A big milestone for the small business owner is hiring their first employees. With that comes some big responsibilities; not only providing a livelihood for someone, but doing it within regulations, with tact, and on time. It’s no wonder there are a ton of questions that roll in about the subject of payroll. Our clients enjoy payroll being handled as part of their outsourced accounting engagements, but we answer the more common questions for those still navigating it by themselves.
If you need some extra guidance on payroll, or just want to make sure you are operating in the best capacity, we’ve got you covered. Here’s your roundup of our recent payroll queries, and links to additional reading, right here.
You're small, have just a few part time employees - why not just shoot them their payment through Venmo? You're modern and tech savvy, right? But wait - there are more things to consider when this is your thinking.
Are they contractors or employees? The IRS has very specific guidance surrounding what is an employee and what is a contractor. At the end of the day it is about control and oversight as it pertains to working hours and work in general. If you are dictating this, they should be a W2 employee. However, if they are more of a contractor, they should be defined as such and will need a W9, so they get a 1099 from you in January. If they are a W2 employee, they should be paid via a payroll system using direct deposit. We like to use Gusto and recommend it to our clients as well.
If this is a contractor and you owe them money, like $200 and it’s easier to get them paid quickly this way, the short answer is yes - do it. However, from an operational standpoint, you should not go down the route of Venmo being your go-to payment system. It’s not very scalable, or super professional, for that matter. If you do pay them through Venmo, you need to ensure it is synced with your online accounting system, like QuickBooks Online. The payment outflow should also be coded to that vendor/contractor. That way, the amount(s) paid and vendor info go into the 1099 that is processed at the end of the year.
Back to that W2 employee. If that’s the route you are going, make sure and get set up with a Gusto account. That will help facilitate the direct deposit and will handle the taxes, filings, etc behind the scenes. Way easier and super professional.
We don’t recommend this, but if it is the best fit for your situation, make sure to take the steps to record the transactions. This will keep your books up to speed, and will help with the 1099 process.
Remote workers are a regular part of business nowadays. Getting them up to speed as part of the team can be challenging, especially when it comes to onboarding and setting them up with your systems and processes. Another added challenge is when the new employee is not in the same state as your business headquarters. At the same time, you can’t afford to lose great talent, just because they aren't in your state.
This may sound slightly repetitive, but it applies to most payroll scenarios; get a good provider, like Gusto. Being able to be compliant and take manual record keeping, reporting, and tasks off your plate are huge. No one needs to be a payroll hero and add hours of confusing work in an attempt to save money. Systems like this are scalable and help business owners stay on track and in compliance.
With that modern payroll system, you will be able to manage the payroll nuances from state to state a lot easier. Gusto walks you through the new items according to the new employee’s state. It essentially recognizes it and says, “hey this person is in PA. Here’s what you need to know and sign up for.” It will guide you to the areas where you need accounts or set up, like a payroll provider/employer in that state, a Department of Revenue account, etc. Once you’ve set up all of the appropriate accounts and entered your info, you will be able to have that employee in your account getting paid and taxed accordingly. They will then file and pay on your behalf. Nice. If you need additional assistance getting some of these accounts set up, they even have help at the ready you can take advantage of.
Modern systems help in the process of setting up remote employee payroll, but it doesn’t make it less complicated. Each state has its own complexities. For example, there's no personal income tax in Florida, but Pennsylvania has a withholding tax and local taxes to worry about. It makes sense to have access to a provider like Gusto that helps streamline things, but also acts as a one stop payroll resource with lots of help available.
The old school way of onboarding an employee is to pay them on a delayed schedule. You start working for a new company, but can wait weeks before seeing the fruits of your labor. This can be a planned cash management strategy, or just a company blindly following an archaic industry standard. At the end of the day, you don’t have to do it.
If you’re not familiar with what we are referring to, here's an example. We are referring to paying in arrears, or paying an employee working the pay period from December 1st through the 15th on December 31st. That’s a 15 day delay between the work they did and when the money shows up in the account.
Accountfully has a lot of employees. Our employees that work the first through the 15th of a month will get paid on the 15th. I mean, why put one of your biggest assets in a bind financially? Don’t treat them like a vendor that you can string along a bit to meet cash flow needs.
In the case of your hourly employees, you will always be paying in arrears. It’s just the nature of the work. You won’t be able to process their payroll until the hours have been submitted. You can still get your hourly employees paid within a week, though. Pick a day that works for you to pay, and include all of the hours up until that day.
Lots of companies stray from W2 employees, thinking they are saving money in payroll taxes. The first step into making the right decision is understanding what you will typically need to pay in payroll tax. In a nutshell, it is a lot less than you think.
We use Gusto to process our payroll, which means our payroll taxes are automatically deducted from our account when we pay employees. At first glance it can seem like a ton of outflow, but it really isn’t when you break it down. First, you have the net pay, which is the money sent to the employees. Secondly, you have the amount of money to be sent to the taxing authorities - federal, state, etc. It looks like you are paying 40% tax on the salary, but you are not.
There are two people that pay taxes; the employee and the employer. Then you have the different taxes paid. That is broken down into three categories; the state and federal income taxes, the state and federal unemployment taxes, and the federal social security and Medicare taxes. Keep in mind that this may be slightly different depending on the state.
The state income tax is 100% on the employee. That is a deduction on their wage. The federal income tax is the same.
When you break down what the employer is paying, it’s actually quite small. Federal unemployment is paid for by the employer and equates to about 1%, maybe 2% (because they cap the amount on wages) of the wage. Medicare and social security is more complicated, but is basically 15.3%. The employer and employee essentially split this. Out of the five items that come out of your account each pay period, you are only paying for two of them. You are seeing the employee paid items coming out, which makes it look more aggressive than it is.
If you are trying to wrap your head around what it takes from you as an employer on the cost side, 10% of the wage is a good calculation. It’s probably closer to 8.5%, but with all of the variables with each state, you're better off rounding up. So a $70k/ year employee will cost you $77k per year. Keep in mind this is JUST payroll, for an employee, and does not include things like benefits, 401K, etc.
Our Making Cents Livestream addresses common questions from business owners like you. If payroll is not your thing, and you'd rather leave it to the pros to handle, we can help there as well. Start by telling us about your business and we will gladly chat more about your specific needs.