What is payroll? Tips for small business owners to know in 2023

This could imply that the company has a labor-intensive business model where significant human resources are required to generate revenue. Industries such as healthcare, hospitality, and manufacturing tend to have higher labor intensity. This means 20% of the company’s revenue is spent on payroll expenses.

• Gross pay for salaried workers is commonly calculated by dividing their annual income by the number of pay periods in the year.
• The net pay is the amount after tax and deductions have been made.
• Records must be kept in such a manner as to enable the tax administrator to determine the payroll expense tax liability of the taxpayer.

A worker’s classification determines how they should be treated for tax purposes. If the worker is an employee, as an employer you’ll incur the payroll expenses discussed above. Independent contractors, on the other hand, are generally responsible for their own taxes. The company’s only expense is the gross amount you pay for services.

Auditing Payroll Expenses – Risks – Assertions, and Procedures

You may have employees who earn overtime at a rate of time-and-a-half or even double time. You may need a payroll service or payroll software—and likely even a time tracking software—to manage that. Say you wanted to see how much you spent on employee the importance of internal controls in accounting payroll last year, as opposed to the year before. All the wages you’d be looking at are payroll expenses (i.e., wages that you have already paid). Recall our previous example of employees getting paid on January 17, from work they did January 2-15.

Some employees are exempt from the FLSA, and the Act does not apply to independent contractors or volunteers because they are not considered employees. The employee inputs their hours through an API, and their pay is processed and deposited into their bank accounts. Payroll tax returns are complex, so the information you submit must be accurate.

What are payroll liabilities?

Using the accrual method, you record both the wages payable obligation (payroll liability) and expenses in the same period. The restaurant example shows a $3,000 wage expense and a $3,000 wage liability balance posted on March 31. When the business owner pays cash on April 5, the liability balance decreases. If your company offers benefits, you may withhold a portion of the costs from a worker’s pay.

This goes back to journals 2 and 3 where you’re recording all taxes you’ve paid. These include taxes the employee is paying via their withholdings each pay period, as well as taxes the business owes. But a record of tax payments will show unemployment taxes listed alongside any taxes the employee paid. You must deduct federal—and possibly local and state payroll taxes—income taxes from wages. The worker’s annual income and the number of allowances they specify on their W-4 determine the amount you deduct. If an employer is allowed the maximum credit of 5.4%, then the federal unemployment tax rate will be 0.6%.

How to Calculate Payroll Taxes

A payroll tax includes the taxes employees and employers pay on wages, tips, and salaries. For employees, taxes are withheld from their paychecks and paid to the government by the employer. These taxes include federal, state, and local income taxes, and the employee’s share of Social Security and Medicare taxes (FICA). Taxes that employers must pay include their share of FICA as well as federal and state unemployment taxes. The $8,135,746 exemption threshold is based on the prior year’s compensation paid to Seattle employees. However, businesses must use the current year’s compensation paid in Seattle to determine the payroll expense tax due for the year.

One of the most common payroll mistakes that small businesses make is missing payroll tax deadlines, as they’re due quarterly, instead of annually. Ensure that part of your payroll process involves managing your business’s payroll tax responsibility, as well as the payroll deductions you must withhold from your employees. Gross wages represent the part of your payroll expense that you pay to employees who are paid an hourly wage. To calculate gross wages, multiply the number of hours that each employee worked during the payroll period — up to 40 hours per week — by that employee’s hourly wage.