Payroll 101: Things You Should Know as A Small Business Owner
LAST UPDATED: June 11, 2022
First-time business owners have plenty to look forward to when it comes to running an operation in the 21st century. From e-commerce to digital advertising, it seems as if there’s a new solution for organizations to utilize on a daily basis, whether to scale their sales or pick up another prospect.
Unfortunately, it’s not always all fun and games. While much of your time will be spent overseeing your operations and closing sales, every business owner has to deal with the nitty-gritty aspect of their trade at some point— and there’s more to it than simple income tax.
If your business has employees besides yourself, you’ll need to manage payroll regularly and crunch numbers to determine critical factors like payroll taxes. Not sure where to start? We’re here to help. Stay tuned as we walk you through everything you need to know about payroll services in 2021.
A Quick Definition of Payroll
In simple terms, payroll is the compensation your employees receive in each payroll period. For modern businesses, this means managing wages, taxes and more.
So, how often do you need to worry about payroll? Well, it depends. These are some of the most common schedules small businesses follow:
- 24 Payrolls Yearly: Semi-monthly paychecks.
- 26 Payrolls Yearly: Bi-weekly paychecks.
- 52 Payrolls Yearly: Weekly paychecks.
Now, managing these schedules isn’t as easy as mailing your employee’s their checks and calling it a day — especially if you’re a first-time business owner. To ensure you don’t accidentally break state or federal regulations, it’s wise to use a payroll service that keeps things in order.
Figuring Out Payroll Taxes
Most self-employed individuals solely need to file their income tax yearly, but things get more complicated when you introduce payroll into the mix. Completing this crucial step means understanding what kind of payroll taxes to deduct from employee wages, including:
State + Local Income Tax
Your employees' resident address determines their tax withholdings; that means that if they work remotely, their state and local income tax may differ from your own. California state income tax is paid to EDD and is filed on form DE-9 on a quarterly basis.
No state nor locality has the same income tax regulations; it’s up to business owners to contact their department of revenue to determine how much they need to withhold.
States with no income tax include:
- South Dakota
Federal Income Tax
This form of tax depends on your employee’s salary, as well as their Form W-4 information. As you might expect, this makes things a bit tricky. Like state income tax, federal income tax is filed on a quarterly basis but form 941 or annual 944. The tax is withheld and paid to IRS when payroll is processed
While you could use the IRS’ Publication 15-T to help you calculate these withholdings, which includes using either a wage bracket method or a percentage method, you’ll quickly find the process to be incredibly time consuming; a payroll service can handle this process easily and save you time from doing it yourself.
Medicare + Social Security Tax
Calculations are a bit easier with this tax type. All you need to do is follow these convenient rates provided by the Federal Insurance Contributions Act:
- Social Security: Withhold 12.4 percent
- Medicare: Withhold 2.9 percent.
Overall, the FICA tax rate is 15.3 percent. However, keep in mind that this tax is split between the employer and the employee, so business owners need to withhold half of FICA’s rate from employee wages — you cover the rest as their employer.
Federal + State Unemployment Tax
This payroll tax contributes to a federal fund, which covers unemployment benefits across a state. All employers are subject to this tax, paying 100% of the amount, which is calculated from employee wages and filed using form 940. The current federal unemployment tax (FUTA) rate goes as follows:
- 6% of the first $7,000 in wage paid to each employee in a calendar year.
State unemployment taxes (SUTA) are also not withheld from employee wages and are paid entirely by employers. SUTA is due on a quarterly basis and filed in form DE-9 to the EDD in California. Businesses in the following states may need to withhold SUTA tax from employees, however:
- New Jersey
Payroll Registers, Withholdings and Deductions
Finally, here are some additional factors you should know about payroll:
- Payroll Registers: Specific to pay periods, registers present detailed employee information to help employers file their payroll tax reports.
- Withholdings: To avoid serious federal punishment, ensure you properly withhold mandatory payroll deductions: Garnishments, income taxes and FICA taxes.
- Deductions: Aside from the taxes named above, you may have to make additional wage deductions in certain circumstances. Retirement contributions, health insurance premiums and garnishments are amongst the most common.
Find A Helping Hand
Overwhelmed? Don’t worry; you’re not alone.
If you’re one of the thousands of first-time business owners struggling to calculate their payroll taxes, consider using a payroll service like Zeffry to avoid the hassle and get back to what really matters: growing your operation.