker as a contractor instead of an employee can result in penalties, back taxes, and interest. You may owe unpaid payroll taxes or face issues with workers' comp or labor laws. Proper classification from the start is less risky and more efficient.

Do I Classify Workers As Employees or Independent Contractors?

To classify staff correctly, consider this: An employee works for you directly, under your schedule and conditions, and you provide the tools or training. They are paid a salary or hourly wage and have taxes withheld. An independent contractor is self-directed, uses their own tools, and often works with other clients, with no taxes withheld. If you're unsure, now's the time to get help. The IRS has clear guidelines.

How Do I Handle Overtime Pay Correctly?

Non-exempt employees must be paid "time and a half" for any hours over 40 in a week. Exempt employees may not qualify for overtime, but strict criteria must be met. Getting this wrong can lead to wage claims and penalties.

While payroll may seem daunting, understanding these foundational elements can prevent costly errors. Business owners should review their classifications, tax practices, and documentation policies. Support is always available for those in need.