Payroll is more than issuing consistent paychecks
While accurate and timely pay stubs are important, there are a number of critical factors to account for when running payroll. On top of accurate wages, payroll also consists of proper tax withholdings, responsible filing, handling deductions such as garnishments, retirement contributions, benefits, and much more.
If you’re running payroll in Michigan, or setting up payroll for the first time, this guide will define what payroll is, why it’s important, how to set payroll up for your business, and the benefits of outsourcing payroll.
1. What is Payroll?
Payroll is, “The sum total of all compensation that a business must pay to its employees for a set period of time or on a given date,” according to Investopedia. Compensation includes salaries, deductions, bonus, wages, and net pay.
Along with compensating employees, payroll also consists of tax withholdings. Tax withholdings are taxes employees must pay and employers must withhold from the wages of every employee.
Tax Withholdings in Michigan include income tax, city tax, as well as Social Security and Medicare. Your income and city tax will depend on your income and which city you live in. The current tax rate for Social Security is 6.2% for the employer and the employee. Medicare is 1.45% for the employer and 1.45% for the employee.
2. Why Payroll is Important
It may seem obvious to state, but payroll is important for legal and ethical reasons, as well as the health and longevity of your business. Payroll is subjected to laws and regulations so it’s vital to keep organized, precise records of your payroll.
Paying Michigan Employees
A payroll system ensures salaried and hourly employees are paid accurately and according to schedule. Failing to pay employees their due wages is not only unethical, it’s illegal. Michigan’s Bureau of Employment Relations outlines laws and regulations related to minimum wage, fringe benefits, overtime pay requirements, and deductions. If an employer fails to properly pay employees, they will be subject to a number of criminal penalties. If you’re setting up a Michigan business and have questions about paying your employees, our guide Everything You Need to Know to Pay Your Employees in Michigan provides thorough instructions.
Filing and Withholding Taxes
As we mentioned above the federal government requires businesses to withhold a percentage of every paycheck for both employers and employees. Federal withholding taxes include Social Security, Medicare, unemployment, and federal income tax. Employers are subject to state income and disability taxes. For a detailed guide on how to file payroll taxes in Michigan, see Everything You Need to Know About Michigan Payroll Taxes for Your New Business.
For accurate tax filing and withholding procedures businesses need all employees to fill out a W-2 form and file it with the Social Security Administration by the middle of April of each year.
3. Setting Up payroll for your michigan business
Now that you’re aware of the responsibilities, laws, and tax information regarding Michigan payroll, it’s time to decide on which payroll system suits your business and budget. There are three common options:
DIY payroll: this is the cheapest option but requires huge amounts of time and a deep knowledge of federal, state, and local tax requirements.
Hire an accountant: accountants are familiar with payroll responsibilities and tax law, but are quite costly and places the control and trust of accurate payroll in the hands of a single person or department.
Outsource payroll: Outsourcing payroll may be the most expensive option, but it alleviates all of the workload of tax filings and deposits and ensures accurate and timely paychecks every time.
No matter which payroll system you choose, you should also set up the following:
Determine how your employees will get paid: by check, direct deposit, or pay cards.
A reporting process for earnings and withholdings of each employee and total withholding amounts to the correct tax agencies.
If you choose to set up your own payroll system for your business, there’s a few things to do to get started.
Get Your Federal Employer Identification Number (FEIN)
Your FEIN is a tax ID assigned to you for your business. It is required to open a checking account and to facilitate other financial transactions and it also identifies a business for federal and state tax purposes. Obtain your FEIN here.
After you have obtained your FEIN, you will need to register with the state of Michigan for income taxes,unemployment taxes and worker’s compensation. Note that all of these are related to Michigan payroll taxes and must be withheld from your employees paychecks or paid by you as the employer.
Classify Your Employees
There are major differences between how you pay employees and independent contractors. It’s important to classify and pay your employees correctly. Improperly classifying an employee as a contractor and failing to withhold and pay their taxes will make you, the employer, liable for back taxes and penalties. You can read more about proper employee classification here.
Choose a Pay Period
There are four main pay schedules to choose from: weekly, bi-weekly, semi-monthly, and monthly. The payroll schedule you choose for your employees will depend on the industry you’re in, the kind of workers you employ (contractors vs. freelancers vs. full-time employees, etc.), and how much administrative work you’re willing to tackle.
For a full breakdown of the four main pay schedules and which industries and trades their most applicable for, read on.
Document Compensation and Manage Records
Precise, accurate, and accessible payroll records are crucial for your business’s long-term success. Regardless of the payroll system you choose make sure you can track employee hours, compensation, how paid time off is calculated and issued, and business deductibles.
Employee payroll data management is important because federal and state laws require you to keep certain records for a specific amount of time. W-4’s must be kept for all active employees and for four years after they leave your organization. Keep W-2’s and copies of tax forms and dates as well. The US Small Business Administration is an excellent resource for document management.
4. Features of an exemplary payroll processor
If you’re responsible for running payroll for a Michigan-based business , you’re probably all-to-familiar with the stress and headaches that come with managing deductions, understanding federal, state, and local tax law and much more. So if you’re considering outsourcing your payroll processes you’ll want to know what features to look for. We’ve outlined a few of the essential features associated with a single-source payroll software like Dominion’s that simplify payroll and HR management tasks.
Automatic Tax Payments: A payroll processor worth their salt should have zero problems accurately submitting local, state, and federal taxes when you submit payroll.
Multiple Pay Options: A suitable payroll processor should give you the choose of picking between popular payment options, such as direct deposit, checks, or pay cards.
Stress-free compliance: Whether you’re worried about tax payments or filing for the Affordable Care Act, a payroll processor should have you covered.
Professional Implementation: The process of switch payroll providers, or switching from an in-house process to an outsourced processor is daunting. An installations team should help your team transfer all the important data you need for a smooth conversion.
Centralized Data: A proper payroll processor will allow you to access important employee data all from one online location. From pay rates to time off to benefits, it’s all accessible easily and at any time.
Expert Customer Support: What supports the average payroll processors from the best is their depth of customer support. Clients of Dominion have access to customer support via phone, email, or chat. The get answers easily and when they need them.
This is not an exhaustive list of all the features you should look for in a payroll provider, but it does give you a starting point when evaluating different providers. Looking to dive deeper? Learn what else to evaluate here.
If you’re curious about all the payroll features Dominion provides, request a demo and see if we’re a good fit for your business.
5. Explaining Deductions
At this point we’ve mentioned various federal, state, and local deductions taken out of Michigan paychecks. Below is a breakdown of these deductions so employees can fully understand what is being taken out of their paycheck, what these deductions are used for, and what employers have to withhold by law.
Federal Tax: Federal tax is taken out of each paycheck. The amount depends on how much you make annually and your marital status.
State Tax: The Michigan statewide income tax rate is 4.25% of an employee’s compensation after deducting personal and dependency allowances.Local withholding taxes vary depending on which city you reside in. Residents of Detroit pay one of the highest percentages at 2.4%, followed by residents of Highland Park at 2%, and Grand Rapids at 1.5%. For in-depth Michigan tax information, go to Michigan.gov.
FICA: The Federal Insurance Contributions Act, or FICA, was created to act as a safety net for retirees and spawned the Social Security Administration. Today employers match employee contributions of 6.2% of the paychecks.
Retirement: Many employees choose to have a percentage taken out of their paycheck for retirement. Common options include 401(k)s and IRAs.
Health: Most employers offer their workers health insurance. Employees eligible for health insurance will have their contributions taken out of their gross amount either pre or post tax.
Life: Some employers offer life insurance. Life insurance contributions are typically small deductions taken out biannually.
FSA: Flexible Spending Account deductions are amounts employees choose to contribute to an account dedicated to medical costs. These contributions are tax-free and can be accessed at any time without penalty.
ESOP: A few organizations offer employee stock option plans. A percentage of a paycheck is deducted to purchase company stock.
Other: Garnishments, union dues, meals, and other miscellaneous deductions may appear on an employee’s paycheck.
It’s important to remember, regardless of what is deducted from your paycheck, the difference between gross pay and net pay.
Gross pay is the total amount of wages earned before any deductions are taken out. Net pay is the amount you walk away with after all of the deductions have been taken out.
Reading a paycheck can be confusing, even if you understand deductions. Eliminate any lasting confusing with How to Read a Paycheck
6. The Decision to keep payroll in-house or to outsource
The decision on where to host your payroll processing system is an important for every business. There are a few benefits and drawbacks to either decision.
From an in-house accountant to an internal payroll software, running payroll in-house has the following benefits:
It’s more affordable. For small to midsize businesses, it’s almost always cheaper to run payroll in-house or pay an accountant instead of paying for an outsourced payroll system.
Data access: In-house payroll guarantees you have immediate access to your payroll information (assuming it’s well-organized and managed).
You know how to do the work: If you’re running payroll by yourself currently, you may think it’s unnecessary to pay another business to do a job you’re already performing.
However, as we mentioned above, running payroll yourself is extremely time-consuming and opens your business up to tax errors, inaccurate and missed paychecks, and filing liabilities.
Outsourcing payroll to a software company specializing in payroll and HR management has the following benefits:
Accurate and timely pay stubs: Payroll software companies are experts in processing tax codes, staying up-to-date on the latest laws, and can handle all manners of deductions, pay frequencies and any other specialized request.
Saves an enormous amount of time: Businesses of all sizes benefit by delegating payroll processes. Outsourcing payroll allows you to stay focused on managing your employees and achieving company goals.
Long-term savings and peace of mind: While an outsourced payroll solution may seem expensive up front, it’s more affordable in the long-term. Paying for a single-source payroll solution eliminates tax errors and the need for an accountant solely focused on payroll processes.
There are a number of pros and cons for internal and outsourced payroll solutions. In order to determine the best solution for your business, you’ll have to account for a number of factors. How many employees do you have? Are you experienced in tax law? Can you offer benefits to your employees? If you’re curious about the costs and advantages of a single-source payroll software, reach out to a member of Dominion to review your needs and determine the best solution for your business.