How to Prepare Basic Payroll and Your Federal 941 Deposit
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How to Prepare Basic Payroll and Your Federal 941 Deposit

Preparing payroll for employees, preparing 941 deposit, making federal 941 deposit,

This factoidz is a 6th part in a series of factoidz that are designed to help the small business owner.  You may access my other factoidz as follows:  https://knoji.com/building-growing-and-managing-your-home-based-business-part-i/  https://knoji.com/building-growing-and-managing-your-home-based-business-part-ii/  https://knoji.com/building-growing-and-managing-your-home-based-business-part-iii/  https://knoji.com/how-to-decide-which-type-of-small-business-entity-best-fits-your-business/  https://knoji.com/simple-small-business-guide-to-estimate-monthly-depreciation-and-amortization/ 

For you small business owners out there that have an occasional payroll to prepare, there are four ways you can get it done: 1.  Hire a payroll service company  2.  Hire an experienced employee to prepare your payroll  3.  Prepare it yourself the old way, with pen and paper and/or  4.  Prepare it yourself with a payroll software program .

If you only have 1-10 employees then preparing it yourself is a good option, especially if you are tight on cash flow.  If you already have a payroll program and it is setup with the tax rates, then you do not need this article, other than to clarify some points on preparation.  Now in management circles this would be a task to delegate and pay someone else to do, especially if you are the owner or the president of the company.  For small startups and in tough periods of economic recession, you should know how to do payroll yourself, should the need arise.  With regards to determining whether a person is an employee or a subcontractor, we will discuss that on another factoid.  Suffice to say for now, that there are multiple reasons why you have an employee.  This discussion is for you self employed owners who have people you want to call employees.  Generally speaking, if you control the hours a person works, they work in your workplace and they work according to your rules and standards, then they are an employee...but there is more, for later discussion.

Whether you are paying on a weekly basis, bi-weekly, semi-monthly or monthly basis, the payroll would be prepared the same way, just calculations are different, due to hours adjusting for the different periods.  Whether you have 1 employee or 10, each payroll is prepared the same, only the payrates and hours worked will change.

If there is overtime, then you calculate the over time by the number of hours overtime worked.  States vary in their calculation of overtime so you should check with your States regulations regarding calculating overtime.  In Washington State overtime is the hours worked in a week in excess of the first 40 hours.  So your employees can work 4 days a week, 10 hour shifts and get their 40 hours in without you as an employer receiving any overtime hours from your employees.  There are other rules regarding business that are open 24 hours a day, such as a senior care center.  If your worker has to be onsite, but can sleep for a period of time while onsite, then some hours are not considered overtime, and in some states you can pay a reduced payroll for the hours they are sleeping.  It is important to check with your state regulations regarding your type of business before proceeding.

For simplicity we will assume you are not an employer serving the needs of our senior citizens or other such business that would qualify for special hours calculations.  For general business purposes we will calculate payroll as follows:

1.  We will assume 1 employee with an hourly rate of $10.00 and a 40 hour work week, your gross payroll is $400.00 ($10.00 hr X 40 hours).

2.  Federal witholding is based on a form W-4 your employee fills out.  If you need a form W-4, you can go online to www.irs.gov and you will see a list of the top forms being requested.  The form w-4 is one of the forms listed.  Click on that link and you will get a form w-4.  Have your employees fill it out as best as they can.  Everyone has a different tax witholding status so do not fill it out for them.  They must figure this out for them selves.  Have them sign it.  Keep it on file and renew it every year for updated information.  It includes the employees social security number and address.  If an employee moves during the year, have them fill out a new w-4, so you have current information on file.

For federal witholding taxes, go to www.irs.gov and then on the upper left corner of the web page select forms and publications.  Look at the tabs across the top of the webpage and select "Businesses".  On the upper left side under business topics, select "Employment Taxes".  In the first paragraph of the new web page, click on the link for publication 15, employers tax guide. This has the tax tables for federal witholding taxes. Look for your pay period. If you pay weekly, then look for the weekly witholding tables. Bi-weekly on the bi-weekly tables and so on. For an employee filing "single and 1 exemption", look at the gross payroll amounts on the left side of the table, go down the list until you find your employees gross payroll, and under the column for single and 1 select that tax rate. This is more simple than it sounds. Once you do a payroll or two and get a handle on doing this, it will become much easier. There is a formula for calculating the witholding taxes in the circular E, if you want to use a formula for building a spreadsheet, or even your own payroll program.  If you do not have a computer, cannot get access to a computer, the general rule of thumb would be to withold 10% for low income, 12% for middle income and for you highly paid execs, figure 15% up to 28%, depending on what tax bracket you fall into after deductions and exemptions.  For this payroll we will figure 10% of $400.00, or $40.00.

3.  Social Security and medicare taxes have to be witheld from the employees payroll and the employer pays a matching share.  Once you have your gross wages calculated, then Social Security is 6.2% of the gross wage for the employer and 4.2% for the employee.  Medicare is 1.45% for the employer and 1.45% for the employee of the gross wage.  Combined they make up a 13.3% total tax rate for social security and medicare taxes.  For employee witholding purposes: $400.00 X 4.2% = $16.80.  $400.00 X 1.45% = $5.80.  you will need to calculate them separately to keep track of their running totals.  Social Security Tax has a gross pay limitation.  Once you reach the upper payroll limitation, you can stop witholding the tax.  For 2011, the social security tax is maximized at $106,800.00.  Medicare has no limitation.  Total employee social security and medicare tax witholding is:  $16.80 + $5.80 = $22.60

The employers matching amount is calculated and paid with the payroll deposit.  That will be discussed in more detail later in this discussion.

In some states, witholding some of the workmen's compensation insurance costs from employees (employer and employee pay this cost)is required.  Some states calculate workmen's comp. by the number of hours worked or by the gross payroll earned.  For Washington State, my example, they calculate based on the number of hours worked.  When you are licensed you are given your tax rates for both workmens comp and unemployment insurance.

Every state has a unemployment division and a workers compensation insurance division.  Both divisions tie in with the federal government because unemployment is partially paid by federal money (futa tax) and workmens compensation uses NAICS codes for labor types to make a national uniform reporting.  State Unemployment taxes are called Suta taxes and Federal unemployment taxes are called futa taxes. Workmens comp is generally called L&I, or just workmens comp.

If you do not have your state rates, you need to contact your state unemployment division and labor and industry division and get both rates.  Once you have the rates then you can calculate your workmens compensation for this payroll.  Assuming an employee witholding rate of .15 cents per hour worked...40 hours X .15 = $6.00

For this payroll then we have a gross wage of $400.00, a federal witholding tax of $40.00, a social security and medicare tax of $22.60 and a workmen's comp insurance payment of $6.00.  Your net payroll is:  $400.00 less $40.00 less $22.60 and less $6.00 for a net total payroll of $331.40.  This is how much you pay your employee.

If you are in the restaurant industry or an industry that received tips, you will add them to the gross wages and then calculate federal witholding taxes, social security and medicare taxes on the new adjusted gross.  If tips were $10.00, then the gross would be $410.00, witholding taxes would increase accordingly.

The total amount of federal witholding, social security tax and medicare tax is called a "941" tax.  It's called this because it is reported on form 941.  Tax payments are due by the 15th of the following month after you pay the payroll, if your total payroll deposit for the month exceeds $2500.00.  If your payroll deposit is less than this, then you can make your deposit with your quarterly 941 reporting form.  This deposit is based on the payroll date.  So if you pay someone on March 16th, the payroll tax is due by April 15th, if over the $2500.00 limitation.  Payroll tax reporting is completed every quarter on form 941.  Preparing that form will be for a later factoid.

Preparing your 941 tax deposit is simple.  Calculate the employers share of social security and medicare taxes.  Remember, the employer pays 6.2% and 1.45% as his share.  Gross payroll was $400.00 X 6.2% = $24.80.  $400.00 X 1.45% = $5.80.  Your total 941 deposit is the federal witholding, plus the social security witheld from the employee, plus the social security paid by the employer, plus the medicare witheld from the employee plus the medicare tax paid by the employer.  Your total 941 deposit then is:  $40.00 federal witholding + $22.60 employee share of social security and medicare taxes + $30.60 employer paid share of the taxes = $93.20 due to IRS. 

State taxes and workmens compensation insurance payments are also paid quarterly, that will also be discussed on a later factoid.  For the purpose of this discussion, we have prepared your first basic payroll.  Your Gross is $400.00, your net pay is $331.40.  Your 941 tax is $93.20, your workmens compensation tax is $6.00.  Unemployment insurance is calculated at the end of the quarter and paid only by the employer, so that will be for my next discussion on factoidz...Congratulations on preparing your first payroll!

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