Understanding payroll can be a confusing endeavor. There are so many rules, laws, requirements, statues, and factors.  In the end, payroll can make or break even the toughest of business entities. Just ask G.M and Ford.

We only need payroll if we hire an Employee, (not subcontractors). Employees are different from subcontractors. Subcontractors are business people who do various parts of the work for us. They become employees when we set the hours, pay, time, location and even what and how they do their jobs. Hiring employees includes hidden costs like payroll tax, insurance fees, training, supervision, etc. So to determine employee classification the IRS sets certain standards.

According to the IRS, an employee falls under 3 Factors of consideration

1. Behavioral control factors: Type of instructions, Degree of instruction. Evaluation systems and Training.
2. Financial controls factors: Significant investment, reimbursed expenses, Opportunities for profit or loss, Services available to market, and Method of payment.
3. Type of relationship factors: Written contracts, Employee benefits, Permanency of relationship, Services provided as key activity of the hiring company.

To summarize all these, we are hiring employees if:  You dictate various things like when to be there, where they will work, what tools must be used, how to do the job, provide work-related training, reimburse expenses, share profit, set wages, provide benefits, evaluate their work process or when they work over extended simultaneous periods.

Understanding Payroll requires we understand these 11 requirements.

1. Employee Information (personal information on W-2’s)
2. Hours worked (payable hours employee worked)
3. Time off (vacations, sick days, paid leaves)
4. Salaries and wage dollar amounts (salaries are fixed, wages are hourly)
5. Overtime pay (over 40 hours per week is typically one and a half times normal pay)
6. Fringe benefits (health insurance, retirement plans, employee discounts)
7. Other pay (tips, commissions, bonuses)
8. Garnishment (typically court ordered deductions from specific employees pay)
9. Deductions (money deducted for workers taxes including local, state and federal taxes)
10. Gross and Net Pay (Track total money paid = Gross, Money after deductions = Net)
11. Payroll taxes (FICA = Social Security and Medicare, Federal/State Unemployment and Disability Insurance)

The overhead cost (cost above their base pay) runs about 1.25 to 1.4 times their base pay (per year). This means a 50,000/year employee might cost you 62,000 – 70,000. This does not include costs of training, increased supervision. Neither does it include the load on other resources like parking, office space, work errors or facility usage etc. As a business decision there are many factors outside just paying a basic hourly rates and which accounting methods we’ll use. Lets look at just a few.

Understanding Payroll – 7 great tips

1. Be consistent with your policy –In regard to fringe benefits and employee management treat everyone equally. Its great business practice. Besides people are very sensitive to inequity in the work place.
2. Track employees work hours – Don’t rely on their honesty and good will. People tend to favor themselves not their boss.
3. Automatically make payroll deductions and tax deposits – Falling behind leads to huge penalties and interest payments.
4. Increase fringe benefits in light of pay raise – This can reward employees and may not increase payroll tax.
5. Be aware of special needs – Not just following disability rules and etiquette, but be aware of medical insurance needs. Health insurance rules change, but hiring more than 50 employees requires health insurance. Those with under 25 full-time employees may receive health insurance tax breaks.
6. Don’t attempt to handle payroll yourself – There are numerous people who you can hire to handle your payroll, and not just big accounting firms. So, shop around and save yourself the headache.
7. Keep a second payroll bank account – This helps keep money separate, and ensures the payroll is done properly. Because the IRS punishes businesses who are late making payments. They may also provide overdraft or lines of credit to help you make payroll when you need. Especially during troubled times.

To end this article about understanding payroll its vital that we hire the right people at the right time. Failing at either can be a recipe for disaster.