As you consider the options for processing payroll, consider the tasks involved in processing employee payroll and in paying and reporting payroll taxes. For this discussion, assume that all of your employees are regular and not independent contractors.
You must prepare a paycheck for each employee. To do this, you must:
- Calculate the gross pay for the employee, based on whether this person is salaried or hourly.
- Take deductions for federal income tax (withholding), Social Security and Medicare pay deductions, state withholding, and other deductions agreed to by the employee.
Making Payroll Tax Deposits
Depending on the size of your payroll, you must make payroll tax deposits to the IRS on a semi-weekly or monthly basis for:
- the amounts you withheld from employee pay for federal and state income taxes
- the amounts you deducted from employee pay for Social Security and Medicare
- the amounts you owe as an employer for Social Security and Medicare.
Other Payroll Tax Deposits
In addition to federal withholding and Social Security/Medicare deduction payments, you must:
- Make payments for federal unemployment tax on a regular basis.
- Make payroll tax deposits to your state, and possibly your locality in addition to federal payroll tax deposits.
Payroll Tax Reporting
Businesses are also required to submit payroll tax reports on a regular basis. You must:
- Submit a quarterly report to the IRS on Form 941 showing the amount of your payroll tax liability and the amounts you have paid on this liability during the previous quarter.
- Submit an annual unemployment tax report on Form 944 to the IRS showing the amount of your unemployment tax liability and the amounts you have paid on this liability.
- Submit other state unemployment and worker's compensation reports.