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Jul 21 2025 13:58
Answers to Common Payroll FAQs for Business Owners
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Even if you've outsourced payroll, many business owners still wish to grasp its essential elements. For those managing payroll themselves, understanding these basics is crucial. Here, we address seven of the most frequently asked payroll questions, offering practical, jargon-free answers.
What Payroll Records Do I Need to Keep and For How Long?
According to the IRS, all payroll-related documents — timecards, pay stubs, W-2s, tax filings, and benefit deductions — should be kept for at least four years. This ensures that records are available for IRS review and can help address employee inquiries efficiently.
Do I Classify Workers as Employees or Independent Contractors?
An employee works directly for your business. You control their work schedule, process, and provide necessary tools or training. They receive a salary or hourly wages, with taxes withheld from their paychecks.
On the other hand, independent contractors are self-directed, using their tools and often working with multiple clients. They are usually paid per job, with no taxes withheld from their checks.
If classification is uncertain, consulting IRS guidelines can prevent future issues.
Can I Offer Benefits Through Payroll?
Yes, you can include deductions for health insurance, retirement plans, and other benefits in payroll. Handling pre-tax and post-tax deductions correctly is vital, as this impacts how benefits are taxed and reported to the IRS.
What Happens If I Misclassify a Worker?
Misclassifying employees as contractors can result in penalties, back taxes, interest, and unpaid payroll taxes. This might also lead to issues with workers’ comp or labor laws. Ensuring correct classification from the start reduces risks significantly.
What Payroll Taxes Am I Responsible For?
Employers must withhold and pay federal income tax, Social Security and Medicare taxes, and federal and state unemployment taxes, along with any applicable state and local taxes. Notably, employers match employee Social Security and Medicare taxes unless the employee hits the yearly Social Security wage limit.
How Do I Handle Overtime Pay Correctly?
Non-exempt employees, typically hourly workers, must receive "time and a half" pay for hours worked over 40 in a week. Exempt employees, such as salaried managers, may not be entitled to overtime but must meet specific criteria to maintain this classification.
