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As the resident payroll specialist, I get asked a lot of questions, which I’m always happy to answer. My job is to be the expert, yours is to focus on your business. Anyhow, I’ve picked the five most frequently asked payroll questions and shared the answers.
Question 1: What are the employer-paid taxes?
As an employer, you are responsible for withholding federal, state and local taxes from an employee’s wages. The amount withheld is determined based on the information an employee provides in Form W-4.
In addition to these taxes, you are also required to withhold social security and Medicare taxes under the Federal Insurance Contributions Act (FICA).
As per the 2016 update from the Social Security Administration (SSA), these tax rates are:
6.2% toward social security on earnings up to $118,500
1.45% toward Medicare on all earnings
Then, there are Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA) payments. These are both employer-only taxes and it is recommended that you check with your state to confirm your rates.
Click here for more information to help you understand your payroll expenses.
Question 2: Can I pay an employee if I don’t have his or her social security number (SSN)?
The Internal Revenue Service (IRS) clearly outlines that an employer is required to enter each employee’s name and SSN correctly in Form W-2. This rule applies to resident and nonresident alien employees as well.
While you don’t have to keep a photocopy of an employee’s SSN on hand, the best practice is to record this information in your payroll / HRIS system in order to prevent the risk of penalties at year-end from filing a W2 with a missing / incorrect SSN.
💡 The Social Security Administration (SSA) offers a free service for employers to verify employees’ names and SSN numbers against their social security records for wage reporting purposes.
Question 3: What is the difference between a pay period and pay date?
A pay period is defined as the period during which your employees worked or earned wages. The pay period usually has a clear start and end date, although the pay period end date may or may not coincide with the pay date.
A pay date (not to be confused with a caramelly, nutty confection known as a PayDay candy bar) is the specific date on which your employees are paid, either by check or direct deposit. The pay date is used to determine when payroll liabilities are due, based on your company’s tax deposit schedules.
An example of when a pay period and pay date may not coincide is when a pay period ends in December of the previous year, while the pay date falls in January of the new year. Because the pay date is in the new year, the tax deposits and reporting also falls to this year.
Question 4: What is a pre-tax deduction?
Health insurance is the most common pre-tax deduction. It includes medical, dental and vision insurance. As an employer, you can withhold health insurance premiums from your employee’s gross pay before Federal, State and Medicare taxes are calculated, thus reducing your tax liability. These health insurance premiums can be paid through pre-tax payroll deductions.
Retirement deferrals, such as those for a 401(k), are another form of pre-taxed deductions. The trick with retirement deferrals is that while the amount deducted lowers the total taxable amount for state and federal taxes, it does not do so for social security and Medicare.
For example, if an employee earns $,1000 and deducts $100 for a 401(k), the state and federal taxes would be based on an income of $9,00. However, social security and Medicare wages remain at $1,000.
Of course, there’s one exception. Pennsylvania is the only state that does not exempt retirement deferrals. We don’t know why, you’ll have to ask Pennsylvania.
(Subtle sales pitch — don’t worry, it’s fast.) If you need a 401(k) solution, we have partnered up with Ubiquity to offer two types of 401(k) retirement plans. Express(k) plans are ideal for businesses looking for an easy, ready-to-go plan, while the Custom(k) plan gives you the flexibility to maximize savings for your business and employees
To learn more about pre-tax deductions, see this comprehensive list of the commonly used deduction types in payroll.
Question 5: Is a workers’ compensation policy mandatory?
This question should really have been at the top of the list because I get asked this question at least once a day.
Yes. Workers’ Compensation coverage is mandatory in the United States. Read all about it in our comprehensive post: Everything you need to know about Workers’ Compensation coverage.
If you need to get set up with a Pay-as-you-go Workers’ Compensation plan, we’ve partnered with the good folks at E-Comp to help you get the right Workers’ Compensation coverage for your business. Request a demo to find out more.
I hope that I’ve answered all your payroll questions. If you have more questions, please leave a comment. The person with the best small business payroll question will also receive some most excellent Wagepoint swag.
Disclaimer: The advice we share on our blog is intended to be informational. It does not replace the expertise of accredited business professionals.