A Beginners Guide to Payroll Processing for Agencies
For insurance agencies large and small, payroll processing is a fundamental task. There’s a lot to payroll beyond the apparent calculations. The process includes setting your business up as an employer and paying employees, the tax agencies, and other involved entities. Any mistake affecting people being paid correctly and on time can negatively affect a company’s image and their employee’s morale.
What is Payroll Processing?
Payroll processing involves managing employee payments, from adding an employee to your payroll to issuing their paychecks. In most cases, this is done by a dedicated payroll professional who makes sure the payment is calculated, tracked, and given out correctly. This person is also responsible for making sure the correct taxes, company benefits, and other deductions are properly withheld.
Payroll Processing Basics
Payroll involves more than just writing checks for employees. Employers have to make sure they report their payroll practices before submitting payroll tax statements to the tax agencies. Below are the basics to help you get started:
Employer Identification Number (EIN)
Your EIN is also known as your federal tax ID (a 9-digit number used to identify a business). This number is used to set up various tax accounts and is required to open a business banking account.
If you don’t already have an EIN, you can apply for one directly through the IRS. The IRS will issue you an EIN free of cost.
A business has to have employees complete certain forms to get them onto payroll. These forms include (but may not be limited to):
- IRS Form W-4 (Employee’s Withholding Allowance Certificate): determine how much federal income tax to withhold from an employee’s pay.
- State W-4: Some states require their own W-4 form to be filled out to determine how much state income tax to withhold from an employee’s pay.
- W-9 (Request for Taxpayer Identification Number and Certification): used when working with independent contractors. You don’t need to withhold taxes, but you must track how much you pay them and complete a 1099 Form at the end of every year.
- USCIS Form I-9 (Employment Eligibility Verification): New hires complete this form to confirm their identity and legal authorization to work in the U.S.
- Health Insurance Form: For employers that provide medical, dental, and Vision insurance to their employees. Participating employees will fill out this paperwork to determine payroll deductions.
- 401(K) Plan Paperwork: This is used to determine the funds to withhold from an employee’s pay before depositing it into their 401(K) account.
Taxes and Withholding
Below are a few of the more common taxes employers withhold from an employee’s pay:
- Federal income tax
- State and local income tax
- Social Security and Medicare taxes
- Other deductions (401(k) and other retirement fund contributions, child support payments, unpaid vacation time, etc.)
An employee’s net pay is calculated by subtracting the carious withholdings from their gross pay. Some deductions are pre-tax, and others are after-tax. Some states have different rules from the federal government, so you must check before making any deductions.
Be sure to transfer any withholding funds into a separate account to later submit them to the IRS, Social Security Administration (SSA), or other agencies.
Payroll-related Fees Paid by the Employer
In payroll processing, specific taxes and fees are the responsibility of the employer and are not deducted from the employees’ pay.
Federal Unemployment Tax Act (FUTA)
Employers pay federal unemployment taxes via FUTA if they pay at least $1,500 in wages during any calendar quarter during the previous or current calendar year. When the employee’s wages reach $7,000 for the current calendar year, the employer no longer needs to pay the Federal unemployment tax for that employee for that tax year.
The current FUTA tax rate is 6%.
The IRS will let employers take credit as much as 5.4% of the FUTA taxable wages when paid into the state unemployment tax funds.
State Unemployment Tax Act (SUTA)
Some states have a state unemployment tax, vis SUTA, where employers must register to file a wage report and submit tax payments.
This wage tax and the unemployment tax rate will vary between states
Workers’ Compensation Insurance
Employers can purchase this type of insurance to cover costs related to an employee’s work-related injury or illness. Doing this lowers the chance of being sued by uncompensated employees.
End of Year Payroll
Record keeping throughout the year is essential to have all the necessary numbers and information for the end of the year. Employers will have to summarize all the withholding fund information on W-2 Forms (or 1099 Forms for independent contractors).
A copy of each employee’s form must be sent to the employee, IRS, and SSA. Employers will also need to submit IRS Form 940 for their FUTA tax (plus any state-specific payroll or tax reporting forms).
These are just the basics when it comes to payroll processing. The way you handle payroll may become more complicated or look slightly different based on your needs.
If you have any questions, the professionals at Agent Pipeline are here to help at 800.962.4693.