This piece was contributed by Square.
You’ve hired your first employee – now you need to make sure they get paid. If you’re new to payroll, you might find yourself in some uncharted waters, navigating a sea of new terminology — pay periods, unemployment tax, Form 941.
If you’re feeling overwhelmed, this quick guide will walk you through the basics to set up a payroll system for your business. This in no way attempts to cover all of the rules employers are exposed to, so be sure to consult with a professional if you have specific questions regarding your obligations as an employer.
Pay periods and paydays
One of the first decisions you have to make is your pay schedule — when your employees are paid for certain days of work. The beginning and ending dates of this schedule is your pay period, which represents the period in which your staff logged work time or earned wages. Pay periods might be weekly, biweekly or semi-monthly.
Payday is the date on which employees are paid. It’s usually a fixed number of days after the end of the pay period. For tax purposes, your payday is used to determine the period in which you need to pay and file payroll taxes.
Collecting employee and employer taxes
Now for taxes. When it comes to payroll taxes, there are two parties — employees and employers — who are required to pay taxes on wages. These taxes are usually owed to both the federal government and the state, and sometimes to cities and municipalities as well.
Generally, employers are responsible for collecting federal income tax, Social Security, and Medicare tax from employees’ paychecks based on what employees marked in their Form W-4.
Employers must also pay a matching amount of Social Security and Medicare tax and Federal Unemployment Tax (FUTA). FUTA is a federal employer tax that, along with state unemployment tax (if applicable), provides unemployment compensation to workers who have lost their jobs. Depending on your state, employers may also be required to collect and pay state income tax. This Employment Tax Guide by the IRS provides more detail on this.
Paying and filing taxes
So when do you have to pay these taxes? Generally, you need to pay federal and state income taxes on a monthly basis. Other types of taxes, like FUTA, are usually paid quarterly. How often you need to pay these taxes depends on the size of your business.
Most employers need to pay taxes on a monthly basis and receive notifications from the state and federal government if they need to pay taxes more frequently. Full-service payroll providers usually withhold these taxes each pay period and pay them to the government when they’re due.
If you’re paying employees, you also need to file some forms. Federal Form 941 (quarterly federal tax return) must be filed each quarter, and Form 940 (FUTA tax return) must be filed yearly. You may also have to file similar forms to the state.
Employers are also required to send Forms W-3 and W-2 to the Social Security Administration each year. Again, most payroll services handle these filings for you electronically. If you process payroll yourself, read more about these forms here.
Federal, state, and local laws
As you set up payroll, you must follow federal, state, and local labor and employment laws, even if the laws have different standards. For example, although the federal minimum wage is $7.25, in California it’s $10.50, and in San Francisco it’s $14.00.
At the minimum, the federal Fair Labor Standards Act (FLSA) establishes minimum wage, premium pay for overtime, and protections for children who work. You should be aware of FLSA requirements as well as state and local wage and hour laws, and always follow the provisions more favorable to your employees (i.e., pay $14.00 per hour if you’re located in San Francisco).
Most states have informative websites to help you figure out which laws apply. It’s a good idea to start there and then talk with a professional to make sure you’re following the right laws.
As an employer, you must track hours worked for hourly, nonexempt employees. Most workers are classified as either exempt or nonexempt depending on their salary and the type of work they do. You can read more about these and other classifications in the FLSA and your state’s wage and hour laws. This fact sheet by the Wage and Hour Division of the Department of Labor can help you better understand timekeeping requirements.
We hope this helps you get started. Contact the IRS or local and state tax authorities to inquire about registration, reporting, and and other compliance requirements. Publication 15, better known as Circular E, has a wealth of information as well.
Square Payroll can help make this all a whole lot easier. Learn how to put Square Payroll to work for your business.
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Square, Inc. creates tools that help sellers start, run, and grow their businesses. Square enables sellers to accept card payments and also provides reporting and analytics, next-day settlement, and chargeback protection. Square’s point-of-sale software and other business services help sellers manage inventory, locations, and employees; access financing; engage customers; and grow sales. Square was founded in 2009 and is headquartered in San Francisco.