Having employees and the related responsibilities is one of the main business challenges that any owner must address. Trying to deal with all the regulations and payroll headaches can be a hassle for even the most experienced business owners. So, let’s look at some of the employee payroll issues and how to address them in this article.

First, it is a common misconception that a $10 an hour employee only costs your business $10 per hour.

As an employer, you are responsible to match the Medicare and Social Security taxes, known collectively as FICA, since your employee pays into the Social Security and Medicare system. The amount of these taxes can change periodically, so you need to verify the amounts to withhold. Currently, the amount is 15.3% of the gross salary paid, with 7.65% withheld from the employee’s paycheck, and the employer matching the 7.65% as a payroll expense. Unfortunately, the IRS takes a dim view of business owners that don’t correctly pay the withholding taxes collected from employees.

Keep in mind that payroll taxes collected must be a priority and are paid first above everything else, even paying yourself. In recent years, audits of payrolls have been the main source of penalties collected by the IRS.

Along with the FICA taxes, there are also Federal Unemployment Tax Act (FUTA) taxes that are paid by the employer. This business expense is currently 0.6% of the first $7,000 of gross wages paid to the employee. State Unemployment Tax Act (SUTA)taxes may be required by employers, depending on the state in which the employee works, so you will need to check on your requirements. And depending on the business circumstance, insurance coverage may be required under Workers Compensation, commonly called Work Comp. This is an expense the employer must bear, so you should keep this in mind when creating your budget.

Another concern from business owners is deciding to do the payroll in house (within your financial software or manually) or with a third-party payroll company. There are two considerations that need to be thought through thoroughly.

The first is who has control of the information.

If you use a third-party company, the information is stored with them in their files. You get copies of report, payments, and tax forms, but you don’t have that information readily accessible in your system. Let’s say you have had employees for 4 years and the payroll has been done by a third party. And at the end of 4 years, you no longer have employees and so you decide to close your account with them. But two years later, you have an audit and are required to supply reports for a specific period. In this case, you don’t have access to any of the individual employee accounts, you can’t extract data by the dates requested, and you can’t download any data because you only have a .pdf of the reports.

Your second consideration is the cost.

You will have monthly costs for not only the service, but also a cost per check and/or direct deposit by employee, and potentially additional costs should your employees live in more than one state. This can get pretty expenses if you live in an area where states come together (like Maryland, Virginia and Delaware). Can you tell which way I lean?

There are times when the requirements of payroll are better left to a third party and that’s when your payroll becomes technical with pension plans, health care plans or other additional items that must be tracked (i.e. housing and/or auto provided, or court ordered withholdings). In this case, your business needs are complex and could benefit from a third-party payroll company.

Another task that comes along with having employees is having employee tax forms! At a minimum, you’ll need an IRS tax forms W-4 and I-9. The W-4 form determines how much tax is withheld from the paycheck. The I-9 is used to verify the identity and employment status of each individual hired. Depending on the state in which the employee lives, you may have county or even towns taxes to withhold. You can find out from each state’s website what payroll taxes are required. As a side note, the IRS is working to completely change the W-4 form for 2020, so watch for that release.

Along with the tax forms mentioned, you have the year-end W-2 tax forms to supply to your employees. The W-2 is the summation of all the taxes paid by each employee for the previous year. The W-2 is always based on the calendar year, so taxes paid in 2019 will be recorded and given to an employee by January 31, 2020. Along with that, you have the year-end Tax Form 940, which is the annual report of the funds for paying federal unemployment taxes for the year. You may also have a state unemployment tax as well, and that will require a report at the end of the year.

If you use QuickBooks for your financial software, there are several different versions of their in-house payroll service, but all are simple to use. You can do as much or as little as you like and can choose the service accordingly.

By Pam Saul, Certified Bookkeeper, Owner of Saul Bookkeeping

Having employees may seem overwhelming, but if you take the time to learn what is necessary, you’ll be able to make a better, more informed decision about when your business is ready to grow with employees.

DISCLAIMER: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.