Using a Payroll Service
If you're a do-it-yourselfer and have employees, you may be tempted to tackle the job of preparing the payroll. You may find this to be a daunting experience, best left to professionals.
Employment tax laws need to be complied with. You must keep up with employment tax law changes. Employment tax reports must be filed timely and accurately. Tax deposits amounts must be correct and made according to the correct deposit schedule (monthly schedule depositor or semiweekly schedule depositor). And of course, the paychecks must prepared and distributed..
An effective and inexpensive alternative is to outsource your payroll function to a payroll processing service. Not only will you free up time which can be used to focus on the important thing, growing your business, but you will sleep a lot better knowing your employment tax reporting and deposit obligations are being met. Failure to comply with the rules can cost you a bundle in penalties.
For example, the penalty for failure to withhold and deposit trust fund taxes is as high as 100% of the tax due. Trust fund taxes include federal income taxes withheld from each employee's pay, plus the employee's share of social security and Medicare taxes withheld.
What a Payroll Service Does
Here are the typical services provided by a payroll service:
- Calculate payroll.
- Generate paychecks for distribution to employees.
- Calculate tax deposits.
- Make tax deposits.
- File quarterly and annual employment tax returns.
- Provide you with copies of employment tax returns.
- Provides you with a detailed record of each payroll (e.g., each employee's gross pay, withholdings, net pay).
- Provides you with the information needed to record each payroll in your books.
- Provides you with a summary employment taxes due and paid.
- Keep employee payroll records up to date.
- Implement employment tax law changes.
- Answer your payroll tax questions
Your Role When Using a Payroll Service
You provide the payroll service with the information it needs to calculate the payroll. They do the rest.
- Have each new hire fill out Form W-4, which is an exemption certificate..
- Have each new hire complete Form I-9. This is to comply with immigration law. You also must obtain the proper identification from each new hire. Form I-9 shows the types of documents deemed acceptable. For example, a social security card and driver's license.
- Have each new hire complete your state's employment tax withholding form (the federal W-4 equivalent). If your state has no personal income tax this won't be necessary.
- Provide the payroll service a copy of each of the above documents. Make sure signatures of the employee and employer appear where applicable. Keep the originals for your files.
- For hourly employees (non-exempt employees), set up a system for tracking their time. You need to provide the payroll service with the number of hours each hourly employee worked during the pay period.
- Provide the payroll service with the hourly rate for each hourly employee and the frequency of their pay period (i.e. weekly, bi-weekly).
- Exempt employees are exempt from the Fair Labor Standards Act (FLSA) overtime rules. According to the FLSA rules, an employee may be considered exempt or nonexempt depending on "(a) how much they are paid, (b) how they are paid, and (c) what kind of work they do". For example, "outside sales" persons are exempt employees while "inside sales" employees are nonexempt. The payroll service needs to know the gross salary for each exempt employee and the frequency of their pay period (i.e. weekly, bi-weekly, monthly).
- Provide the payroll service with information regarding bonuses, sick pay, vacation pay, changes in hourly rates for nonexempt employees, changes in gross pay for exempt employees, and terminations (voluntary and involuntary).
- If you use an unincorporated independent contractor to perform services for your business, have the contractor provide you with his taxpayer identification number (TIN) . This could be a social security number or employment identification number.
- If you pay a contractor $600 or more during the tax year and you fail to get a correct TIN from the contractor, backup withholding is required. The backup withholding rate for 2016 is 28%.
- Use Form W-9 to request a taxpayer identification number from independent contractors. They complete Form W-9 and return it to you for your records. Provide the payroll service with a copy of Form W-9.
- Form 1099-MISC must be issued to each independent contractor who was paid $600 or more during the tax year. Although Form 1099-MISC is not required if a contractor was paid less than $600, it may still be issued.
For Freelancers and independent Contractors
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- Pay your quarterly estimated taxes online.
- Export Schedule C to TurboTax at year-end for faster filing.
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Have an accounting or bookkeeping question? Email it to me.
- Return to the Payroll Taxes Table of Contents to find related links.