1. What is gross income?

Gross income is the amount of money an employee has earned before any deductions are removed. 

Gross pay is calculated for hourly employees by multiplying the hours worked by the hourly wage. For salaried employees, the salary is divided equally across the number of pay periods in a year. For both kinds of employees, tips and bonuses are added (along with overtime pay for hourly employees).

2. What is net income?

Net income is what an employee receives after all deductions have been removed from their gross wages. 

The difference between gross pay vs. net pay is that net pay is the amount that the worker takes home after deductions are withheld. These deductions include:

• Taxes
• Retirement fund contributions
• Insurance premiums
• Wage garnishments and unpaid child support

To determine an employee’s net income, consult tax charts and an itemized list of deductions to ensure you’re withholding the correct amounts.

3. How frequently should I run payroll?

How frequently you want to run payroll is up to you as long as your payroll schedule follows all relevant laws and regulations.

The most common payroll schedules are:

• Weekly
• Biweekly (every two weeks)
• Semimonthly (twice per month on set days)
• Monthly 

Running payroll weekly might make your employees happiest because they don’t have to wait as long between paychecks, but it can be expensive and difficult for your payroll team to manage. On the other hand, monthly payroll is the most affordable option for business owners but is unpopular among workers because it can make it tough to plan their finances. Biweekly and semimonthly payroll schedules split the difference between the two extremes. 

4. Can I do my business’ payroll? 

Definitely! With modern payroll software, it’s never been easier to handle payroll on your own. That being said, there are a few potential drawbacks:

• It can take a good deal of time, especially if you have a lot of employees
• A lack of integrated systems (HR and benefits systems time tracking, for example) adds more time to the process and introduces more chances for errors

Outsourcing your payroll could save you a lot of time that you can then devote to other parts of your business, but it comes with an additional cost. Deciding between in-house vs. outsourcing payroll is a choice you might come back to a few times as your business grows, so weigh the time commitment of doing payroll yourself against the cost of outsourcing it fairly often. 

5. What’s the best way to run payroll?There are three main ways you can run your company’s payroll: 

• Handling it in-house with dedicated payroll or HR professionals
• Running payroll yourself using payroll software
• Hiring a payroll service 

Running payroll in-house is usually the most expensive option because it requires you to pay an employee to do the work (along with the cost of benefits and taxes for another employee). In-house payroll provides time savings because your payroll team can work with the rest of the HR team to streamline and integrate their payroll system with other programs already being used.

The least expensive option is to manually do payroll or use payroll software. Good software will integrate with other common systems for time tracking and human resources and is regularly updated with the newest tax codes and tables. While the low price and updated tables are great, running payroll software can be time-consuming, especially if you have a lot of employees. 

Outsourcing payroll is one of the more expensive options but also the fastest. Payroll service providers have the infrastructure and employees to handle your payroll efficiently. And because it’s their business to know the latest tax codes and tables, you get peace of mind. 

Those benefits come at a price. Most providers charge a flat fee (sometimes based on the number of employees you have) and a per-employee fee for every pay period. These fees vary based on the size of your organization, your deductions, and how you want to pay your team.

Not sure how to choose a payroll provider? Evaluate the features they offer, the service cost (plus the per-employee fees), and how well their system integrates with other programs you use to find the right one.

6. What are the essential components of payroll? 

Want to learn how to setup payroll? First, you need to know exactly what makes up the essential components of payroll. They are the employee’s information, salary or wages, and deductions. 

Employee information

This information helps you pay the right person the right way. This info usually includes:

• Employee’s legal name
• Address
• Social Security number
• Bank account information

Because this is sensitive information, you must keep it safe.

Salaries and wages

Some employees are paid by the hour while others earn a salary. To ensure you’re paying your team properly, you need to know exactly what each employee’s gross wage is. This can vary from pay period to pay period due to:

• Number of hours worked
• Vacation or sick time
• Tips
• Bonuses
• Other wages

Once you have these components in order, it’s time to start deduction from the gross pay.

Deductions

Deductions are any amount of money that needs to be withheld from an employee’s pay. This includes:

• Federal income taxes
• State and local taxes
• FICA taxes (Medicare and Social Security) 
• Health insurance premiums
• Retirement account contributions  
• Voluntary deductions
• Wage garnishments
• Child support

Seems pretty straightforward (but still pretty complicated), doesn’t it? One of the benefits of using payroll software (or a payroll service) is that a lot of the heavy lifting is done for you. 

7. What is the easiest way to pay my employees?

The three easiest ways to pay your employees are with cash, direct deposit, or paper checks.

Cash is the most affordable and most straightforward option because you can simply hand it to an employee without check or direct deposit fees. However, cash is the least secure and potentially risky way to pay your employees. Having lots of cash isn’t always safe, and it may make you and your employees the target of an audit. 

Paper checks are fairly secure and are relatively easy to distribute, though they can be expensive, especially if you send paychecks by mail. Paying with paper checks allows you to easily distribute a pay stub with an itemized list of deductions. 

Direct deposit is fast, affordable, and fairly easy (after the initial setup process). It’s also more secure than paying with cash or by paper check. As long as your payroll system and bank accounts are set up correctly, the direct deposit process means your workers receive their pay quickly without going to a bank.

8. What are the different types of pay?

The different types of pay include:

• Hourly pay: the set amount an employee makes every hour they’re at work
• Salary: a fixed yearly amount divided evenly by pay period
• Supplemental pay: any pay that isn’t normal hourly or salary pay, including overtime, bonuses, commissions, and tips. 
• Overtime: the amount (usually 1.5x an employee’s hourly rate) a worker earns when they have worked a certain number of hours per day, per week, or consecutively in addition to their 40-hour work week. Make sure to check local and federal overtime laws when paying your employees.

Each type of pay is governed by different rules and laws that change state-to-state.

9. What paperwork do I need employees to fill out for payroll?

When you hire a new employee, they’ll need to fill out various paperwork. These payroll forms are important because they help ensure someone can work and that your company is deducting the correct taxes. 

The I-9 form provides proof of the employee’s right to work. The employee provides one or several documents proving their identity and ability to work in the United States. As the employer, you’ll have to fill out part of the form, and so will the employee. You’ll need to retain a copy of the I-9 for everyone on your payroll. 

Employees need to fill out a W-4 Employee Withholding Certificate before they start working or on their first day. This form lets you withhold the correct amount of federal income tax from the employee’s pay. Depending on your business’s location, your employee may have to complete a similar state form.

You’ll also need to have each employee fill out a direct deposit authorization form if you pay by direct deposit. 

10. How long is my business required to keep payroll records?

It depends. Several departments of the federal government require you to hang onto employment and payroll records, and those periods vary. The IRS requires these records to be kept for at least four years. The FLSA (Fair Labor Standards Act) and Age Discrimination in Employment Act of 1967 (ADEA) states that you need to retain records for at least three years. The Equal Employment Opportunity Commission (EEOC) says those records need to be saved for a year. 

Some states have different requirements, too. For example, New York law says you have to save employee records for six or more years.

11. How do I calculate payroll taxes?

Calculating payroll taxes can seem confusing at first, but if you follow the steps, it all makes sense and comes together in the end.

1. To figure out payroll taxes, you’ll need to have the information each employee provided on their Form W-4 , as well as the latest state and federal tax requirements. 
2. Using the latest federal and state tax tables, find the tax amounts for the employee’s wages. 
3. Subtract the tax amounts from the employee’s gross wages. 
4. Move the taxed amount into an account specifically for paying payroll taxes.

Using IRS Publication 15-T, you can find the best method to determine taxes based on how you’re running payroll (automated or manually). There are some differences between W-4s from before and after 2019 to be aware of.

These forms combine information from a W-4 and federal tax tables to help you determine the proper amounts to withhold from an employee’s check. The IRS provides resources for businesses and individuals to determine tax withholdings.  

Filling out these forms manually can be time-consuming, and there is a risk of making mistakes, especially if you are new to calculating payroll taxes. Luckily, some paycheck calculators use the latest tax tables to make the process go faster. 

Preparing payroll taxes isn’t always easy, and everyone makes mistakes. If you’re calculating taxes on your own, you could face steep penalties for what might seem like small gaffes. 

When you use certain brands of payroll software or hire a payroll processing team, they may provide you with tax penalty protection. This protection means that they assume responsibility for mistakes. That peace of mind (and a reduced workload for you) are good reasons to consider getting professional payroll help.

12. What is an EIN and does my business need one?

Payroll is full of acronyms. One of the most important ones you need to remember as an employer is EIN. What is an EIN? It’s an Employee Identification Number. The IRS uses this number to identify a business. You can think about it almost like an SSN for a business. 

The IRS recommends most businesses get an EIN. If you’re a sole proprietor, you don’t need one, but it can help protect your personal information and make it easier to separate personal finances from business finances, apply for credit for your business, and make paying taxes more simple.

If your business meets any of these criteria, you’ll need to apply for an EIN if:

• Your company employs people
• You have a partnership or corporation
• You’ll file (or have filed) tax returns for: alcohol, tobacco, firearms, employment, or excise
• Your company withholds taxes on income paid to noncitizens
• You are involved in a trust (there are some exceptions for certain exempt organization business income tax returns), 
• You are involved in grantor-owned revocable trusts, IRAs, or estates
• You are involved in plan administrators
• You are involved in agricultural cooperatives
• You are involved in real estate mortgage investment channels
• You are involved in nonprofit organizations
• You want to open a bank account in the name of your business
• You want to apply for a credit card in the name of your business
• You want to apply for business permits
• You want to apply for a business license
• You want to apply for a business loan
• You want to furnish independent contractors with a Form 1099

You can apply for an EIN online through the IRS. Applying for and receiving an EIN is free.

13. What taxes do I need to take out of an employee’s check? 

When running payroll, you’ll have to take out the following taxes from your employees’ gross pay:

• Federal income tax
• Federal Insurance Contribution Act (FICA) taxes: This covers Social Security and Medicare contributions
• State income taxes (if applicable)
• State unemployment tax (if applicable)

Payroll software or payroll processing providers will make determining payroll withholdings easier. 

14. When does my business need to send in payroll taxes?

You’ll need to pay payroll taxes either monthly or semiweekly, depending on how much you paid during the lookback period. If you paid less than $50,000 during the corresponding lookback period, you’ll pay monthly. If you paid more than $50,000 during the lookback period, you’ll pay semiweekly. IRS Publication 15 covers these tax dates in more depth.  

15. Which tax forms does my business need to send in?

You’ll need to send in all tax forms, but they aren’t all due at the same time. Some small business tax forms have one due date each year, while others are due multiple times.  

16. What is an exempt employee vs. a non-exempt employee? 

An exempt employee is classified as exempt because they’re usually in a supervisory, administrative, or other professional role and aren’t entitled to overtime pay. If they’re classified properly, their salary must reach or exceed a minimum amount. 

An employee is non-exempt if they are paid by the hour and can receive overtime pay or if their salary is below a threshold set by The Department of Labor. These positions are required to make at least minimum wage.  

Correctly classifying your employees isn’t just important for collecting the right tax amounts and paying your people correctly. It also protects your business from fines and even lawsuits. If you aren’t sure if someone is an exempt vs. a nonexempt employee, check with the IRS.

17. Do I pay contractors in the same way as other employees?

No. Because a contractor is not one of your employees, you don’t pay them like you would an employee. How is payroll calculated differently for contractors? First, you don’t deduct taxes from their gross wages because they are responsible for paying their own taxes on the wages they earn. Second, you (the business owner) aren’t responsible for paying any FICA tax for the wages paid to a contractor. 

There are some very specific requirements you need to follow when working with contractors to ensure you aren’t misclassifying an employee, so if you aren’t sure how to hire an independent contractor, consider speaking to a lawyer or an accountant.

18. What are payroll deductions?

A payroll deduction is any money you withhold from an employee’s gross pay. Some deductions are voluntary, like health insurance premiums or 401(k) contributions, while others are mandatory, like taxes and wage garnishments.

Deductions can be pretax or post-tax.

19. Which deductions are pre-tax vs. post-tax?

Pretax deductions are taken from wages before taxes meaning that the overall amount of taxable income is reduced. These deductions are limited to paying for things like health insurance and some retirement plans.

Post-tax deductions are paid with the wages remaining after taxes have been withheld. Common post-tax deductions are Roth IRAs, union dues, and wage garnishments.

20. What paperwork do I need to provide to employees with each check?

Whenever you pay your employees, you need to provide them with a pay stub. This is a physical or digital document that includes:

• The name and address of the employer
• The pay period beginning and end dates
• Employee name and address 
• Rate of pay
• Number of hours worked
• Gross wage
• Amount of taxes withheld from employee’s pay
• Amount of taxes paid by the company on behalf of the employee (unemployment tax, its portion of FICA tax)
• Amount of deductions
• Amount of wages garnished
• Accrued paid time off
• Net wage

Each state has different paystub requirements that are important to follow.

21. What do employees need when filing their personal taxes?

Your employees will need a W-2 from your company to file their personal income taxes. The W-2 contains information about:

• Their wages
• Withheld taxes
• Benefits for dependent care

If they paid into an HSA, FSA, or retirement account, they’ll need additional paperwork. Usually, that paperwork comes directly from the administrators of those accounts.

W-2 form instructions can get complicated, especially when employees receive multiple kinds of payment (hourly, overtime, and tips, for example) or if your company helps pay for health care or retirement programs. Working with a payroll service provider can make this process easier.

This article originally appeared on the Quickbooks Resource Center and was syndicated by MediaFeed.org.

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