Payroll is the one area of small business accounting where mistakes are punished quickly and personally. Taxes withheld from employees are not the business's money, and deadlines are strict. That is why many owners hand it off early.
What a payroll service does
- Calculates gross-to-net pay, including overtime and deductions.
- Withholds federal, state, and local income tax and employee payroll taxes.
- Deposits taxes on the required schedule.
- Files quarterly returns such as Form 941 and annual returns such as Form 940.
- Issues Forms W-2 to employees and files them with the government.
- Handles state registration, new-hire reporting, and state unemployment filings where included.
The employer taxes behind the scenes
- Social Security and Medicare: the employer pays 7.65% of wages (6.2% plus 1.45%), matching the employee's share.
- Federal unemployment (FUTA): 6.0% on the first $7,000 of each employee's wages, reduced by a credit of up to 5.4% when state unemployment taxes are paid on time and in full.
- State unemployment: rates and wage bases vary by state and employer.
- Workers' compensation insurance, which is separate from payroll tax but often tied to payroll reporting.
Who counts as an employee
Worker classification depends on the actual relationship, including behavioral and financial control, not on what the contract says. Misclassifying employees as contractors can lead to back taxes and penalties. Review each role carefully before skipping payroll.
Owner payroll
If your business is an S corporation, you must run your own pay through payroll. See S-corp reasonable salary. Sole proprietors and partners are not employees of their businesses and do not run payroll for themselves.
How providers price
Most charge a base fee plus a per-employee fee per pay run or per month, with add-ons for state filings, new-hire reporting, time tracking, or benefits administration. We do not quote dollar figures because they vary widely and we could not verify reliable current sources. Ask for a written quote that lists exactly which filings are included.
How to compare providers
- 1Does the provider file and deposit taxes on your behalf, and are they responsible for errors?
- 2Are state and local filings included?
- 3Who answers questions, and how fast?
- 4How are year-end W-2s and 1099s handled?
- 5Can payroll connect to your accounting software so the books stay in sync?
- 6What happens if you leave? Can you export your records?
A note on responsibility
Even with a provider, the business is ultimately responsible for payroll taxes. Check your IRS account and state accounts occasionally to confirm deposits and filings are posting. If payroll taxes ever fall behind, read what happens if your business falls behind on payroll taxes.
Learn about our payroll service, or talk about your payroll requirements. Pairing payroll with bookkeeping keeps the numbers consistent.
