Payroll expenses you’re probably are getting wrong


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Payroll expenses are the costs associated with hiring employees and independent contractors for your business. To pay workers, start with gross pay and deduct withholdings to calculate net pay. Processing payroll requires you to collect and manage data, and your payroll expenses may change frequently.

    What are payroll expenses for employers?

    Payroll expenses are what employers pay to hire workers. Amounts you withhold from a worker’s pay and submit to a third party are not company expenses. To understand these differences, review each payroll component and determine if the component is a business expense.

    Gross wages

    Calculate gross wages from an annual salary or hourly rate of pay and hours worked. The gross wages you pay employees may be your largest payroll expense.

    Deductions for state and federal income tax withholdings

    You must deduct federal—and possibly state and local—income taxes from wages. The worker’s annual income and the number of allowances they specify on their W-4 determines the amount you deduct. Pass what you withhold to each taxing authority. These amounts aren’t employer expenses.

    Deductions for FICA taxes

    FICA taxes fund Medicare and Social Security. Currently, employers pay a 6.2% Social Security tax and a 1.45% Medicare tax (7.65% in total). Each worker pays the same 7.65% tax through payroll withholdings.

    Unemployment tax (FUTA and SUTA) withholdings

    The Federal Unemployment Tax Act (FUTA) and the State Unemployment Tax Act (SUTA) provide temporary income for workers who lose employment.

    The current employer’s FUTA tax rate is 6% on the first $7,000 in gross income a worker earns. If wages are subject to a state unemployment tax, the employer can use a 5.4% FUTA credit, which reduces the FUTA tax to 0.6%. Total federal and state unemployment taxes vary and depend on each state’s unemployment program.

    Benefit withholdings

    If your company offers benefits, you may withhold a portion of the costs from a worker’s pay. You may withhold amounts for the employee’s share of insurance premiums or their retirement contributions, for example. Your share of the costs is a payroll expense. Generally, the only payroll expense for an independent contractor or freelancer is the dollar amount you pay for services.

    How independent contractors differ from employees

    A worker’s classification determines how you treat them for tax purposes. If the worker is an employee, you’ll incur the payroll expenses discussed above. Independent contractors, on the other hand, are responsible for all tax withholdings. The company’s only expense is the gross amount you pay for services.

    The IRS explains how to assign workers to a particular category. The control you have over a worker determines if the worker is an employee or an independent contractor. The guidelines consider how much control you have over what the worker does, who provides tools and supplies, and if you have a written contract. If you have a lot of control over a worker, you should classify them as an employee.

    When are payroll expenses incurred?

    Every business should use the accrual method of accounting, which matches the revenue it earns with the expenses it incurs. The accrual method records payroll expenses in the month that you incur them, regardless of when you pay for the expenses. The matching concept presents a more accurate picture of company profit. This accounting method does not post expenses based on cash outflows.

    Assume that a restaurant owes workers $3,000 in payroll for the last five days of March and that the next payroll date is April 5. Using the accrual method, the $3,000 wage expense posts on March 31, along with a $3,000 increase in wages payable.

    When the business owner processes payroll on April 5, cash decreases by $3,000, and wages payable decreases by $3,000. The expense posts in March, when employees worked those hours. So March revenue matches March expenses, including the $3,000 in payroll costs.

    Meanwhile, the accrual method posts payroll liabilities and expenses in the same period. The restaurant example shows a $3,000 wage expense and a $3,000 wage liability balance post on March 31. When the business owner pays cash on April 5, the liability balance decreases.

    How to calculate payroll expenses

    The payroll process requires you to collect information, perform calculations, pay workers, and submit withheld payments to third parties.

    1. Collect information on Form W-4

    New employees must complete Form W-4. The form tells employers how much to withhold from a paycheck for tax purposes. The number of allowances on the W-4, along with the gross pay, determines the tax withholdings.

    The W-4 also guides employees who have multiple jobs or spouses who work. There are extra schedules to calculate withholdings in these situations.

    2. Use the payroll cycle to determine gross pay

    Gross wages are the starting point for payroll. The number of pay periods per year determines how much of a worker’s salary you pay on each payroll date. If you pay an employee hourly, the pay period indicates the start and end dates for payroll.

    3. Use gross pay and other data to calculate net pay

    Net pay is the amount the worker receives after all deductions and withholdings. Use the information you’ve collected to calculate net pay.

    Let’s say you process payroll 26 times per year. You withhold income taxes, FICA taxes, and health insurance premiums from an employee’s pay. But you don’t withhold unemployment taxes because they’re an employer expense.

    Now, let’s say an employee’s annual gross pay is $60,000. Their gross pay per period is $2,308. Then you deduct 20% for federal income taxes and 5% for state income taxes. You deduct another 7.65% for FICA taxes and $50 for the employee’s health insurance. So the employee’s net pay for the pay period is $1,504.

    4. Submit payroll tax deposits

    Business owners must submit deposits for tax withholdings. The deposit frequency varies and depends on the dollar amount. Submit payroll tax deposits for federal and state income taxes and FICA and FUTA taxes. You can pay tax deposits online, which makes it easier for you to submit them on time.

    5. Complete payroll tax forms

    Payroll tax returns are complex, so the information you submit must be accurate. Make sure to submit the forms on time to avoid late fees. There are four common payroll tax forms. Payroll software can generate these reports automatically.

    1. Form 941 reports federal income taxes and FICA taxes to the IRS each quarter.
    2. Form 940 is your annual federal unemployment (FUTA) tax return.
    3. Form W-3 reports the total wages and tax withholdings for each employee. File this form with the Social Security Administration annually.
    4. Form 1096 reports the dollars you paid to independent contractors using 1099 forms. File this form annually.

    6. Report pay amounts to workers

    Business owners issue Form 1099-NEC to independent contractors. You must issue a 1099 to each contractor who makes $600 or more from your business during the calendar year. If they make less than $600 from your business, the earnings are still taxable, so the contractor should report them on their tax return. Employees receive a W-2, which reports gross pay and all tax withholdings for the year.

    7. Keep records on file

    The Fair Labor Standards Act (FSLA) requires businesses to maintain employee time and pay records for at least two years. Changes to tax laws, adding or losing employees, and changes to tax withholdings may affect your payroll calculations from one pay period to the next.

    Posting payroll tax journal entries

    Businesses must post three common payroll journal entries. If you use a payroll service , you can save time and process payroll correctly.

    1. Accrued payroll: Debit accrued wages (or wages expense) and credit wages payable to expense payroll in the proper period.
    2. Accrued payroll in cash: If you accrue payroll and then pay workers in cash, you debit wages payable and credit cash.
    3.  Income taxes withheld: When a business withholds taxes, the company records a liability for the amount it withholds. When the company pays the withheld taxes, the tax liability account decreases with a debit, and cash decreases with a credit.

    Manage payroll expenses

    Processing payroll requires a company to complete several steps and calculate withholdings for employees. The accrual method allows you to match payroll expenses with revenue and posts payroll expenses and liabilities in the same period. Use a payroll solution to process payroll and avoid manual calculations. Payroll can change frequently, so document your payroll process to save time.


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

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    5 tips for organic business growth

    5 tips for organic business growth

    It’s no secret that startups have a prodigious failure rate. In fact, according to a recent study, the four-year survival rate for a startup is just 49%.

    With demoralizing stats like this in mind, entrepreneurs may be tempted to grow their profits through any means necessary, including inorganic strategies like acquisitions or mergers. However, the truth is that business owners can achieve impressive growth through organic strategies as well, allowing them to retain control of the companies they built from the ground up.

    Also known as “true growth,” organic growth refers to the process of growing a business by reducing costs and increasing sales, either by finding more customers or enhancing output to current clients. On the other hand, inorganic growth occurs when a company merges with or is acquired by a second business. Entrepreneurs should take the time to familiarize themselves with the advantages of organic and inorganic growth, as well as some of the top strategies for execution, so they can decide which is the best choice for their business.

    As a new business owner, you’ll likely want to increase profits as quickly as possible. By employing inorganic strategies like mergers and acquisitions, startups can grow their businesses more quickly while taking advantage of resources such as stronger credit lines and expanded market resources. Additionally, joining with another company lets you take advantage of its expertise and experience in the industry to develop your own brand.

    By merging with another business, you agree to hand over some of your control and equity to another company. Not only can your initial vision become diluted, but you may also be forced to take on new business and managerial challenges before you’re truly ready. In some cases, you may have to rush to grow your staff and production capabilities to keep up with demand.

    On the other hand, organic growth techniques allow you to grow your business on your own timeline. Because you aren’t sharing control with another company, you can hire employees and expand sales at your own pace. Additionally, entrepreneurs who maintain their autonomy now can sell for a larger profit later when the company is fully developed.

    While retaining control of your company offers many advantages over the long haul, it can make business growth challenging in the short term. Some entrepreneurs struggle to grow beyond their current marketplace, while others find themselves cut down by the competition. Additionally, new businesses must often fight to make ends meet from month to month. Fortunately, strategies exist to help startups grow their profits without handing over control to partners or investors.

    Here are just a few of those strategies to help you grow your business organically:

    Want to grow a business that will feed your family and employees for years to come? The first step on the road to entrepreneurial success is starting the right kind of company.

    With home-based and e-commerce businesses, you can avoid expenses like rent and commuting during the early, lean years of your company. As an added bonus, working out of the home lets you write off parts of your mortgage and electric bill. You can then invest these savings back into the business to help you grow in the long term.

    A common conundrum for new business owners is whether to take your full cut of the profits or invest the money back into your company. While you may be tempted to keep some of those hard-earned dollars for yourself, you should aim to reinvest gross profits whenever possible to help your business grow. Investing your own money shows prospective clients and lenders that you are confident in your company’s long-term potential.

    Not sure where to put profits? When in doubt, invest in marketing, SEO and other tactics likely to generate more business for your startup. If your income permits it, you may also want to invest in employee training and technological improvements, as these can yield large profits down the line for your company.

    No matter how happy your current clients are with your offerings, you will have trouble growing your business organically if you don’t put effort into finding new sales channels. If you don’t currently sell your goods online, you should definitely consider starting a website to expand your reach to other regions. Additionally, you can introduce new products, cross-market services to your existing clients and expand to different markets. For example, a company that specializes in SEO may want to expand its services to include social media and search engine marketing.

    Finally, business owners should employ market segmentation to customize their strategies according to the specific channels they are leveraging and the specific markets they are trying to reach. This way, you can create unique campaigns based on customer location and demographics and watch your sales rates skyrocket.

    As a new business owner, you may feel the urge to micromanage everything that happens at your company. However, the truth is that macro-management is a far more effective way of enabling organic growth for your startup.

    To keep your company moving forward, you should train top employees to take over some of your daily responsibilities. While you may be tempted to keep costs down by hiring employees who will work for less, in the long run these staff members could end up costing you more if their efforts aren’t up to par. Find people you can trust to get the job done—even when you’re not around—so you can focus on growing and developing your business in the years to come.

    From minimizing spending, to reinvesting profits back into the business, organic growth strategies help ensure that you will retain control of the company you worked so hard to build. Do your research, and consider all the growth strategies available in order to give your business the best shot at success.

    Do you know how sales taxes are impacting your bottom line? Check out our sales tax calculator.

    This article originally appeared in the QuickBooks Resource Center and was syndicated by

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