Payroll Taxes Explained: FICA, Withholding and More
From Tax Guide.
Tax Guide · Arab, Alabama
How Payroll Works for a Small Business
Understand the small business payroll process step by step: from setting up employees and pay periods to withholding, deposits, year-end forms and records.
The short answer
How does payroll work for a small business?
Payroll is the recurring process of paying employees their wages, withholding the required taxes, sending those taxes to the government, and filing the reports that go with them.
Each pay period you figure out what each employee earned, subtract taxes and other deductions to get take-home pay, pay the employee, and set aside the taxes. Then, on a schedule the IRS and the state assign, you deposit the taxes and file returns. It sounds simple, and it is, until a deadline is missed.
This guide explains the flow in plain terms. For the details of each tax, see payroll taxes explained.
Step by step
What are the steps in the payroll process?
The payroll process has a handful of steps that repeat every pay period and a few that come at set times of the year.
Before the first paycheck, the employer needs a federal EIN and the state registrations that apply, plus a signed Form W-4 and a work eligibility form for each new employee. After that, the cycle below runs on repeat.
- Collect hours or salary information for the pay period
- Calculate gross pay
- Subtract withholding for taxes and any other deductions to reach net pay
- Pay the employee by check or direct deposit
- Record the payroll in your books
- Deposit the withheld and employer taxes on the assigned schedule
- File quarterly and annual payroll returns and year-end forms
From gross to net
How do you calculate an employee paycheck?
A paycheck starts with gross pay, then withholding is subtracted to leave net pay, the amount the employee takes home.
The taxes withheld from an employee include federal income tax based on the employee's Form W-4, Social Security and Medicare tax, and Alabama income tax withholding. Some Alabama cities and counties also have occupational taxes. Voluntary deductions, such as retirement contributions, or court-ordered ones can be taken as well.
The employer also owes taxes of its own on top of gross wages, which are not taken from the employee. Read more in payroll taxes explained. Figures such as rates and limits change, so use the current published tables or software, not last year's numbers.
Deadlines
When are payroll taxes due?
Payroll taxes are deposited on a schedule the IRS assigns to your business, and returns are filed quarterly and annually.
Some employers deposit monthly and some more often, depending on the size of their payroll history. The federal return is generally Form 941 each quarter, and the state has its own returns. The dates are set by the agencies and vary, so we do not list dates here.
Depositing late can bring penalties and interest, even if the employer eventually pays. Our guide on payroll mistakes to avoid covers this. When the year ends, employees receive Form W-2 and the government receives copies. See W-2 and W-4 forms for employers.
Options
Should I run payroll myself or hand it off?
You can run payroll yourself with software or a spreadsheet, or you can hand it to a payroll provider, and the right choice depends on your time, your comfort with the rules and your headcount.
Running it yourself gives you control but also puts every calculation, deposit and filing on you. Handing it to someone else saves time but still leaves you responsible for the result. Either way, the business is the one the agencies come to for a missed deposit.
Records matter in either case. Keep pay records, tax deposits, signed forms and filed returns organized. Employment records are generally kept for longer than the basic three years, so ask what applies to you.
Getting started
What do I need before I run my first payroll?
Before your first payroll, you need an EIN, your state accounts, a completed W-4 and work eligibility form from each employee, and a place to keep the records.
It also helps to decide on a pay schedule, such as weekly or every two weeks, and to confirm that your workers are truly employees. See hiring your first employee for the full new-hire list.
If you already have workers and have never run payroll properly, do not wait for a notice. Reach out and we can look at where things stand.
How we can help
How Melton Tax Services can help with payroll
Our payroll and bookkeeping service can handle the calculations, tax paperwork and record keeping so the routine is handled carefully and on schedule.
Through payroll and bookkeeping, we support small business owners with the recurring work that payroll requires. You focus on running the business, and we help you keep the paperwork straight.
We serve Arab and the surrounding area. Call 256-586-4635 or use our contact page. Bring your paperwork to the office, and please do not send Social Security numbers or documents through the website.
Answers
Questions about how payroll works
What is the difference between gross pay and net pay?
Gross pay is what the employee earned before deductions. Net pay is what is left after taxes and other deductions are subtracted.
Do I have to withhold taxes from every worker?
You withhold from employees. Independent contractors are generally paid in full and handle their own taxes. Whether someone is an employee depends on the facts, not the label.
How often do I need to pay employees?
It depends on your agreement with the employee and any state rules. Weekly, every two weeks, twice a month and monthly are all common schedules.
What forms do I give employees?
A new employee completes Form W-4 and a work eligibility form. At year end, employers give employees a Form W-2.
Can I pay myself through payroll?
It depends on how your business is set up. Sole proprietors and partners generally take draws, while owners of corporations who work in the business are usually paid wages.
What if I missed a payroll tax deposit?
Act quickly. Late deposits can bring penalties that grow, so gather your records and call the office to review where you stand.
Read next
Related reading
Hiring Your First Employee: Tax and Paperwork Guide
From Tax Guide.
Payroll Mistakes to Avoid and How to Fix Them
From Tax Guide.
W-2 and W-4 Forms for Employers
From Tax Guide.
Payroll and Bookkeeping
A service Melton Tax Services provides.
Melton Tax Services
Questions about your taxes or your business?
Our team in Arab is just a phone call away, and we are glad to talk it through with you.