Are all employees required to be on payroll? It depends on the size of your business and whether they receive a W2 or 1099 form at the end of the year. If you are only paying those who work for you 1099, you should put them on payroll. The business structure dictates this, not necessarily the tax laws. Our quick article can talk you through it.
For firms and individuals, a crucial question that needs to be addressed when determining who pays tax on earnings is whether an employee should be placed on payroll or be kept as a salary employee. This can mean the difference between paying hundreds of thousands more in income tax than what would have been needed to pay wages
Payroll
Paying employees fairly, legally and on time is an important part of running a business. But with taxes, tracking paperwork and setting a payroll schedule, it can be hard for busy small business owners to know where to begin. If your company grows and your number of employees increases, you’ll need to be familiar with the legal requirements around payroll, create a set schedule for paying employees and build a master plan for keeping employee and tax records.
Payroll is the process by which companies pay their employees’ wages. For many businesses with employees, payroll is their biggest expense. It can also be a complicated process to manage. You’ll need to track time, classify employees, collect employee health insurance premiums and retirement contributions and pay taxes, which requires careful planning and recordkeeping.
When it comes to payroll, there are three ways to approach it: handle it yourself, use a payroll service or hire an expert to do it for you. No matter which approach you take, it’s still your responsibility as the leader of the business to know basic payroll laws and requirements.
Know the requirements
Employees of a small business are covered by federal, state and, sometimes, local employment laws. The main federal law that affects payroll is the Fair Labor Standards Act (FLSA). Check with your local government for state and local laws that apply to your business. The FLSA outlines rules for:
- Current minimum wage and overtime laws
- Exempt and nonexempt employees
- Overtime
- Child labor laws
- Tipped wages
- Hours worked
- Travel time
- Waiting time
- On-call time
- Sleeping time
- Meeting and training time
- Permitted to work
For help understanding each of these criteria, check out the Fair Labor Standards Act Advisor. For a poster that lists FLSA minimum wage requirements, which employers are required to display in their place of business, visit the U.S. Department of Labor website.
Decide on paid holidays, vacation and sick time
As you approach setting a payroll schedule, you’ll also need to decide how many paid days off you want to offer your employees, if any. Although paying employees for days they haven’t worked isn’t required by federal law, it may be required by state and local governments, and offering this perk can help you stay competitive with other companies and attract better employees.
Holidays
Holidays offered by many employers in the U.S. include:
- New Year’s Day
- Memorial Day
- Independence Day
- Labor Day
- Thanksgiving Day
- Christmas Day
Many businesses also offer paid or unpaid days off that employees can use for religious holidays, along with bereavement leave (time off work in the event an employee’s family member passes away).
Vacation time
On average, businesses offer full-time employees with one year of experience 10 days of vacation time per year, and those with five years of experience 15 days per year. You can decide whether you’d like your employees to finish a certain amount of time before tapping into this benefit. This could be a year of work or a probationary period (meaning an introductory period). Some business owners have employees earn paid time off each month (for example, 8 hours per month), which can be taken at any point after the time is earned.
Sick leave
Sick leave is not required by federal law, but many states and some cities require employers to meet certain criteria for the benefit. Even if your local laws don’t require you to provide it, giving employees paid time off for illness can help you stay competitive as an employer and may even save your business money. For instance, if a sick employee comes into work, he or she could make you or any other employees sick, costing you valuable resources over a longer period of time. If that person is serving your customers directly, he or she could also get your clientele sick, leading to unhappy clients.
Whatever leave you decide to offer, it’s wise to explain it clearly to new employees in writing, and to include it in your employee handbook if you have one.
Getting started with payroll
Between managing employee paperwork, collecting taxes and making payments to the state and federal entities, payroll can be an intimidating task. Here are some of the steps you can take to set up payroll for your business.
1. Set a pay schedule
This is the schedule that defines when you’ll pay employees for a particular amount of time worked. Most pay periods are weekly, bi-weekly or monthly. Decide what will work best for your business depending on whether you want the simplest option in terms of paperwork and calculations (weekly or monthly) or the one that most employees prefer (bi-weekly). Every state has unique pay schedule requirements, so be sure to check the laws in your state.
2. Classify employees
You’ll need to make sure your employees are classified correctly for their own benefit and for that of your business. These are the main categories of employees to know.
An employer has several legal obligations to its employees when doing the payroll. It must develop a system that tracks payments, applicable taxes and other deductions during each pay period. An employer must also be aware of state and federal taxes it owes on behalf of its employees.
Payment Requirements
According to the Texas Payday Law, employers must establish a set schedule to pay employees. According to the Texas Workforce Commission, employers must pay employees twice a month if they are covered under the Fair Labor Standards Act. If applicable by law, payments must also include overtime pay, which is generally time-and-a-half, but should be calculated based on FLSA requirements. Paydays must be as evenly spaced as possible. If an employer does not choose the paydays, then by law they become the first and 15th of the month. In addition, an employee must receive pay during business hours or by mail on time.
Exempt Employees
Often employees on salary or working professional jobs are exempt from the FLSA. Therefore, employers only need to pay workers only once a month, not twice a month. According to the U.S. Department of Labor, employees that qualify as exempt are often salaried executives, professionals, administrative, outside sales and some computer employees that make $455 or more per week.
Record Keeping
The FLSA determines payroll record-keeping requirements for those covered under the law. The law requires that employers keep records noting the employee’s name, address, date of birth, gender, occupation, rate of pay, hours worked, overtime, deductions and additions, total wages, pay period and back pay. This information must be given to employees during each pay period as well. Although some payroll records only need to be kept for two years, unemployment tax records must be kept for four years, and the TWC recommends keeping all payroll records for four years.
Tax Requirements
An employer is required to manage some of its employee’s wages when doing the payroll. According to the Internal Revenue Service, an employer must withhold state and federal income taxes from its employee’s paychecks. Social Security and Medicare taxes, also known as FICA taxes, are withheld as well. With FICA taxes, employers are required to pay a matching amount withheld from each employee. With Social Security taxes employers may eventually reach a cap or wage base, after which they don’t need to pay. Medicare has no cap. Also included are federal and state unemployment taxes, which are deposited quarterly and have a cap. Although the tax is calculated based on an employee’s earnings, only the employer pays the tax.
When do you need to set up an employee payroll?
As an employer, you need to set up employee payroll as soon as you hire your very first employee. Payroll will need to be set up before you pay them their first wages or salary. It’s important not to leave it to the last minute in case you run into unexpected issues.
How to set up employee payroll
Before you get started with paying your employee through PAYE, you’ll need to do the following:
- Register as an employer with the HMRC- Once you have done this, you’ll receive a PAYE reference number in your welcome package from them. Please allow 5 working days for the HMRC to get back to you.
- Request your employee’s tax code and National Insurance number. These will be necessary when it comes to processing their pay.
- Ask for your employee’s P45 from their previous employer. This will bring you up to date with what they currently owe for the tax year. If they don’t have one or don’t have access to one, the HMRC provides a checklist that helps you calculate what they may owe.
Now you have everything you need to process your first employee’s pay through PAYE and the HMRC.
What is a payroll tax deduction?
National Insurance Contributions should be your biggest concern when it comes to a payroll tax deduction, as you’ll need to pay NICs for both yourself and your employees. The NICs thresholds are also much lower than formal taxes, which means that you’re more likely to have to pay it.Once employees start earning over a certain amount, you’ll also need to calculate what they owe in terms of income tax. Student loans and pensions are other contributions that you’ll have to withhold.What you need to remember is that each employee’s situation will be different depending on their income, and you should ensure that you have all the necessary information for each employee.
What you need to do every time you pay your employees
On the day that you pay your employees, or a few days before, you’ll need to do the following.
- Ensure that their pay is recorded- This includes their wages, salary, any bonuses or commission that was earned.
- Record any deductions that were made from their pay- deductions typically include things like tax, National Insurance Contributions, pensions, and student loans.
- Create payslips- payslips act as formal proof of payment.
- Report pay and deductions to the HMRC by using a Full Payment Submission Form.
What you need to do after you’ve paid your employees
In the UK, you usually need to pay your employees by the 5th. From the 6th, you can start the processes that you’ll need to do after you have paid your employees, but keep in mind that you’ll only have access to what you owe from your Full Payment Submission on the 12th. And this information will be available online.What you’ll need to do in the month following paying your employees, you’ll need to:
- Send an Employer Payment Summary to the HMRC by the 19th of the month- in this summary; you will be able to claim any reductions on what you owe.
- You’ll be able to view the full balance of what you owe within two days of submitting your Employer Payment Summary.
- Ensure that you pay the HMRC in full by the 22nd if you are paying online. If you’re paying by post, you’ll need to pay by the 19th.
You need to ensure that you pay on time; otherwise, you may be met with a penalty by the HMRC. However, if you end up usually paying less than £1, 500 per month (which is common if you don’t have many employees), you may be able to pay the HMRC quarterly instead of monthly, which may make things easier for you.
Conclusion
This is a question many business owners ask themselves when they hire someone. The question continues to be brought up since many people are confused as to if they can legally get away with hiring an individual and not adding them on their payroll. There are laws that the IRS has set up to make sure all employees meet the qualifications.