Let’s talk payroll! As we mentioned in our last blog post, payroll can be the black hole of accounting. Some love it, some hate it, some just stay away from it all together. So we’re stepping in this month to demystify, debunk, and disclose all things payroll, in hopes that you can make an educated decision on what you need or perhaps what you’re missing.
Let’s first define payroll. Payroll is the money that's paid out to W-2 employees at the end of each year.
To determine whether an individual falls under the category of W-2 employee OR an independent contractor, the IRS asks three questions:
- Behavioral: Does the company control what the worker does and how they do their job?
- Financial: Does the company manage how the worker is paid, cover expenses, and provide tools or supplies?
- Type of Relationship: Is there a contract or benefits (e.g. insurance or vacation) in place? Is the work provided essential to keeping the business going?
- Example #1 – if your business hires a photographer from time to time to snap pics of your product, they are likely a contractor. They work independently, provide intermittent services, and use their own equipment. (P.S. these are the people who will be issued a 1099, stay tuned for more on this subject in an upcoming December blog post!)
- Example #2 – if your business has a team of photographers and editors who provide product imagery to your clients, they’re probably employees. They are vital to the operation of your business, follow your schedule and typically use your equipment.
Okay, so we know they are an employee, now what? Let’s chat through the process of paying your employees… this is where payroll comes in! While we guess you could calculate and process payroll yourself, most businesses use a payroll provider such as QuickBooks Payroll or Gusto.
Why? Because they are sane humans who value time, accuracy, and efficiency. No, but really when you process payroll, you as the employer are responsible for calculating the employer tax (your responsibility) and the employee tax (withheld from their paycheck based on their W-4) and paying it to the associated agencies.
When enlisting the help of a payroll service, this is all simplified. You set it up, input the info, and let it handle the rest, including the tax payments and filings.
Before we keep going, let’s take a timeout to answer some common questions:.
Can you have an employee on payroll and pay them as a contractor, too?
Not usually. If they are doing the same job, you need to pick one based on your answers to the questions above. But if they are providing two distinctly different services, it may be okay. For example, if they are your staff photographer from example #2, but they do some plumbing work on the side; they can most likely be 1099’d (considered a contractor) for the plumbing job.
Can you pay the owner of a business through payroll?
Yes and No.
- Yes: if the owner is a W-2 employee who is receiving pay with taxes withheld. Additionally, this counts as an expense and reduces the profit shown for the company at the end of a period.
- No: if the owner is receiving pay in which taxes are not withheld. Unlike the above owner-employee example, this type of payment is considered “owner’s distributions” and is not processed through payroll. This does not reduce profit but instead reduces the owner's equity account found on the balance sheet.
Can you process employee bonuses via payroll?
What’s the difference between an employee’s gross pay and net pay?
The gross pay is the dollar amount you tell the employee they are going to earn – either their hourly rate or salary rate. The net pay is what they get to take home after withholding the taxes they owe to the agencies. For example, if an employee earns $1,000 in gross pay, but your payroll provider calculates that $300 of that is owed for taxes, your employee will take home a net pay of $700. You in turn withhold the $300 tax that they owe and are responsible for paying it to the appropriate tax agencies on their behalf.
What are payroll liabilities?
A liability is what you owe to someone, i.e., you are liable for it. So, in the above example, when you withheld that $300 from the employee’s paycheck, it is considered a payroll liability until you actually pay it. From an accounting standpoint, it’s important that your payroll liabilities are always netting to $0. Money is withheld, that same money is then paid.
When do you pay these “payroll liabilities”?
Who are these “agencies”?
Now that we’ve got all that straightened out, let’s get into some payroll essentials that always seem to make an appearance at the party, whether invited or not!
- Worker’s Comp Insurance: This is essential insurance that protects you from potential employee claims due to a work-related injury or illness. Although mandates vary by state, we always encourage having it in place to safeguard your business. And forget the old-school method of estimating coverage up front; there are now “pay-as-you-go” plans that sync seamlessly with your payroll. Say goodbye to worker’s comp audits, just charges based on actual hours worked by your employees, saving you time and helping with cashflow.
- Retirement Plans: Depending on your location and team size, retirement plans may or may not be mandatory. The good news? They also joined the 21st century. Companies like Guideline now partner with payroll providers like QuickBooks to automate retirement benefit calculations and fund contributions. It’s efficient & low maintenance – they do the heavy lifting for you (we like that). 😉
- Health Insurance: The requirement to offer health insurance is again based on your company’s size and state regulations, so check those out. But here’s where automation shines again! Many payroll providers (cough, cough, QuickBooks) have partnered with insurance brokers to integrate employee health benefits into their services. Say goodbye to manually calculating health deductions – it’s all built in!
So with all that said, we'd like to officially welcome you to the world of streamlined payroll, where automation is the name of the game! 😊 And since you’re a payroll expert now… (lol) let’s talk about getting you set up with a service!
- Scenario 1: You have never had payroll and have a lot of questions? No problem – let’s chat and see what you need. We can help you figure out the best provider, how to obtain the appropriate agency numbers, and ultimately get your payroll solution set up and running. Heck, we can even run the payroll for you! Click here to schedule.
- Scenario 2: You have payroll but they don’t have these cool built-in features, plus they cost an arm and a leg. Also no problem – we have an awesome team of payroll experts that can help seamlessly transition you from one provider to the next. The best time to do this is at year end… but also, the busiest time to do this is at year end. So, if you live in this bucket, we recommend getting an appointment with our team now so that we can plan appropriately and not be scrambling at the end of December. That said, you can transition at any point in time, but doing it at year end wraps it all up in a nice little bow. Thank you, Santa.
- Scenario 3: You’ve been paying people as contractors, but you think they should be on payroll. Again, year end is the best time to transition these individuals. And while yes, it may cost you a bit extra on the employer tax side, it relieves you from the worry of potential audits.
- Scenario 4: You know you need payroll and want to go at it solo! Don't worry, we have a solution for you, too! Here are some links to buy, that will get you access to our discounts without having to go through our team!
I’d say that about wraps up our payroll spiel, however we sort of feel like we still only grazed the tip of the iceberg, if we’re being honest. So, if we left you with questions, please feel free to schedule a call with our team. We can help you take a look beneath the surface to uncover your bigger picture.
And just for funsies and because we can’t help ourselves, we’re going to throw in a few more "Did you knows"!
- Did you know… that QuickBooks Payroll Online and Gusto payroll have set it & forget it features for salaried employees? Never worry about missing a payroll deadline!
- Did you know… that QuickBooks Payroll Online and Gusto can automatically post your payroll entries to ensure that the gross wages and employer taxes are recorded correctly? Fun fact: The expenses that come through the bank as “XYZ Payroll Provider Wage” and “XYZ Payroll Provider Tax” are not your true wage and tax expense and should be adjusted before being posted directly to your P&L!
- Did you know… that QuickBooks Payroll Online offers an Elite subscription that has free onboarding and protects you against any payroll tax penalties?
- Did you know… that QuickBooks Payroll Online can provide job costing when used with the project module in QBO Plus? (Check our last blog post to learn more about this!)
- Did you know… that when you pair QuickBooks Payroll Online with QuickBooks Time, you can automate billable client time tracked by your employees, ultimately being able to add it to your client's invoice? (More on this can also be found in our last blog post!) And Bonus! Here’s a link to our QuickBooks Time discount, if you’re interested.