At some point along the line, payroll was added to the growing list of services an accounting firm is expected to provide. However, payroll is not generally taught in a 4 year college accounting program, and it’s not something a senior CPA is expected to work on. Nonetheless, an accountant may find themselves in the unique position of having to do payroll with limited resources to get started. Even if you’re not working on payroll functions, it’s beneficial to understand the basics.
If you’re tasked with payroll responsibilities, are thinking about expanding your practice, or just interested in learning more about payroll – here is a quick summary of all its important details, as well as some tips and tricks that will help you along the way.
What is Payroll?
Payroll is split into primarily two functions: paying employees, and paying payroll taxes and filing payroll tax reports.
1) Paying the employees
Before starting, enlist the help of a leading accounting or payroll enterprise system such as QuickBooks. This will expedite the process and keep good clean records of the entire process.
Employees must fill out the basic federal forms available on the IRS website:
*Obtain a direct deposit authorization form from your payroll software provider if applicable.
From the forms, fill out the digital employee profile including important information such as the social security number, number of federal and state exemptions, and hourly or salary wage rate.
Now you’re ready to begin routine payroll processing:
- The process begins with the receipt of employee time-sheets from your client (generally an office manager or human resources staff).
- Start by inputting the hours for each employee (make note of how hours are reported on the time-sheets, 3:50 hours is different from 3.50 hours, your accounting software should be able to handle both types but generally converts to hours format (3:50).
- Ask your client to generate a summary of the payroll report by hours. Run a payroll report and match the amount of hours from their report to the hours you’ve entered in your system before transferring funds. This will help avoid a lot of silly mistakes (and headaches).
- Print or save pay stubs and deliver them to management.
- Create a system of receiving time sheets from clients at a specified time during the week. If the employees are to be paid on Fridays, payroll will need to be completed by Wednesday. Third party transaction establishments such as banks currently need about 2 days to secure and deposit funds into employee bank accounts. Submitting payroll too late will add a 3 day delay (Friday, Saturday, Sunday) until employees receive funds. This can be very damaging to your reputation as a reliable provider of paychecks.
2) Paying payroll taxes and filing payroll tax reports
Each individual state has its own requirements regarding amount of taxes owed, deadlines, and types of forms to be filed. These individual rules can be found on the respective state government websites. As a result, we’ll discuss laws relating to the federal government.
The first order of business is determining what “type” of depositor your client is. This will determine how often they’re obligated to make federal tax payments.
The Look-back Period
The type of depositor for the current calendar year is determined by looking at a 4 quarter look-back period. The look-back period for the current calendar year begins from July 1st and ends June 30th of the prior year (refer to the IRS schedule below).
Total tax liability is calculated by adding federal income tax withheld as well as the employee and employer portions of Medicare and social security taxes.
If the total tax liability for the look-back period was $50,000 or less you’re considered a monthly depositor, if your total tax liability for the look-back period was greater than $50,000 then you’re considered a semi-weekly depositor.
Monthly depositors must make federal tax deposits by the 15th day of the following month.
Semi-weekly depositors have 3-5 days to make federal tax deposits after the payroll date according to the following IRS schedule:
New employers with no look-back period should use the monthly depositor schedule for their first year of business.
$100,000 Next-day deposit rule
If a $100,000 payroll tax liability has accumulated at any point, regardless of the type of depositor, a payroll tax deposit must be made by the next business day.
Filing the return
Generally, if you have employees that you pay wages to, you must file federal form 941.
Form 941 reports payroll activity in the quarter and is due by the end of the month following the closing of the quarter (refer to the IRS schedule below).
The federal quarterly return must be filed as per the above deadlines regardless of your depositor schedule. Your accounting enterprise software should generate this return based on the payroll and payroll tax payments you make. The return must be signed and filed.
- When making the last federal payroll tax payment, generate a 941 return and match the balance due on the form to the amount you must pay through your software. There should be an option to “adjust payroll liabilities” in your accounting software to match the required payment on the form. This will be applicable if federal tax payments are made outside of the payroll software for whatever reason.
- Save your filings in an organized folder as this information may be requested for insurance purposes such as workers compensation policies, loan approvals, or anything else.
- If handling a large volume of payroll clients, create a database (or a simple excel file) and keep track of each client’s depositor schedule and forms to be filed, and deadlines.
For more information regarding federal payroll taxes including FUTA (federal unemployment) tax, payroll tax phase outs, base wages, allowable delays due to legal holidays, penalties for non-filing and non-payment, and more, refer to 2017 IRS Publication 15: https://www.irs.gov/pub/irs-pdf/p15.pdf