Payroll Introduction

Payroll Basics > Introduction

Introduction

Many businesses begin operations as a sole proprietorship (business owned by one individual). The owner often starts out as the only person performing all the tasks necessary to running the business such as planning, purchasing, selling, bookkeeping, and handling the day to day operations. In other words, we got a chief with no indians. Some not only start out, but continue to operate as a one man or woman show without the need for any employees. The one person operations are content in the income they can produce on their own from providing their product or service and may not want the "hassle" of employees.

On the other hand, we're all probably familiar with the saying "that many hands make light work". As the business grows, however; even the sole proprietorship is often faced with the decision of obtaining additional help. The additional help can be obtained in the form of employees, temporary services, or contracted services. If the business out sources, uses temporary help or contracted services exclusively, any special government requirements and payroll knowledge and procedures related to employees is avoided.

All U.S. businesses must have a taxpayer identification number. The two most common types of taxpayer identification numbers are your social security number (SSN) or an employer identification number (EID). A social security number is issued by the Social Security Administration while an employer identification number is issued by the IRS to sole proprietorships (individuals), partnerships, corporations, limited liability companies, and other entities.

SS-4 Tax Payer Identification Application

When Do You Need An Employer Identification Number ?

If you have or plan on hiring any employees.
If you have a qualified retirement plan.
If you operate your business as a partnership, corporation, or limited liability company (LLC). Actually, an LLC is treated by the IRS as a corporation, partnership, or an entity separate from its owner (sole proprietorship).
If you are required to file any of the following returns:

Employment Taxes
Excise Taxes
Alcohol, tobacco, or firearms taxes

If you meet any of the above criteria, the first requirement you need to take care of ( U.S. businesses) is obtaining your Employer Identification Number (EID) from the Internal Revenue Service (IRS). If none of the requirements listed above apply, you may use your Social security Number (SSN) as your taxpayer identification number.

If you need an employer identification number, you must complete and file Form SS-4 Application For Employer Identification Number in order to fulfill this requirement. You can apply for your employer ID number on line at the IRS's website.

Who Are Employees ?

According to the IRS, a person performing services may be classified as an independent contractor, a common-law employee, statutory employee, or a statutory non-employee. In general, if an individual is not classified as a common-law employee you are not required to collect and report payroll deductions and taxes.

Let's first look at who is not an employee.

Independent Contractor
Examples of independent contractors include lawyers, accountants, and contractors who work in an independent trade, business, or profession that offer services to the general public. These type of individuals (firms) are normally not classified as employees. As a general rule if you employ an individual or firm and you only have the right to control the results of the work, but not the methods, means, and procedures used to accomplish the work, the individual or firm is classified as an independent contractor.
Statutory Non-Employee
By law statutory non-employees include individuals engaged in direct selling, companion sitters, and licensed real estate agents. Why ? Just because that is the law.

Their services are performed under a written contract providing that they will not be treated as employees for Federal tax purposes.

Well we briefly discussed who's not an employee, now let's see who is.

Common-Law Employee
In general, anyone who works for you where you can control what and how the work is performed is treated as your employee and you are required to collect and report payroll deductions and taxes.
Statutory Employee
By law certain types of work performed are treated as employees regardless of any other general guidelines that may be used to determine employee status. Why ? Again, just because that is the law.

In summary, if the law says an individual or type of occupation is or is not treated as an employee then no additional determination is needed. When not covered by the law, the common-law and independent contractor rules need to be evaluated in making the determination.

What Do I Need To Do When Hiring Employees ?

You need to perform the following tasks:

Of course your going to need to set up your payroll system so that you can track your employee's wages and deductions and remit all the necessary payments required by the IRS. In addition, you'll need to design or obtain the forms such as employment applications, employee reviews, employee deduction authorizations, lay off slips, etc. needed to administer your payroll system.

Determine Your Pay Periods
You need to decide how often you are going to pay your employees.

Weekly (52 paychecks per year)
Semi-Weekly -Every other week (26 paychecks per year),
Bi-Monthly -Twice a month (24 paychecks per year)
Monthly (12 paychecks per year),
Annually (one paycheck per year).

Note: You can have different pay periods for different "categories" of employees. For example, you could pay your salaried employees once a month and pay your hourly employees every week.

You should register with your state's employment agency or department for payment of state unemployment taxes. These "contributions" to the state are used to pay employees who are laid off and unable to find other work. You will normally be assigned an initial rate and the rate will be periodically adjusted based on your experience (how often the fund is used to pay for your employees periods of unemployment).

Obtain worker's compensation insurance. This insurance provides benefits to your employee's who suffer an on-the-job injury.

Determine what Federal and State Labor Laws apply to your business. Check out the Department of Labor's DOL's website and your applicable state's labor department.

Check to see if any Occupational Safety and Health Act (OSHA) requirements apply to your type of business using OSHA's website for help and information.

Determine, obtain, and post all the labor posters required for your business. Need help ? Check out the Department of Labor's DOL's website. You should also check your state's labor department to see if any posters are needed.

Determine what, if any, fringe benefits you plan to provide your employees and any applicable laws and regulations.

Report all new hires to your state's new hire reporting agency. This agency's purpose is to help track down parents who owe child support.

Fill out Form I-9, Employment Eligibility Verification for each employee hired. This form is required and used to verify that every employee you hire is eligible to work in the United States. To get this form click Employee Verification Form. For additional information regarding employee eligibility and rules check out the U S Citizenship and Immigration Services main site USCIS.

Have all employees fill out IRS Form W-4, Withholding Certificate obtained from the IRS. This form provides the information necessary for properly withholding the correct amount of income tax from your employee's wages. The Form has been redesigned to simplify calculating the amount of income tax to withhold from employee's earnings.

Fair Labor Standards Act

The Fair Labors Standards Act (FLSA) applies to employees of enterprises that do at least $500,000 in business a year. It also applies to employees of smaller firms if the employees are engaged in interstate commerce or in the production of goods for commerce, such as employees who work in transportation or communications or who regularly use the mails or telephones for interstate communications. It also applies to employees of federal, state or local government agencies, hospitals and schools, and it generally applies to domestic workers.

The Act (FLSA) establishes minimum wage, overtime pay, record keeping, and child labor standards affecting full-time and part-time workers.

The FLSA requires you to classify all of your employees as either exempt or non-exempt. You use the rules set out by the law (FLSA) in order to determine whether an employee is exempt or non-exempt and whether you have to follow special rules when paying some or all of your employees.

Note:State's also have laws and regulations governing how an employee must be paid. If a state's laws (rules) are more beneficial to an employee than the FLSA (laws) rules then you most adhere to your state's labor laws.

Classifying Your Employees

Exempt / Non-Exempt Employees

Exempt Employee Requirements

Basically to qualify as an exempt employee , the employee must (1) be paid on a salary basis, (2) perform exempt job duties, and (3) earn a salary of at least a weekly amount set by the law. Effective January 1, 2020, the minimum salary level to be exempt is at least $684 per week ($35,568 per year).

Non-Exempt

An employee who is not paid on a salary basis is non-exempt no matter what kind of work he or she does.

Note:Being paid on a salary basis does not automatically classify an employee as exempt. Non-exempt employees may also be paid on a salary basis. An employee who is paid on a salary basis is exempt only if they meet the exempt employee requirements stated above.

What does "exempt" mean?
The term used in your daily life means that you don't have to do something. It also has the same meaning when used in conjunction with the FLSA. If an employee is determined to be (classified) exempt from the FLSA, it means that you as an employer are not subject to any of the FLSA special rules for this employee and the employee is not entitled to any of the FLSA protection and benefits. This means that an exempt employee does not have to be paid overtime for hours worked in excess of 40.

If you want to be able to classify an employee as exempt, you must pay him or her a salary.

Most employers are well aware that employees must be paid on a “salary basis” to be considered exempt from the overtime requirements of the Fair Labor Standards Act (“FLSA”). This means employees must receive the same amount of pay each week regardless of the amount or quality of work they perform for a given week. Accordingly, exempt employees must be paid their full weekly salary for any week in which they perform work, whether or not the employee has actually worked a full work week.

What does "nonexempt" mean?
Nonexempt is the exact opposite of exempt. It means you have to do something. If an employee is determined to be (classified) as non-exempt from the FLSA, it means that you as an employer are subject to all of the FLSA special rules for this employee and the employee is entitled to all the protection and benefits provided by the FLSA (law) such as minimum wage and overtime requirements. Any employee not paid a salary (hourly rate, piece rate, or commission) is automatically classified as non-exempt; however, as stated earlier you can have non-exempt employers that are paid a salary.

What's Next ?

Introduction Video