Learn about payroll accounting as one of the top priorities when you hire your first employee. There are several very important rules and requirements in payroll accounting with significant penalties and fines if they are not followed correctly. Discuss your needs with your accounting services firm for initial support.

Payroll accounting software solutions are very popular and are most useful for companies with at least five employees. Payroll accounting system solutions often come bundled in an accounting software package or can function as an independent solution. Follow the three items below to learn more about payroll accounting basics.

1. Attend a payroll accounting class.

2. Locate books on payroll accounting.

3. Find payroll accounting services firms.

Action Steps to Make Your Best Deal on a Payroll Processing Contract
The best contacts and resources to help you get it done

Sign up for payroll accounting classes

Make a list of the payroll accounting skills that are required for your firm. Hourly and salaried employees, benefits, government deductions and remittances are some examples of required information. Look at the course offerings in your area to ensure your staff are properly trained and up to date.

I recommend: Schedule staff to attend a payroll accounting basics class. Look for courses endorsed by the American Payroll Association. This organization is the standard for all payroll professionals. Herzing and the Institute of Payroll Professionals offer payroll accounting courses to meet your needs.

Read about payroll accounting

Make a list of commonly used payroll books and resources. Keep up to date with an annual subscription to the American Payroll Association. Laws and deduction limits change each year, at both the state and federal levels. Ensure only the most recent volume is available to staff.

I recommend: Purchase payroll processing and payroll accounting books to use as resources in the office. These books provide valuable information to ensure the correct process is being used. They are very valuable when researching or implementing an online payroll accounting or online payroll processing system. The American Payroll Association and Wiley both provide payroll accounting books for purchase.

Locate payroll accounting services firms

Document the services you require from a payroll accounting software. Include the number of employee types, payroll frequency, union contracts, benefits, pension and any other benefits. Review reporting requirements, frequency of remittances and banking information. Discuss these needs with payroll accounting services to find a solution that meets your needs.

I recommend: Send this list of accounting and payroll requirements to the suppliers of payroll accounting services or payroll accounting software. Include online payroll processing suppliers, as this method is increasing in popularity, due to lower cost and increased security. USA Payroll and Telegenisys both provide payroll accounting services.

Tips & Tactics for Understanding Payroll Processing Service Contracts

Helpful advice for making the most of this Guide

• •  Accounting payroll is a specific skill area that requires training and a commitment to stay current on the legislation and dollar values that have an impact on payroll calculations.

Thinking of processing your first payroll but unsure of what needs to be done? This guide is the first in our series and will summarize all of the steps necessary to register your business, comply with IRS, DOJ, and FLSA requirements for hiring, calculate a paycheck, deposit taxes, and report federal employment taxes. Future guides will explain each step in more detail.

Action Steps
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Obtain an Employer Identification Number (EIN)

This a relatively simple task, but before completing this step, ensure your company has not already been assigned an EIN. If you're unsure, check with whomever incorporated your business to see if an EIN was obtained. If not, simply visit the IRS web site and locate Form SS-4, Application for Employer Identification Number, by entering 'SS-4' in the search box or select the link below. Print the PDF form and complete it on paper. Then select the IRS Online EIN Application link or call 800-829-4933 to apply via telephone. In either case, an EIN will be issued immediately.

I recommend: IRS Main Web Site
IRS Form SS-4
IRS Form SS-4 Instructions
IRS Online EIN Application
More Information about Form SS-4

Collect The Right Paperwork From Your Employees

There are currently two forms required of all new employees, Form W-4, Employee's Withholding Allowance Certificate, and Form I-9, Employment Eligibility Verification. Form W-4: An employer must have each new employee complete and sign a Form W-4, documenting the employee's name and social security number. Form W-4 is also used to determine the employee's withholding status.Form I-9: The Immigration Reform and Control Act of 1986 (IRCA) requires all employers collect certain information on each worker's eligibility to be employed. Each employer must:1. Verify the identification of a worker and their right to work in the United States through physical review of the worker's documents. 2. Attest that the employer has seen the required employment verification documents. 3. Maintain records of each worker's employment verification.

I recommend: Blank Form W-4
Blank Form I-9
More Information About Forms W-4 and I-9

Determine Federal Income Tax Withholding

There are several acceptable methods of calculating a paycheck, but the two most commonly used are the wage-bracket method and the percentage method. Both result in nearly the same income tax withholding and only the wage-bracket method will be explained here. 1. Determine the amount of wages subject to income tax by reducing gross wages by any pre-tax deductions. 2. Using pages 39-58 from IRS Publication 15, find the table that corresponds to the employee's payroll period and filing status (from Form W-4). 3. Locate the wage-bracket that contains the employee's wages subject to Federal Income tax (amount from step #1). 4. Determine the amount to be witheld. 5. Add any additional withholding indicated on Form W-4. This amount is then withheld from the employee's gross wage.

I recommend: IRS Publication 15
More Information about Withholding Methods

Determine Federal Employment Taxes

Employment taxes fall into two categories - Employer only and Employer & Employee employment taxes. The employer tax is Federal Unemployment Tax (FUTA) and is generally calculated at an effective rate of 0.8% on the first $7,000 of annual wages per employee. This rate may be higher in some states. The Employer & Employee tax is often referred to as FICA, although it is comprised of two separate taxes - Social Security and Medicare. In 2007, both the ER & EE pay 6.2% on the first $97,500 in annual wages for Social Security and 1.45% on ALL wages for Medicare. The EE's portion is withheld from gross wages while the ER portion is paid as an employer tax.

I recommend: More Information on Federal Employment Taxes

Depositing Payroll Taxes

The default deposit frequency for all new employers is monthly, which means all Federal withholding and employment taxes are due by the 15th of the month following payment. For example, taxes calculated on wages paid in June are due by July 15th. Deposits can be made at an authorized depository financial institution (bank) using Form 8109-B or electronically using the Electronic Federal Tax Payment System (EFTPS). All new employers are pre-enrolled in EFTPS and simply need to activate their pin to begin using this system. If you are not already enrolled, a link to EFTPS has been provided below.

I recommend: EFTPS
More Information about Depositing Payroll Taxes

Reporting Payroll Taxes

The most common payroll tax reporting requirements include Form 941, Employer's QUARTERLY Federal Tax Return, Form 940, Employer's Annual Federal Unemployment Tax Return, and For W-2/W-3, Wage & Tax Statement. The later two forms are filed annually while Form 941 is filed quarterly and due by the last day of the month following the calendar quarter (i.e. April for the first quarter). If a business meets certain requirements and is notified in writing of this fact by the IRS, Form 944, Employer's ANNUAL Federal Tax return may be prepared in place of Form 941.

I recommend: Note: Many Forms change each year. To find current forms and instructions I encourage you to visit www.irs.gov, select forms, and then locate the correct form year and number.

More Information on Reporting Payroll Taxes

Tips & Tactics

Helpful advice for making the most of this Guide

• •  State employment agencies require employers to perform 'New Hire Reporting' on a periodic basis. Each state has its own requirements, but the purpose of New Hire Reporting is to facilitate the identification and location of any individuals with child support orders. Once identified, the court will send the employer a garnishment order to be applied to the employee's wages.

Completing employee payroll accounting requires a basic knowledge of some accounting terms. Making a mistake about the meaning of any of the terms could cost your business money. Many terms you will encounter seem interchangeable but, in fact, most of the time, each term has a slightly different meaning and purpose.

Before you print out employee checks or complete deposits, make sure you review the following payroll accounting key terms:

1. Know the meaning of the different types of payments associated with payroll accounting.

2. Figure out if you are paying employees or independent contractors.

3. Determine which benefits are taxable and which ones are non-taxable.

Action Steps
The best contacts and resources to help you get it done

Learn payroll accounting key terms for payment types

There are different types of employee pay types, including extra hours and excess hours, which differ slightly but, can make a big impact on accounting and payroll. Extra hours are hours that an employee works in addition to the normal schedule. Excess hours are authorized additional hours an employee works beyond the regular schedule. The difference between the two is that you must pay overtime hours on excess hours, but it may not be necessary on extra hours.

I recommend: California State University Monterey Bay offers detailed explanations of common accounting and payroll terms, including those associated with payment types. AccountingCoach.com has in depth definitions for common payment types you will find when completing employee payroll, even if you are using an online payroll accounting program or payroll accounting software.

Determine if your payroll database includes independent contractors

Determining if people on your payroll are employees or independent contractors affects payroll processing. You must withhold taxes from employees, but not from independent contractors. Generally, an employee works is required to work how you deem fit, while following a schedule you decide. An independent contractor is free to set his own hours and do the job his way, as long as he completes it properly. For the most part, an employee has benefits, while an independent contractor does not.

I recommend: The Internal Revenue Service website offers information to help you determine if a person on your payroll database is an employee or a contractor. You can find information on how to distinguish an employee from an independent contractor on the State of California website. This website offers explanations and interpretations of both employee types.

Know the common payroll accounting benefit terms

Certain types of benefits must be taxed in certain ways. Knowing the difference between taxable fringe benefits, such as awards and stipends, and non-taxable benefits, such as de minimis fringe benefits and qualified employee discounts, is vital, even if you are using an online payroll processing service. An award or stipend is a standard of amount of money presented to an employee in addition to regular payroll. A de minimis fringe benefit is a benefit with a value so small, it wouldn't amount to a taxable amount as determined by your state law. A qualified employee discount is any discount under 20% for hourly employees and 50% for salaried employees that is part of the employee benefit package.

I recommend: Sacramento State and Duke University offer definitions of benefits types you may encounter when accounting payroll amounts. Both websites offer easy to understand definitions.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  If you need more detailed help completing employee payroll accounting, consider enrolling in an online course or a course at a local college.