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
This Introduction provides
an overview of payroll, employees, and your requirements as a
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
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
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
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
As mentioned earlier, Lessons also
contain references (links) to other helpful sites where you can
obtain more detailed information regarding the topic discussed in
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
- If you have a qualified
- 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
- If you are required to file any
of the following returns:
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.
- Employment Taxes
- Excise Taxes
- Alcohol, tobacco, or firearms
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
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
- 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
- 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
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
- Weekly (52 paychecks per
- Semi-Weekly -Every other week (26
paychecks per year),
- Bi-Monthly -Twice a month (24
paychecks per year)
- Monthly (12 paychecks per
- Annually (one paycheck per
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
- 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
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. You may want to check out 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 or obtain posters Labor
Posters. You should also check your state's labor department to see if any posters are
- Determine what, if any, fringe
benefits you plan to provide your employees and any applicable laws
- 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 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.
- 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.
Exempt / Non-Exempt
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
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
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
What does "exempt"
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
What does "nonexempt"
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
The lesson covering government
regulations will provide additional information about labor laws
and links to sites that provide more detailed
||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.