Payroll Processing

Service description

Payroll processing is calculating employees' pay, withholding the required taxes, paying employees on time and filing the payroll tax returns and deposits. A provider runs each pay cycle, issues pay statements, and keeps the records the tax and wage laws require. Federal rules apply to every employer, and state rules on withholding, unemployment insurance and pay timing apply as well.

Common industries

Applies to any business with employees, across every industry.

ROI

Removes a high-frequency compliance risk (payroll tax penalties are common) for a predictable per-run cost.

Benefit

Outsource payroll — calculation, tax filing, and payments — so employees and agencies are paid right and on time.

Why get it

Employers must withhold and deposit payroll taxes and keep wage records. Mistakes affect employees' paychecks and carry penalties for the business.

When you benefit

Recurs every pay period, with quarterly and annual payroll tax filings and year-end wage statements for employees.

What it costs

Typically a per-run fee.

When you pay

Providers usually charge a base fee per payroll run or per month, plus a fee per employee. Tax filing, direct deposit and year-end forms are sometimes included and sometimes billed extra. State registration at setup may carry a one-time charge.

Other costs

Employee pay and payroll tax deposits are funded by the business itself. Add-ons such as benefits administration, time tracking or off-cycle runs may carry extra charges.

Risks to know

Withheld taxes are held for the government, and a person responsible for failing to pay them over can be personally liable under IRC §6672. Late or short deposits bring separate penalties under IRC §6656, and inaccurate or missing wage records breach the federal recordkeeping rule in 29 U.S.C. §211.

When risks arise

Penalties for a late or short deposit begin once the deposit deadline passes. Withholding errors and worker misclassification usually surface later, in an agency notice, an employee complaint or an audit.

The process

The provider registers the business for payroll taxes, enters employees and pay rules, and sets the pay schedule. Each cycle the business submits hours and changes and approves the run; the provider calculates pay and withholding, pays employees and makes the tax deposits. It files the returns and issues year-end forms.

Your commitment

The business provides employee details and tax forms, pay rates and hours, and any benefit deductions, and funds each payroll on time. It should report new hires, terminations and pay changes before each cutoff, and confirm who approves each run.

Documents to gather

• Employer identification number and state tax account numbers
• Completed employee withholding forms (Form W-4) and pay rates
• Prior payroll registers, if switching providers
• Benefit and other deduction details

Helpful reading

• Payroll Explained: Step-by-Step Guide to Calculating Payroll Taxes — Investopedia
• Understanding FICA: Your Guide to Social Security and Medicare Contributions — Investopedia
• Hire and manage employees — U.S. Small Business Administration

Further research

• 26 U.S. Code § 3402 — Income tax collected at source (withholding from wages)
• 26 U.S. Code § 3111 — Rate of tax (employer share of Social Security and Medicare tax)
• 26 U.S. Code § 3301 — Rate of tax (federal unemployment tax)
• 26 CFR § 31.6302-1 — Deposit rules for employment taxes and withheld income taxes
• 26 U.S. Code § 6672 — Failure to collect and pay over tax
• 26 U.S. Code § 6656 — Failure to make deposit of taxes
• 29 U.S. Code § 211 — Collection of data (Fair Labor Standards Act wage records)
• IRS Publication 15 — Employer's Tax Guide (Circular E)