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Payroll FAQs

February 24, 2021 | posted by Abacus Payroll

What is your payroll FAQ about?

Q: As an employer, what are my federal payroll tax responsibilities for 2021?
A: FICA rates require a 6.2% Social Security tax and 1.45% Medicare tax.  There is an additional Medicare surtax of 0.9% for incomes exceeding $200,000 to be withheld from each employee’s paycheck. The employer’s match requires them to pay 6.2% Social Security tax and 1.45% Medicare tax of the employee’s wages.  Every year the Social Security tax limit is increased. Please see our 2022 payroll tax alert for the current limits. There is no limit on Medicare.

Q: When do I make my payroll deposits?
A: Monthly: The 15th of the following month.
Semi-Weekly: Wednesday, Thursday, Friday Paydays = By Following Wednesday
Saturday, Sunday, Monday, Tuesday Paydays = By Following Friday

Q: When is tax money deducted from my account?
A: Every time you process payroll, your payroll services provider deducts this money from your account whether your payroll is weekly, biweekly, or monthly.

Q: Does switching pay period frequency create tax implications?
A: No, since they are percentage-based the taxes and gross pay will be the same. However, the payroll processing fee could change.  For example, if you switch from weekly to bi-weekly, your employer would only be paying for 26 runs instead of 52.

Q: How do you treat the last period of the year, where earnings may be earned in December but the pay date is in January of the following year?
A: The payroll would be reported in January.  According to the IRS, the pay date determines the quarter and year the income is reported.

Q: What are my employer responsibilities for Affordable Care Act reporting?
A: The Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan on an employee’s Form W-2, Wage and Tax Statement, in Box 12, using Code DD. Until the IRS issues final guidance for this reporting requirement, many employers are eligible for transition relief for tax year 2015 and beyond. The amount reported does not affect tax liability, as the value of the employer’s excludible contribution to health coverage continues to be excludible from an employee’s income, and is not taxable. This reporting is for informational purposes only, to show employees the value of their health care benefits. Small employers who file fewer than 250 Forms W-2 are exempt.

Benefits (aggregate cost) included for W-2 reporting:

  • Medical Plans
  • Dental, unless “stand alone” plans
  • Vision, unless “stand alone” plans
  • Medicare Supplemental Policies
  • Employee Assistance Programs (required if employer charges a COBRA premium)
  • On-site clinics if they provide more than the minimum care (required if employer charges a COBRA premium)
  • Wellness programs (required if employer charges a COBRA premium)
  • Health FSA value for the plan year in excess of employee’s cafeteria plan salary reductions for all qualified benefits
  • Hospital indemnity or specified illness (insured or self-funded), paid through salary reduction (pre-tax) or by employer
  • Domestic partner coverage included in gross income

Benefits Exempt From W-2 Reporting:

  • Disability Income or Accident Policies
  • Hospital indemnity or Specific Disease or Illness Policies (insured or self-funded), paid on after-tax basis
  • HSA, or Archer MSA (employer or employee) contributions, HRA contributions reporting is optional
    • FSA Health Salary Reduction Contributions
    • Long Term Care Coverage
  • Payment/reimbursement of health insurance premiums for 2% shareholder-employee, including in gross income
  • Some Governmental plans

In addition, to aid you in further Affordable Care Act compliance, Abacus Payroll can produce reports summarizing employees’ hours and wages to help you determine employee eligibility.

Q: What do I have to do as a Household Employer?
A: Household employers are required to withhold and pay FICA for domestic workers (age 18 and older) if paid cash wages of $2,300 or more in 2021.  The $1,000 per calendar quarter threshold continues to apply for FUTA.  These taxes are reported on Schedule H of the employer’s personal tax return (Form 1040), but must be remitted through withholding or estimated payments during the year.  For PA and NJ, unemployment coverage applies for domestic service in an employer’s private home for cash wages of $1,000 or more in a calendar quarter in the current or preceding calendar year.

Q: What do I do if I receive a payroll tax notice from the IRS or a state agency?
A: You should forward the notice to your Abacus Payroll specialist so that it can be immediately addressed.

Q: How long should an employer keep payroll records?
A: The Department of Labor Fair Labor Standards Act states employers must preserve payroll records for at least three years. The IRS states employers must keep tax returns for four years after the date the tax return is due. Individual states may vary.

Q: What happens if my company’s payday falls on a federal/bank holiday?
A: Federal law requires that all employees be paid on or before payday. Therefore, our software is designed to automatically change your pay date, should it fall on a banking holiday, to the day before the holiday. For example, if Thursday is your pay date, then each year we will date your employees’ checks/direct deposits for Wednesday of Thanksgiving week. It is important to stress that you must report your payroll to us two (2) business days prior to the actual pay date. Therefore, on Thanksgiving this would mean you having to report payroll/hours to us on Monday even if your regular reporting day is Tuesday.

Q: How do I know my taxes are paid on time and correctly?
A: No matter what payroll service you use, insist that the IRS has your address as the “Address of Record,” and not your payroll company’s address. The significance here is that the IRS and controlling authorities at the state level send their notices and “tracers” to this address. These tell you, the taxpayer, when something is not right. You may then forward them to your payroll company and they can address them. As the taxpayer, YOU are responsible for paying your taxes. If the payroll company fails to address any issues, the IRS will expect you to pay your taxes AND any interest or penalties. Making sure your address is the Address of Record greatly reduces the chances of this happening.

Q: What is “New Hire Reporting” and why must my business comply?
A: Federal law requires every employer to report each new hire and rehire to a designated state agency, and requires all states to conform to a set of minimum standards for the information that must be reported. All employers in New Jersey and Pennsylvania are required to report basic information about employees who are newly hired, rehired, who return to work after separation of employment, or who are returning from a required leave of absence without pay greater than 30 days.  NJ employers can report this information via the internet here and PA employers can click here or we can assist you. Failure to report a new employee could result in a fine up to $25 per violation. New employers should receive instruction booklets upon registration with the state.

Basic employee information that must be provided is as follows:
1- Employee’s name
2- Employee’s address
3- Employee’s social security number
4- Employee’s date of hire and birth
5- Employer’s name and address
6- Employers federal identification number

Q: What are my responsibilities as an employer in Pennsylvania or any other state that has local/city taxes?
A: There are several states that allow cities or counties to collect local taxes, and one of them is Pennsylvania. Pennsylvania Act 32 is a law that reforms and standardizes the local earned income tax system and requires uniform withholding of earned income taxes and remittance to a single local collector or Tax Officer.  Act 32 requires each employee to complete a Residency Certification form and employers must begin to withhold the local EIT from employees’ paychecks. Common for this area is the Philadelphia City Wage Tax. All Philadelphia residents owe the City Wage Tax regardless of where they work and non-residents who work in Philadelphia must also pay the Wage Tax. For the latest rates, please see our annual payroll tax alert. Abacus Payroll’s experts have resources and software to determine the appropriate counties and cities where local taxes need to be paid to keep you in compliance.

Q: What is Form 941?
A: Form 941 is a federal tax return prepared and filed quarterly by the majority of U.S. employers who withhold Social Security and federal income taxes from their employees. The due date for Form 941 is the last business day of the month following the end of the quarter. If tax deposits have previously been on time and for the full amount due, employers can take a 10-day filing extension. This form is used for all tax depositors; however, Schedule B, Form 941 is used for semiweekly and one-day depositors.

Form 941 reports the following information:
– All wages, tips, and other compensation.
– The amount of federal income tax withheld from wages, tips, sick pay, or other compensation.
– Total wages and tips subject to Social Security and Medicare taxes.
– Total deposits for the quarter, including balance due or any overpayment.

Q: What is Form W-2?
A: Form W-2, Wage and Tax Statement, shows wages received during the calendar year (including tips and other compensation) and the amount of taxes withheld from those wages. At the end of each calendar year, all employers must furnish a Form W-2 to each employee who has worked for them during the calendar year. Even if the employee has no federal income tax withheld, the employer must still provide a Form W-2 if the wages were subject to Social Security and Medicare taxes. Employee W-2s must be postmarked by February 1st. The W-2 Wage Statement must be reported to the Social Security Administration by February 1st. You may request a 30 extension of time to file with the Social Security Administration by filing Form 8809.

Q: What is Form 1099 NEC?
A: Beginning for the reporting for year 2020, use form 1099-NEC, Nonemployee Compensation to report payments for services performed for your trade or business.

Form 1099-NEC (provide link)  is a tax form that is used to report at least $600 in paid services in the course of your business. Generally payments to a corporation do not have to be reported.  Typically, report:
• Services performed by someone who is not your employee (including parts and materials)
• Cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish
• Payments to an attorney for services performed (not settlement payments)

The small business owner must complete and provide the form 1099-NEC to non-employees and the IRS by January 31st. There is no automatic 30 day extension.

Q: What is Form 1099 Misc?
AForm 1099 is a tax form that is used to represent miscellaneous income that was received during the year. Typically, this income is received through a variety of sources including:

  • Rent
  • Royalties
  • Other income
  • Any fishing boat proceeds
  • Medical or health care payments received
  • Crop insurance proceeds
  • Payment towards prizes, rewards, or legal services (settlement agreements)
  • Section 409A deferrals
  • Nonqualified deferred compensation

The filing threshold varies for each paid expense listed above.  Please contact Abacus (maybe insert a link) for additional details.  The small business owner must complete and provide the form 1099-MISC to non-employees by March 1, 2021, if you file on paper, or March 31, 2021, if you file electronically.

Q: How do I know what to claim on my W-4?
A: In addition to your wages amount, employers use the information provided on Form W-4 to determine the amount of income tax to be withheld on your regular paychecks to cover federal income tax.

Your W-4 allowances tell an employer
– Whether to withhold at the single rate or at the lower married rate.
– How many withholding allowances you claim. The more allowances you claim, the less tax will be withheld.
– Whether you want an additional amount withheld.

When you begin a new job, or change your marital status, exemptions, adjustments, deductions, or credits you expect to claim on your return, you will need to complete a new Form W-4 and submit it to your employer. To determine if you should be receiving a higher paycheck, or a higher tax refund, refer to the W-4 Assistant on our Tools & Calculators page.

Q: What forms do I need from new employees?
A: All new employees are required to file Forms W-4 and I-9 which are to be kept on file by the employer.  A new Form W-4 should be obtained when an employee’s filing status or exemption changes. Be sure to request and keep on file a completed Form W-9 from all non-corporate taxpayers to whom your company pays commissions, interest, rents, etc., totaling $600 or more, and also payments made to incorporated entities such as attorneys and providers of medical and health care services. These forms, along with PA Residency Certification for local tax purposes and a Direct Deposit Authorization form can be found in the Resources Center on our website.

Q: Are bonuses processed as taxable wages?
A: Yes, bonuses are considered supplemental wages and are taxable. As defined by the Internal Revenue Service (IRS) in the Employer’s Tax Guide, “supplemental wages are compensation paid in addition to an employee’s regular wages. They include, but are not limited to: bonuses, commissions, overtime pay, and payments for accumulated sick leave, severance pay, awards, prizes, back pay, retroactive pay increases, and payments for nondeductible moving expenses. “Bonuses” can be calculated in one of two ways. First is the percentage method, where the bonus/supplemental wages amount is directly taxed a flat rate of 22%. The second is the aggregate method, where the bonus is combined with the employee’s normal pay. Then the normal withholding amount based on IRS withholding tables for the sum of both amounts must be determined. Subtract what was already withheld from your last paycheck, and withhold the rest from the bonus amount.

Q: What about signing bonuses for new hires?
A: According to the IRS, signing bonuses are subject to FICA and FUTA taxes because the payments are related to the employment arrangement between the employer and employee and, therefore constitute “remuneration for employment” as described by §3121(a).

Q: Are all salaried employees exempt from overtime?
A: No. In order to be exempt from overtime, an employee needs to fall into one of the exempt categories based on their duties and responsibilities.  Simply being paid by a salary basis does not categorize one into one of the exempt categories.

Q: How do you calculate overtime?
A: The Fair Labor Standards Act (FLSA) requires that covered, non-exempt employees in the United States be paid at least the federal minimum wage for each hour worked and receive overtime pay at one and one-half times the employee’s regular rate of pay for all hours worked over 40 in a work week.

Q: What do I do about an employee’s pay at termination?
A: States have different laws pertaining to a terminated employee’s wages. For example, New Jersey, Pennsylvania, Delaware, Maryland, and New York all require employers to compensate the former employee no later than the next regularly scheduled payday for the pay period during which the termination or suspension took place. Other states, like Colorado, may require the employer to present payment at termination. If requested, wages can be paid by mail.

Q: What are wage garnishments?
A: Garnishment is the legal term for a court-ordered involuntary transfer of earnings on an employee’s wages to satisfy payment of a debt. When wages are eligible for garnishment, the employer is notified and must withhold a certain portion of the employee’s earnings under law. Common grounds for garnishment include local, state or federal tax levies, child support or alimony, student loans, and private creditors. A garnishment on earnings typically means attachment on wages, salaries, commissions, bonuses, and income from a pension or retirement program as it is generally imposed on one’s entire earnings, not just after-tax salary.

Q: How do I know if payment to an employee is a tip or service charge for payroll tax purposes?
A: All cash tips received by an employee, whether from customers or other employees under a tip-sharing agreement, are wages for FICA tax purposes and must be reported to the employer, as long as they exceed $20 in a month’s span. Payment is considered a service charge (i.e. automatic gratuity), and therefore treated as wages for payroll tax purposes, unless the following tip-defining factors exist: 1. The payment must be made free from compulsion; 2. The customer must have the unrestricted right to determine the amount; 3. The payment should not be the subject of negotiation or dictated by employer policy; and 4. The customer has the right to determine who receives the payment.

Q: What is the difference between exempt and non-exempt employees?
A: The difference between exempt and non-exempt employees is that exempt employees are not eligible for overtime (hours worked over 40 hours in one week) while non-exempt employees are eligible for overtime. . Exempt employees must be paid $684 a week or $35,568 annually.  Five categories of exempt employees are

  1. Executive – Owners, Shareholders, Vice Presidents, etc.
  2. Administrative – Managers, Supervisors, etc.
  3. Professional – Teachers, Lawyers, Computer Personnel, etc.
  4. Computer Employee – Computer System Analyst, Computer Programmer, Software Engineer, etc.
  5. Outside Sales – Majority of sales is done outside of the office.

Q: How do I know if someone is considered an employee?
A: To determine if someone is considered an employee, apply the Common Law Rules:

  1. Behavioral: Does the company control or have the right to control what the worker does and how she/he does the job?
  2. Financial: Are the business aspects such as how the worker is paid, whether expenses are reimbursed, who provides supplies/tools are controlled by the payer?
  3. Type of Relationship: Does the payer provide employee benefits such as pension plan, insurance, or vacation pay? Is there a written contract between payer and worker? Will the relationship continue and is the work performed a key aspect of the business?

Q: How do I know if someone is classified as an independent contractor?
A: If the answer to any of the questions in the previous Q&A was no, then the individual should be classified as an independent contractor. An independent contractor performs a service or does work for you or your business, while retaining total and free control over the means and methods used in doing the work or performing the service. This worker is not subject to federal or state taxes, and as an employer you are not required to pay federal and state unemployment taxes on the worker’s wages.  This worker will require a Form 1099 after the end of each calendar year.

Q: If I switch to Abacus Payroll in the middle of a year, will I then have to provide my employees with two W-2s?
A: No. As an employer you are only required to disperse one W-2 to each employer for your given Federal Tax Identification Number.  At the time of the switchover, a conversion must be done in order to provide each employee with a consolidated W-2 at year-end that includes all year-to-date data.

Q: Is there a benefit to waiting until the start of a new quarter to switch payroll providers?
A: Yes, if you are already outsourcing your payroll it is recommended you wait until a quarter break. The payroll outsourcing provider collects tax monies from you before sending it to the controlling authority (state or federal government, for example) starting the first week of the quarter. If you switch mid-quarter, the former payroll provider will have already swept some of your quarterly tax money, and will need to refund it. In the meantime, the new payroll provider will need to sweep all the tax money at once, often before the first company refunds the money. Depending on your situation, that may create cash flow problems for you. The most ideal time to switch is January 1st so that you are beginning the year with a clean slate. However, if you are preparing payroll in-house and are looking to begin outsourcing, there is no particular advantage to waiting.

Q: Do I need workers’ compensation?
A: In most states, it is required when you have one or more employees, and it is paid by the employer. Pricing is competitive and based on employee payroll, the number and classification of the employees, classification of business and past loss experience.

About the Author: Abacus Payroll

Abacus Payroll, Inc. is a leading provider of payroll solutions for businesses of all sizes. Whether yours is a family-owned small business or a national corporation, we provide payroll, tax and other financial services on time and at an affordable price. Unlike other payroll providers, Abacus Payroll will assign your very own payroll specialist who will understand your payroll needs inside and out. So no more speaking to a different person each time, no more sitting on hold for hours and most importantly no more missed deadlines! Contact us today to see how we can help your business. You can count on us.