Even when payroll is outsourced, most business owners still want to understand the basics. For those handling payroll in-house, this knowledge becomes even more important. Below, we walk through seven common payroll questions with clear, practical explanations—no jargon, just essentials you can rely on.
What happens if I misclassify a worker?
Misclassifying someone as a contractor when they should be an employee can lead to penalties, back taxes, interest, and issues with workers’ comp or labor laws. It’s far easier—and far less risky—to get classifications right from the start.
Can I offer benefits through payroll?
Yes, payroll can include deductions for health insurance, retirement plans, and other benefits. Make sure pre-tax and post-tax deductions are handled correctly, as this affects how benefits are reported and taxed.
How do I handle overtime pay correctly?
Non-exempt employees (often hourly workers) must be paid “time and a half” for any hours worked over 40 in a week. Exempt employees may not qualify for overtime, but they must meet specific criteria. Getting this wrong can lead to wage claims and penalties.
What payroll taxes am I responsible for?
Employers are responsible for withholding and paying federal income tax, Social Security and Medicare taxes, additional Medicare tax for higher earners, federal and state unemployment taxes, and any applicable state or local taxes. Employers also match Social Security and Medicare amounts unless the employee has reached the yearly Social Security wage limit.
What payroll records do I need to keep and for how long?
The IRS recommends keeping payroll-related documents—timecards, pay stubs, W-2s, tax filings, benefit deductions, and more—for at least four years. These records help ensure compliance and make it easier to answer employee questions.
Do I classify workers as employees or independent contractors?
Employees work under your direction—you set schedules, provide tools or training, and oversee how work is done. Contractors work independently, use their own tools, and often serve multiple clients. They’re paid per job and typically have no taxes withheld. If you’re unsure, it’s wise to ask for guidance to avoid issues later.
How do I handle overtime pay correctly?
Non-exempt employees must receive time and a half for hours worked over 40 in a week. Exempt employees have different rules but must meet certain criteria. Mistakes with overtime can quickly become costly.
Payroll may feel complicated, but understanding the basics goes a long way toward avoiding costly errors. Now is a great time to review how you classify workers, handle taxes, and maintain documentation. And if you’re unsure, support is always available to help you get it right.