Small Business Payroll: From Expenses to Deductions and Reporting Everything You Need to Know


Payroll solutions can greatly reduce the complexity and risks, but you still need to understand what’s involved in the payroll process. Statutory fringes are counted as payroll expenses only when they’re paid by the employer, and not deducted from the employee’s compensation. The IRS requires employers to withhold Social Security and Medicare taxes from employees’ gross wages. They are both calculated as a percentage of the wages and the rate can change from year to year. The employer must also withhold federal, and often state, taxes before calculating the net pay. At the end of the year, the employer issues form W-2 to the employee and to the IRS to report the total gross and net wages for the calendar year and the details of the taxes withheld and remitted to the government.


Payroll Expenses in this category include Social Security and Medicare as well as industrial and unemployment insurance premiums. Processing payroll requires a company to complete several steps and calculate withholdings for employees. The accrual method allows you to match payroll expenses with revenue and posts payroll expenses and liabilities in the same period. Use a payroll solution to process payroll and avoid manual calculations.

Why you should avoid paying employee expenses through payroll

If you have a lot of control over a worker, you should classify them as an employee. It’s easy for employees because all they need to do is enter the required information, submit it, and go about their day. Adding more work to your accounting system can cause more headaches than it’s worth and increase costs related to compliance issues such as audits and record-keeping requirements from HMRC.

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If your business is larger with more employees or your payroll situation is more complex, consider using payroll software or an outsourced payroll company. If you have many employees that live in different states, you will need a payroll solution that stays up to date with all federal, state and local tax laws. The main payroll report that must be submitted quarterly is Form 941, which is used to pay an employer’s portion of FICA taxes and to report total federal income and FICA taxes withheld from employee paychecks. Some states may also require businesses to submit additional quarterly payroll tax reports. Will hours accrue and carry over into the next year if unused?

Small Business Payroll: From Expenses to Deductions and Reporting—Everything You Need to Know

This could include sales and closing contracts, major decision-making, management roles, and more. They may also include reasonable, incremental meal, accommodation and travel expenses. The worker’s annual income and the number of allowances they specify on their W-4 determines the amount you deduct. Payroll processing services can also involve calculating, recording, and sending required payroll information to employees and reports to government agencies regularly.

  • Still, managing payroll—and payroll taxes in particular—is important and necessary.
  • Automation is one of the easiest ways to reduce payroll costs since it saves you moneyandtime.
  • The employer’s share of Medicare taxes is recorded as an expense and as an additional current liability until the amounts are remitted.
  • The payroll expense is the portion you pay for your employees’ health care plans and/or retirement funds.
  • The employer is also required to file IRS Form 940, Employer’s Annual Federal Unemployment Tax Return.

Distribute paychecks, reload pay cards or transfer funds through direct deposit. Record the payments to each employee, the total payroll amount and other information for bookkeeping and tax purposes. Payroll software solutions also may integrate with other business software, like accounting or HR systems. However, businesses are fully responsible for following applicable tax laws and labor regulations—though a good payroll software solution should stay up to date with the requirements in every jurisdiction. Based on these calculations, the company then delivers net pay to all employees on payday, either electronically or via check.

Payment methods and foreign exchange rates

When your employee submits a W4-form, you will be able to calculate the exact amount of taxes you need to withhold. Don’t worry – excellent payroll software will work this out for you. This content is for information purposes only and should not be considered legal, accounting, or tax advice, or a substitute for obtaining such advice specific to your business. No assurance is given that the information is comprehensive in its coverage or that it is suitable in dealing with a customer’s particular situation. Intuit Inc. does not have any responsibility for updating or revising any information presented herein.


Although you may be familiar with the laws in your country, you may be less sure of the rules internationally. With the rise of remote workers and international contractors, this is an area of law that is changing quickly. Payroll expenses are costs incurred by an enterprise in employing workers.

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