PAYROLL your business

1. What is Payroll?

“Payroll” means payments to employees, where those payments are required to be reported to state and federal agencies, such as the IRS, Social Security Administration, Washington Employment Security Department, and Washington Department of Labor & Industries.

2. Do I need a payroll?

Most individuals you hire are considered “employees” by law. These include:

  • Temporary workers
    • Unless hired through a temporary services company that has the worker on its payroll
  • “Casual labor” and many “1099 workers”
  • Friends, relatives, and others receiving anything of monetary value in exchange for their work
  • Many independent contractors
    • Independent contractors must meet specific requirements to be considered exempt from employment laws.
    • There are several laws defining independent contractors, each with different requirements.
    • You can’t assume someone who meets the independent contractor definition and is exempt from one set of employment laws is therefore exempt from other laws.
    • The burden is on you to prove someone who works for you is not
    • Independent contractor laws that affect payroll tax responsibilities

3. Can I handle payroll myself, or do I need a professional?

  • Payroll calculations and related taxes aren’t necessarily difficult; however the recordkeeping, filing and payment responsibilities are significant. 
  • Learning all you need to know, keeping up on changes, and taking the time necessary to meet your requirements is time you’re not spending building your business.
  • If a business hires just one person early in a year, there will be 18 forms to complete that year, plus the legal responsibility for creating and maintaining employment and payroll records. That’s a lot to keep track of!
  • Because of all the requirements and time involved, many businesses contract with bookkeepers, accountants or payroll services to handle the process and required reporting for them.  

4. What payroll reporting and tax responsibilities do employers have?

Most responsibilities are summarized in this chart. Detailed explanations follow the chart.

Requirement 
(in order of action timing)

Purpose

Action

Agency

W-4 Form (completed by employee prior to first payroll; new forms can be completed at any time)

Needed for employee information and to determine federal income tax withholding

Keep on file

U.S. Internal Revenue Service

I-9 (completed by both employee & employer within 3 days of hire)

Needed to provide proof of an employee’s eligibility to work in the U.S.

Keep on file

U.S. Dept. of Homeland Security

New Hire Reporting (completed by employer within 20 days of hire or rehire)

Agency determines if employee has child support enforcement obligations.

online, fax or call in to DSHS (800-562-0479)

WA. Dept. of Social & Health Services

 

 

 

IRS Electronic Federal Tax Payment System (EFTPS)

Need account to pay federal taxes.

Set up account

U.S. Internal Revenue Service

IRS Form 941  - Employer’s Quarterly Federal Tax Return (1 each calendar quarter per employer)

Report employee earnings, employer and employee paid Social Security and Medicare taxes, and employee-paid income taxes.

Send forms quarterly to IRS by mail (due 4/30, 7/31, 10/31, 1/31). Send payments using IRS online system EFTPS

U.S. Internal Revenue Service

Workers’ compensation premium report (1 each  calendar quarter per employer)

Workers’ compensation insurance for medical costs and wage replacement if injured on the job.

Complete and pay online at www.lni.wa.gov (due 4/30, 7/31, 10/31, 1/31)

WA Dept. of Labor & Industries

State unemployment tax report (1 each calendar quarter per employer)

Unemployment benefits for employees who lose their jobs.

Complete and pay online at www.esd.wa.gov (due 4/30, 7/31, 10/31, 1/31)

WA Employment Security Dept.

IRS Form 940 - Employer’s Annual Federal Unemployment Tax Return

Pays for administration of the national unemployment insurance program

 

Send form to IRS by mail and transmit payment using IRS online system by 1/31 for the preceding year

U.S. Internal Revenue Service

IRS Form W-2 - Wage and Tax Statement for each employee for a calendar year

Employees need the form to file their federal income taxes. IRS and Social Security Administration need for recordkeeping.

Give three copies to each employee by 1/31 of the following year. Send original with the W-3 to the Social Security Administration by 2/28

U.S. Internal Revenue Service and Social Security Administration

IRS Form W-3, Transmittal of Wage and Tax Statements (W-2 Forms). 

Social Security Administration needs for recordkeeping. IRS needs for reconciliation with Forms 940 & 941.

Send with W-2 Forms to Social Security Administration by 2/28 of the following year.

U.S. Internal Revenue Service and Social Security Administration

 

Federal income taxes  – employee paid

  • Employers withhold income taxes from employee paychecks.
  • Send amounts withheld to the IRS electronically using EFTPS (Electronic Federal Tax Payment System) at the time due (typically quarterly or monthly for small businesses, depending on total taxes)
  • Include information about employee withholding in your IRS Form 941 – Employer’s Quarterly Federal Tax Return. Form 941 due dates:
    • 1st Quarter - April 30
    • 2nd Quarter - July 31
    • 3rd Quarter - October 31
    • 4th Quarter - January 31 the following year.

Federal Social Security and Medicare taxes – employee and employer paid

  • Withhold 7.65% of employee total wages and other compensation from employees’ paychecks (use the same gross payroll figure as used for determining income tax withholding)
    • 6.2% for Social Security
    • 1.45% for Medicare
  • The employer portion matches the amount withheld from the employee.
  • Employer pays both employee and employer shares to the IRS.
  • Send both employee and employer tax amounts to the IRS electronically using EFTPS (Electronic Federal Tax Payment System) at the time due (typically quarterly or monthly for small businesses, depending on total taxes)
  • Include information about Social Security and Medicare Taxes in your IRS Form 941 – Employer’s Quarterly Federal Tax Return.  Form 941 due dates:
    • 1st Quarter - April 30
    • 2nd Quarter - July 31
    • 3rd Quarter - October 31
    • 4th Quarter - January 31 of the following year

Federal Unemployment Taxes (FUTA) –  employer paid

  • Calculate tax based on the employee’s total wages plus other compensation.
  • FUTA is paid until the employee’s wages and other compensation add up to $7000 during the calendar year.
  • If an employee earns more than $7000 in the calendar year, no further FUTA tax is due for that year.
  • Send tax payment to the IRS electronically using EFTPS (Electronic Federal Tax Payment System) at the time due (typically quarterly or annually for small businesses, depending on payroll).
  • Complete IRS Form 940 – At the end of the calendar year complete the Employer’s Annual Federal Unemployment Tax Return and submit it by January 31 the following year.

Federal Wage and Tax Statement (Form W-2) and Transmittal (Form W-3)

  • By January 31, provide each employee copies of their W-2 Form, which summarizes that employee’s earnings and federal withholdings for the preceding calendar year.
  • Complete Form W-3 – Transmittal of Wage and Tax Statements, which summarizes all W-2 Forms issued by the employer.
  • By the last date of February, send Form W-3 and all original W-2 forms for the preceding calendar year to the Social Security Administration.

State Unemployment Taxes (SUTA)  –  employer paid

  • Use the tax rate provided to you by the Washington Employment Security Department.
  • SUTA is paid on wages and other compensation, up to a maximum per employee during each calendar year (the “taxable wage base” is $41,300 for 2014). 
  • If an employee earns more than the taxable wage base, no further tax is due for that year.
  • Complete quarterly reports and pay online.
  • Due dates
    • 1st Quarter - April 30
    • 2nd Quarter - July 31
    • 3rd Quarter - October 31
    • 4th Quarter - January 31 of the following year.

State workers’ compensation insurance premiums – employer and employee paid

  • Use the rate or rates provided to you by the Washington Department of Labor & Industries (L&I).
  • In most cases, rates are per hour worked, and are based on risk classes as assigned by L&I for the nature of your business.
  • Calculate premiums by multiplying employee hours, as reported on timesheets, by the rate for the appropriate risk class assigned by L&I.
  • Don’t include vacation time, sick leave or holiday hours in the calculation of premiums.
  • Employers can choose to report salaried employee hours at 160 hours per month, or 480 hours per quarter. If employers choose this option, all salaried employees must be handled the same way, and timesheets for those employees aren’t required. (If in the trucking industry, please contact L&I for special instructions.)
  • Withhold the allowable employee portion (provided by L&I) from your employees’ paychecks.
  • Complete quarterly reports and pay online.
  • Due dates
    • 1st Quarter - April 30
    • 2nd Quarter - July 31
    • 3rd Quarter - October 31
    • 4th Quarter - January 31 of the following year.

Do you have employees based out of Washington State?

  • Follow the same federal requirements
  • Learn and follow the requirements for each state where you have employees.

5. What payroll records do I need to create and keep?

  • Payroll records are essential.  Many government agencies have the right to view and audit payroll records.  In the absence of records, agencies have the authority to estimate taxes due, plus assess penalties for failure to keep records.
  • Payroll records must be kept. Different agencies have different retention requirements but 6 years should be sufficient. 
  • Payroll records include:
    • Employee information (name, hire date, job title and duties, address, social security number, job change dates, termination date)
    • W-4 form for each employee
    • Pay rate
    • Basis of pay (hourly, monthly, commission, bonus, piece rate, etc.)
    • Timesheets (include dates and hours worked; include activity if multiple workers’ compensation risk classes or prevailing wage “scopes of work” apply)
    • Noncash compensation (such as apartments, vehicles, etc.)
    • Overtime pay calculations
    • Gross payroll calculations
    • Tax withholdings from the employee
    • Other payroll deductions authorized by the employee (such as medical insurance, gym memberships, charity deductions)
    • Payroll check registers
    • Employee pay records (pay stubs)
    • Bank statements
    • Tax reports and payments

6. What payroll records do I need to create to give my employees?

  • For each paycheck, you need to provide the employee an itemized pay statement,  or check stub,  which includes the following information
    • Pay period dates
    • Basis and rate of pay (Examples of basis include hourly, salary, piecework, etc.)
    • Gross pay
    • Itemized taxes and other payroll deductions
    • Net pay (gross pay minus deductions)
  • The information can be provided electronically if the employee can access it on the established payday.
  • Employers of Seattle-based employees must also include accrued hours of “sick and safe leave” 

7. What do I need to have in place before issuing pay checks?

  • Establish a standard 7-day workweek for purposes of overtime calculations.
    • Many employers choose Monday 12:00 a.m. to Sunday 11:59 p.m.
    • Employers can’t change their standard work week to avoid paying overtime, but they can change it for business reasons if they provide employees advance notice.
  • Establish standard payperiods and paydays, no less often than monthly.
    Some examples:
    • Weekly:
           payperiod Monday through Sunday
                           --> payday the following Wednesday
    • Every two weeks (biweekly):  
           payperiod Monday through 2nd Sunday
                           --> payday the following Friday
    • Twice per month (semimonthly):
           1st payperiod the 1st through the 15th  of the month
                           -->  payday the 25th
             
      2nd payperiod the 16th thru the end of the month
                           -->  payday the 10th of the following month
    • Monthly
           payperiod the 25th of one month to the 24th of the next month
                           --> payday the 1st of the following month
  • Establish a basis of pay
    • Hourly:  Paid a set amount for each hour worked
    • Salaried:  Paid a set amount each pay period
      • Salaried as a basis of pay doesn’t mean an employee doesn’t earn overtime pay when their hours exceed 40 in a workweek.  See “calculation of overtime” below
      • If paid twice per month or monthly, overtime calculations may require you to look at the previous payperiod to determine if an employee’s hours exceeded 40 in a workweek.
    • Piecework:  Paid a set amount for each item produced or service provided
    • Commission:  Paid a percentage of sales or profits
    • Hybrid: Paid on more than one basis

8. What else do I need to know about paying employees?

  • Provide these details to your employee each payday to show how you calculated their paycheck:
    • Gross pay
    • Taxes withheld
    • Other payroll deductions
  • Read the Dept. of Labor & Industries’ Getting Paid web page to understand employer payroll requirements.
  • Overtime eligible employees versus overtime exempt workers:
    • Most workers are eligible to receive overtime pay for hours they work in excess of 40 in a week, at a rate of 1½ times their regular rate of pay.
    • To determine the overtime pay amount for workers paid hourly
      • Take the number of hours an employee worked in excess of 40. 
      • Multiply that number by the employee’s hourly rate
      • Multiply the result by 1.5.
    • To determine the overtime pay amount for workers paid two or more hourly rates, a regular salary, or a piece rate, read How to Compute Overtime, from the Dept. of Labor & Industries.
    • Federal and state laws require you to pay overtime.  Employees who are eligible for overtime cannot choose to have time off as an alternative.
    • The addition of overtime pay will affect payroll tax calculations.
    • See the Dept. of Labor & Industries Understanding Overtime web page for more information.
    • Employers do not have to pay overtime to certain managers, administrators and professionals who have significant decision-making authority, outside sales representatives, some live-in care givers, certain farm workers, and a few other types of workers. Before determining that an employee is exempt from overtime, read L&I’s Jobs Not Paid Overtime web page.
  • Deductions from paychecks

9. How can I estimate payroll costs?

  • Use the online “Payroll Calculator” to estimate payroll costs. There are two different calculators, one for hourly employees and the other for salaried employees. 
  • You’ll need to enter the appropriate information into the white cells.  The shaded cells will calculate automatically.
  • In addition to wage or salary and hours worked, you’ll also need to enter the state unemployment insurance (UI) tax rate provided by the Employment Security Department and the workers’ compensation insurance rate provided by the Department of Labor & Industries. 
    • If you don’t yet know your UI rate, you can use 2% as a reasonable approximation, or contact Employment Security if accuracy is important.
    • If you don’t yet know the workers’ comp rate, you can go to Rates & Risk Classes and find the rate for a similar business activity, or call L&I at 360-902-4817 if accuracy is important.

 

PAYROLL CALCULATOR - HOURLY EMPLOYEE
Employer payroll costs (one employee, one pay period)
1 Hourly wage $ per hour $  
2 Hours at straight time hours  
3 Hours at overtime hours  
4 Base pay line 1 x line 2 {{base_pay | currency}}  
5 Overtime pay line 1 x 1.5 x line 3 {{overtime_pay | currency}}  
6 Gross payroll* line 4 + line 5   {{gross_pay | currency}}
7 Social Security line 6 x rate {{social_security_rate}}% {{social_security | currency}}
8 Medicare line 6 x rate {{medicare_rate}}% {{medicare | currency}}
9 Federal Unemployment Tax** line 6 x rate {{federal_unemployment_tax_rate}}% {{federal_unemployment_tax | currency}}
10 State Unemployment Insurance Tax*** line 6 x rate % {{state_unemployment_insurance_tax | currency}}
11 Employment Adminstration Fund*** line 6 x rate % {{employment_administration_fund | currency}}
12 Workers' compensation premium**** lines 2+3 x rate $ {{workers_comp_premium | currency}}
13 Less employee share of wkrs' comp**** lines 2+3 x rate $ {{employee_workers_comp | customCurrency}}
14 Employer paid benefits (if any)     $
15 Total employer cost     {{employer_cost | currency}}
 
* Gross payroll should include value of noncash items, such as apartments and vehicles
** If state unemployment taxes don't apply (such as in the case of exempt corporate officers), the federal unemployment tax rate is 6% (rather than 0.6%) of the first $7000 of compensation per year
*** UI and EAF tax rates provided to you by Employment Security Dept.
**** Employer and employee rates provided to you by Dept. of Labor & Industries
 
Employee paycheck
  Gross payroll line 6   {{gross_pay | currency}}
  Social Security  line 7   {{-social_security | customCurrency}}
  Medicare line 8   {{-medicare | customCurrency}}
  Income Taxes per tax tables   $
  Workers' comp - employee share line 13   {{employee_workers_comp | customCurrency}}
  Other voluntary deductions (if any)     $
  Net paycheck     {{net_paycheck | currency}}

 

PAYROLL CALCULATOR - SALARIED EMPLOYEE
Employer payroll costs (one employee, one pay period)
1 Salary $ per payperiod $  
2 Regular hours hours  
3 Overtime hours hours  
4 Annualized salary   $  
5 Overtime rate line 4 / 2080 x 1.5 {{overtime_rate | currency}}  
6 Overtime pay line 3 x line 5 {{overtime_pay | currency}}  
7 Gross payroll* line 1 + line 6   {{gross_pay | currency}}
8 Social Security line 7 x rate {{social_security_rate}}% {{social_security | currency}}
9 Medicare line 7 x rate {{medicare_rate}}% {{medicare | currency}}
10 Federal Unemployment Tax** line 7 x rate {{federal_unemployment_tax_rate}}% {{federal_unemployment_tax | currency}}
11 State Unemployment Insurance Tax*** line 7 x rate % {{state_unemployment_insurance_tax | currency}}
12 Employment Administration Fund*** line 7 x rate % {{employment_administration_fund | currency}}
13 Workers' compensation premium**** lines 2+3 x rate $ {{workers_comp_premium | currency}}
14 Less employee share of wkrs' comp**** lines 2+3 x rate $ {{employee_workers_comp | customCurrency}}
15 Employer paid benefits (if any)     $
16 Total employer cost     {{employer_cost | currency}}
 
* Gross payroll should include value of noncash items, such as apartments and vehicles
** If state unemployment taxes don't apply (such as in the case of exempt corporate officers), the federal unemployment tax rate is 6% (rather than 0.6%) of the first $7000 of compensation per year
*** UI and EAF tax rates provided to you by Employment Security Dept.
**** Employer and employee rates provided to you by Dept. of Labor & Industries. For salaried employees, employers can calculate workers' compensation premiums on actual hours (as shown here), or a standard number of hours to total 480 hours per quarter (160 for monthly pay periods, 80 for semimonthly, 74 for biweekly, 37 for weekly).
 
Employee paycheck
  Gross payroll line 7   {{gross_pay | currency}}
  Social Security  line 8   {{-social_security | customCurrency}}
  Medicare line 9   {{-medicare | customCurrency}}
  Income Taxes per tax tables   $
  Workers' comp - employee share line 14   {{employee_workers_comp | customCurrency}}
  Other voluntary deductions (if any)     $
  Net paycheck     {{net_paycheck | currency}}

10. What other responsibilities do I have as an employer?

11. Need assistance?

State of Washington Small Business Liaisons can help you get the information and resources you need. Also, help us improve the Small Business Guide by filling out a short, confidential survey.