Opportunity Informer

Payroll Guide for Small Businesses
By InterPay, a leading provider of outsourced payroll solutions

Whether you outsource your company's payroll management, or handle everything internally, the Payroll Guide provides access to federal and state information about the latest published laws, government forms, applications, and general payroll policies.

Federal Information
Q. What is a Federal Tax ID number and how do I get one?
Q. What are the different Federal withholdings?
Q. What do I need to know about Federal payments?
Q. When will I receive my Form 8109 coupon booklet?
Q. What are the Recurring Federal Reports?
Q. What do I need to do when I hire a new employee?

State Information
Q. What do I need to know about State wage hour laws?
Q. Do I need to keep track of independent contractor wages?

Other Things to Consider
Q. What forms will I need for employees?
Q. What's the best way to avoid IRS penalties?
Q. What are the required records I need?
Q. How do I determine a payroll policy for my company?
Q. What are some sample deductions?
Q. How do I determine if I should outsource my payroll?

Q. What is a Federal Tax Identification number and how do I get one?

A. You must file for a federal tax identification number or EIN (Employer Identification Number) to ensure that federal payroll tax withholding payments, Social Security contributions, and federal unemployment payments are properly credited. After your Application (Form SS-4) is submitted to the IRS, you will receive a letter with your EIN and a coupon booklet (the 8109-Federal Tax Deposit). This booklet is essential for payment of federal payroll tax obligations.

Q. What are the different Federal withholdings?

A. Federal Withholding taxes - These are taxes paid by the employee and are calculated on individual employee data (wages, marital status, exemptions and frequency of payroll). Commonly used tax tables are listed in the IRS Employer's Tax Guide (Circular E).

Social Security and Medicare taxes (Federal Insurance Contributions Act or FICA) - Taxes are paid by the employee with matching contributions paid by the employer. For 2001, Social Security tax is 6.2% (0.062) on the first $80,400 of each employee's gross wages; Medicare tax is 1.45% (0.0145) of each employee's gross wages. There is no wage limit, and the employee and employer each contribute at these rates.

Federal unemployment taxes (FUTA - Federal Unemployment Tax Act) - Taxes paid by the employer only is calculated at the rate of 6.2% (0.062) on the first $7,000 of gross wages paid to each employee. In figuring your FUTA tax, you can deduct a credit of up to 5.4% (0.054) for state unemployment taxes paid resulting in a net federal unemployment tax of 0.8% (0.008). All percentages and gross wage limits should be verified every January 31st.

Q. What do I need to know about Federal payments?

A. The first recurring federal tax payment is the federal withholding and Social Security and Medicare (FICA). Tax payments are combined into a single payment, the 941 deposit. Frequency of payment and deposit method are determined by the amount of tax liability incurred. Consult Circular E to determine your frequency of deposit.

Another recurring federal payment is Federal Unemployment Tax (FUTA), or the 940 deposit. Taxes for each quarter must be paid on or before the last day of the calendar month following each quarter. If the tax due is less than $100, it can be carried over to the next quarter. Payments for both the 940 and 941 deposits are made by using coupons from the IRS 8109 booklet or by paying through the IRS Electronic Funds Transfer Payment System (EFTPS). InterPay can provide this service to you through our TaxSmart offering.

Q. When will I receive my Form 8109 coupon booklet?

A. The 8109 coupon booklet is sent to you once you have applied for an EIN. Complete this coupon following instructions in the booklet. A check made payable to the bank, along with a completed coupon, should be deposited at a bank designated to receive federal tax deposits. Retain the dated bank receipt for your records and record all deposits in your 8109 booklet for easy reference.

If the amount of withheld income and employment taxes exceeds a certain amount during a "determination period," employers are compelled by law to deposit them and any other federal depository taxes by electronic funds transfer (EFT). The IRS notifies businesses by letter when mandated to file electronically.

Q. What are the Recurring Federal Reports?

A. Form 941 is a reconciliation of federal tax withholding and FICA payments. It must be submitted once each quarter by the last day of the month following the calendar quarter.

Form 940 is the federal unemployment report. It should be completed and filed by January 31st following the close of the calendar year for which the tax is due.

Forms W-2, W-3, 1099, 1096. Annually, every employer must provide a Wage and Tax Statement (Form W-2) to each employee who earned taxable income. The employer is also required to submit a Transmittal of Income and Tax Statements (Form W-3), along with copies of all W-2s to the Social Security Administration. If you provided wages to a subcontractor, you must also provide miscellaneous income reports (1099 and 1096).

Q. What do I need to do when I hire a new employee?

A. Federal law stipulates that employers must report W-4 information on all new employees, as well as the name, address and EIN of the employer to a specified state agency within a certain number of days from date of hire. Individual state requirements differ and some states require employers to report more extensive information about newly hired employees. Contact your state's Department of Revenue, Department of Employment & Training, or Department of Labor.

Q. What do I need to know about State wage hour laws?

A. Many states have adopted their own wage-hour laws that quite often are more stringent than federal laws. Many states also govern such employee wage practices as frequency of payment, method of payment, and employee's right to accrued vacation or paid time off. State and federal laws may overlap. In those areas, the law requires that the governing body more generous toward the employee should prevail.

Q. Do I need to keep track of independent contractor wages?

A. Independent contractors are responsible for keeping their own tax records and making the appropriate (and legal) tax payments.

Q. What forms will I need for employees?

A. Employee's Withholding Allowance Certificate (Form W-4) Completed by the employee, form W-4 provides you with the basic information required for payroll. The employer must retain this form, and a copy must be filed with your state in a timely manner. InterPay's New Hire Reporting service reports this information for newly hired or re-hired employees and maintains this information for you if changes in circumstances occur (marital status, # of exemptions, etc.).

Employment Eligibility Verification Form (Form I-9) [link to downloadable form] Information regarding Form I-9 may be obtained from the Immigration and Naturalization Service. Failure to comply may result in civil fines. Employers must retain this form together with their employee's W-4

Q. What's the best way to avoid IRS penalties?

A. Keeping accurate records is an essential part of owning and operating a successful business. With payroll it is especially important because of the substantial penalties the IRS imposes on inaccurate and/or late payments and filings. If you outsource your payroll, ensure your provider not only gives you copies of all records and transactions executed on your behalf, but that they also cover any penalties that arise due to inaccuracies or delays in filing due to their error. Payroll management services, such as InterPay's Tax Smart service, assume responsibility for timely and accurate processing of all your payroll tax reporting and filing services.

Q. What are the required records I need?

A. You need to have the following records:

Gross wages
Social Security
State withholding
Federal withholding
Medicare
Net wages paid
Employee summary for unemployment
Employee summary for workers' compensation

Payroll management service providers, such as InterPay, can assume liability for timely and accurate processing of all your payroll tax reporting and filing services.

Q. How do I determine a payroll policy for my company?

A. Set up payroll policies based on your particular business practices. Here are some questions to consider:

What constitutes regular hours?
When to start paying overtime and at what rate?
How an employee will be paid (hourly or salary?)
Frequency and sick-time rate on commission or bonus checks?
How vacation and holidays will be allocated and tracked?
Who within the organization will research and coordinate employee benefits?
How can payroll deductions reduce the number of money transactions?
How to ensure the employer is paid first?

Q. What are some sample deductions?

A. Deductions could include the following:

Employee portions of insurance benefits
Garnishment payments
Savings plans
Uniforms
Pension plan contributions
Union dues
Repayment of employee loans
Employee purchases

Q. How do I determine if I should outsource my payroll?

A. When determining whether to outsource your payroll or do it in-house, consider factors that may apply to your business:

Who will calculate payroll taxes and accept responsibility for timeliness and accuracy?
What kinds of human resources are available?
How much time can be devoted to payroll and related tasks?
What is my cost for in-house software and stock?
How can my employees benefit (e.g. a retirement plan, direct deposit, etc.)?

InterPay is the smart solution for your business, offering cost-effective Standard Payroll Package that can grow as your business grows. Flexibility means choice. So whatever services you choose, you are always in control of your payroll management.

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