When you start a business, you have to think of hiring employees and figure out how to pay them. You have to keep accounts of how much you pay them to show the tax authorities when required.
Every country and state has rules about minimum wages and employee health insurance etc.
Follow the rules to protect your interests and that of your employees. Sometimes you can save by employing apprentices whose pay is lower than those who are trained.
There are four ways to pay your employees:
- Hourly wages
- Weekly salary
- Monthly salary
- Annual salary
Hourly wages are paid by counting hours of work and an hourly rate.
40 hours a week can be paid by working out $10 per hour which comes to $400.
It’s better to have part time employees working on an hourly basis in the beginning to figure out how many hours you need exactly. No point in hiring a full time employee when you don’t have so much work for them to do.
They can also get overtime pay if they are working late night hours etc.
Annual salary can also be worked out by figuring out how much per day it comes to. Salaried employees don’t get paid for overtime. While hourly wages are perfect for small businesses, corporate jobs are offered annual salaries.
Commission Plus Base Salary
Employees on commission basis get a basic salary which can be paid hourly. They also get a commission if they make a sale in a car sales company, for example.
While they work full time attending the customers who walk in, they get a commission on top of that if they are able to close a deal depending on the percentage of the deal.
It’s the best incentive to motivate the employees to close a deal.
Fair Labor Standards Act – FLSA
You must know about the minimum wage and overtime laws in your state. Pay of an employee is determined by how much others are paying for similar jobs. It could be different in a big city from a small town.
The type of work also should be taken into account. Market research will help you to see what other companies in your field pay for the role you’re hiring for, or for the type of work you need.
Use online data available to find out how much an employee is getting paid for similar jobs.
PayScale and Salary
Hourly is a payroll app online tool that can be useful to tell you how much you should be paying to your employee in your part of the country for doing the type of work as required.
Pay any Employee in a Small Business
You will need to collect information from your employees to set up a payroll system that works for you. You have to collect tax forms from your employees like:
IRS W-4 form for Federal tax withholding. State forms like California’s DE 4.
Any other state forms required, like forms for local withholding and USCIS 1-9 form for verifying work eligibility.
If you are paying your employees via direct deposit, you will need to get their banking information too.
How to Calculate Pre-Tax Pay
First calculate your employees’ gross pay for the pay period on a weekly, bi-weekly, monthly or annually as you wish.
Calculate tax withholding according to the paperwork you have collected from each employee on a personal basis.
Hourly wages: Multiply hourly rate by the number of hours they worked during the pay period.
If they took any time off,subtract those hours.
Salaried employees: Divide their yearly salary by the number of pay periods.
Commission employees: Calculate their hourly or salaried base pay. Add their commission for that pay period, according to your company’s commission policy.
Refer to the paperwork you collected from employees to calculate how much of their earnings you need to withhold in:
- Federal income taxes
- State income taxes
- Local taxes
Federal Insurance Contributions Act FICA
Social Security taxes and Medicare taxes are payroll taxes. Deductions have to be made for benefits such as healthcare, retirement savings plans, flexible spending accounts, and commuter benefits sometimes offered and paid by the employer with their pay package.
The cost of unemployment insurance in your state as applicable should be deducted.
State Unemployment Tax Act – SUTA, Federal Unemployment Tax Act – FUTA, this is not usually deducted from the pay of the employees.
The employer has to pay for it.
How To Calculate Net Pay
You’ve calculated your employees gross pay. Calculate their net pay by subtracting taxes from their gross pay. Checks and direct deposits are the most popular ways to pay an employee.
If you use direct deposit, refer to the bank information your employees gave you. Alternatively, you can have your bank or payroll provider cut checks for employees.
Using apps like Hourly to pay your employees and provide them with pay stubs they can view from their phones eliminates the need for paper checks.
You are responsible for paying taxes on behalf of your W-2 employees that you withheld from their paychecks.
For your tax filings, take the portion of the employee’s paycheck that has been withheld, file taxes with the IRS, your state’s tax collection agency, and your municipality’s tax collection agency.
Some taxes are paid by the employer.
Pay Into Benefits
Not all withheld pay will go to the taxes. A portion may go toward employee benefits.
This might include contributions toward:
- Health insurance
- Commuter benefits
- Health savings accounts
- Flexible spending accounts
If you offer any other employee benefits program, make a payment on behalf of your employees into the relevant accounts.
Update Payroll Records
You’ll need to keep your payroll records for years in case of an audit. Keep your payroll register up to date, organized, and accessible.
All the information about who got paid, how much they worked, how much they were paid, and what taxes were withheld should be kept handy.
How to Pay an Employee
Payroll sounds complicated. Corporate businesses have teams dedicated to paying employees. Small businesses may not be able to afford or need a payroll specialist.
However, even one-person businesses are responsible for labor law compliance and tax withholding just like a corporate office.
Using payroll software is the best option to pay employees in a small business.
Payroll software automates every step of the payroll process, including distributing payments, generating Pay stubs and other essential documents. You can make use of the paystub generator to create paystubs online for your employees
How to Pay a Worker with a 1099
To pay 1099 workers, pay their gross wages but don’t withhold their taxes. 1099 workers are considered as independent contractors.
Independent contractors are responsible for paying their own taxes. They’ll file their own state and federal tax returns.
An independent contractor is one with whom you control the final product, but not how the work is done. You can pay your 1099 contractors an hourly rate or a fixed fee for their work.
Tax payments with the IRS and state and local treasuries would be handled by the contractor in connection with his work.
You can pay independent contractors a fixed fee or hourly wages,but you can not pay them a salary.
They are considered non-exempt employees and would not need to get a W-2 from you.
Your Employee can be both a W-2 and 1099 Worker
A full-time manager, gets a W-2 and is expected to work full time and follow the set up.
If the same employee also provides any other service for advertising etc. this additional work would be classified as independent contractor labor.
You provide input on how you want the extra services and the employee decides when, where, and how he/she creates the advertising.
If you’re unsure about whether someone is an employee or independent contractor, it’s best to consult an advocate who can clarify how federal laws from the Department of Labor apply to your company.
To avoid any legal issues, be sure you are complying with the FLSA when paying your employees.
First, you must calculate how much you’ll pay them after taxes.
Second, you have to determine whether your staff are W-2 employees or 1099 contractors.
Finally, you must run payroll correctly to make sure everyone is happy on payday.
The process may seem complicated. Fortunately, there are payroll services like Hourly that take the stress of payroll by automating it.
They can help with your payroll recordkeeping, as everything is stored in the app, including your tax returns, which they’ll file for you.
Hourly also offers time tracking of your employees and workers’ compensation insurance.
You can free yourself from payroll stress with Hourly and relax.