So, you want to learn
Bookkeeping!
Payroll
by Bean Counter's Dave Marshall
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Introduction Lesson 1 Lesson 2 Lesson 3 Lesson 4 Lesson 5 Lesson 6 Lesson 7 Lesson 8
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Hello it's Dave again. For those of you that took my free So you want to learn Bookkeeping! Introductory Tutorial or any other of my other bookkeeping tutorials we've already met. This tutorial actually requires no knowledge of bookkeeping, however; I recommend that you take my free So you want to learn Bookkeeping! Introductory Tutorial if you don't have a basic understanding of some accounting terminology , debits and credits, transaction analysis, and the general ledger and general journal.

This tutorial is geared to business owners, managers, and individuals who have not had any formal bookkeeping training or on the job experience and need or want to learn the basics of payroll. The purpose is to provide an introduction and overview of payroll and the laws, rules, regulations, forms, records, and calculations that small business owners and/or their employees responsible for payroll need to be familiar with. No, when you finish this course you won't be an expert; however, you will be familiar with what is required to have a legally functioning payroll system. In many of the lessons, I've also included helpful references (links) to other sites where you can find additional payroll related information. In addition, a detailed listing of links to other useful payroll information is provided in my last lesson. You do need to be connected to the Internet (on line) to access these sites. In some complicated areas such as employee benefits you may also want to seek the advice of an expert.

Note: Some references provided are in PDF format and require Adobe's free reader. When required, these references (links) are denoted with a bold PDF.

If you don't have Adobe Reader download and install a free version.
Adobe Reader
http://www.adobe.com/products/acrobat/readstep2.html

Tutorial Navigation
A menu of all the lessons is presented at the top and bottom of all the lessons. A back and next arrow also allow you to go back to the prior lesson or on to the next lesson.

What's Covered ?

Note: Note: The Current Minimum Wage is $7.25 per hour.

Although the calculations used in this tutorial have not been revised to reflect the new minimum wage and use the old minimum wage of $5.15, the methods and procedures using the minimum wage ,regardless of the rate, are all still applicable.

This Introduction provides an overview of payroll, employees, and your requirements as a business.

Lesson 1 Types Of Compensation discusses and explains that an employee's compensation includes not only direct payments (salary and wages) but also indirect benefits known as fringe benefits or "perks".

Lesson 2 Types Of Deductions discusses and explains the different types of deductions that are taken from an employee's salary or wages such as social security, medicare, federal and state income tax, and other deductions such as health insurance and retirement plans.

Lesson 3 Calculating Payroll uses a fictitious company called Mom's Secret Recipes to illustrate what calculations are needed and how to do them in order to correctly calculate and pay your employees.

Lesson 4 Payroll Taxes and Withholdings discusses and reviews how an employer reports and deposits amounts deducted from their employees' wages and salaries and also how an employer is required to "match" amounts deducted for social security and medicare.

Lesson 5 Payroll Records illustrates and discusses the records needed by employers to properly documents and record their employee's wages and salaries and deductions taken.

Lesson 6 Self Employed reviews and explains what self employment tax is, who is required to pay this tax, and how to properly calculate, report, and deposit this tax.

Lesson 7 Government Regulations presents a brief overview of the federal and state laws, rules, and regulations that you as a business owner or manager need to be aware of.

Lesson 8 What You Should Know summarizes and reviews the major points covered in this tutorial.

As mentioned earlier, Lessons also contain references (links) to other helpful sites where you can obtain more detailed information regarding the topic discussed in the lesson.

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.

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. Apply On Line
http://www.irs.gov/businesses/small/article/0,,id=102767,00.html

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 and licensed real estate agents. Why ? Just because that is the law.

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. The IRS publications previously mentioned provide detailed guidance in making employee determinations.

What Do I Need To Do When Hiring Employees ?

  • 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). If you need help finding your state's appropriate agency check out Unemployment Help.
    http://www.statelocalgov.net
  • 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.
  • http://www.dol.gov
  • http://www.dol.gov/esa/minwage/america.htm
  • Check to see if any Occupational Safety and Health Act (OSHA) requirements apply to your type of business. You may want to check out OSHA's website for help and information.
    http://www.osha.gov
  • Determine, obtain, and post all the labor posters required for your business. Need help ? Check out the Department of Labor's DOL's website or obtain posters Labor Posters. You should also check your state's labor department to see if any posters are needed.
  • http://www.dol.gov
  • http://www.dol.gov/elaws/posters.htm
  • http://www.dol.gov/esa/minwage/america.htm
  • 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
  • http://uscis.gov/graphics/formsfee/forms/i-9.htm
  • http://uscis.gov
  • Have all employees fill out IRS Form W-4, Withholding Allowance Certificate. This form provides the information necessary for properly withholding the correct amount of income tax from your employee's wages. Form W -4 indicates your federal tax filing status (i.e. single or married), the number of exemptions you are claiming for federal tax withholding purposes and any additional money you wish to withhold for federal tax purposes. If you need this form visit the IRS site.
    http://www.irs.gov/formspubs/lists/0,,id=97817,00.html
  • Any eligible employee who wants to claim the Advanced Earned Income Credit must complete Form W-5. As an employer, you are required to make advance EIC (Earned Income Credit) payments to any employees who qualify and have provided you with a completed and signed W-5 form. If you need this form visit the IRS site.
    http://www.irs.gov/formspubs/lists/0,,id=97817,00.html

Classifying Your Employees

Exempt / Non-Exempt Employees

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 nonexempt. You use the rules set out by the law (FLSA) in order to determine whether an employee is exempt or nonexempt 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. For example, if your state's minimum wage is $7.00 an hour and the FLSA minimum wage is $5.15 , you have to use the $7.00 an hour rate as your minimum wage for all employees that qualify.

Basically to qualify as an exempt employee , the employee must (1) be paid on a salary basis and (2) perform exempt job duties and (3) earn a salary of at least $455 per week. An employee who is not paid on a salary basis is nonexempt 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. Nonexempt employees may also be paid on a salary basis. An employee who is paid on a salary basis is exempt only if they also performs exempt job duties.

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 may not have to be paid minimum wage or paid overtime as specified by the FLSA.

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 nonexempt 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.

If you want to be able to classify an employee as exempt, you must pay him or her a salary. Any employee not paid a salary (hourly rate, piece rate, or commission) is automatically classified as nonexempt; however, as stated earlier you can have nonexempt employers that are paid a salary.

The lesson covering government regulations will provide additional information about labor laws and links to sites that provide more detailed information.

We all start out learning something new just like an infant. We take baby steps first. Believe it or not, we've covered quite a bit and you should now at least be aware of some of the laws and requirements that you as an employer have to consider when making the decision on hiring employees. If you already have employees, you got a good review of some of your requirements and needed forms.

Let's roll into Lesson 1 and discuss the Types Of Compensation. By the end of this tutorial you'll hopefully be able to let go of the teddy bear.

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Introduction Lesson 1 Lesson 2 Lesson 3 Lesson 4 Lesson 5 Lesson 6 Lesson 7 Lesson 8
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