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. Any business that has at least one employee will have to process payroll. Chances are, if you’re reading this, you fall in this category. But what is it exactly? Essentially, payroll can refer to one of three things:
The employees you pay, as well as all their employee information.
The amount you pay employees during each pay period.
The process of actually calculating and distributing all wages and taxes.
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.
A Breakdown of Payroll
There are many different aspects of payroll, such as employee information, hours worked, salaries and wages, deductions, and net and gross pay. In this section we’re going to take a closer look at each of these components and more to how they affect payroll.
In order to process payroll, you have to compile a lot of information from your employees. Each employee must fill out Form W-4, which provides information about their federal income tax withholding exemptions. You’ll also get the employees’ name, address and Social Security number from this document. All of this information is necessary to have in order to effectively run and distribute payroll. Each new employee you hire will have to fill out Form W-4.
There are two different kinds of employees: hourly and salary. For your hourly employees, you have to keep track of all hours worked in order to pay them the proper amount. This is less important for salaried employees, however, you may still want to track their time in order to ensure they are putting in their time.
If you offer any kind of paid time off (PTO) options to your employees, you’ll want to track that time for each employee. PTO can take many forms, from vacation time to sick time to holidays. With the new Mandatory Paid Sick Leave Act, this is more important than ever. Make sure you have a detailed description of your policy that informs employees about how much time they are able to take off.
Salaries and Wages
A salary is a fixed amount that you can pay an employee. Typically, an employee is given a yearly salary, which is then divided by the number of pay periods in the year. A wage, on the other hand, is what you pay an employee based on the hours worked. You will set a specific rate of pay for each hourly employee. To calculate an employee’s total wages, you will multiply the rate of pay by the number of hours the employee works.
In addition to hourly and salary employees, you also have exempt and nonexempt. Sometimes these mean the same thing, but not always. Nonexempt employees must receive overtime pay, regardless of whether they are hourly or salary. Overtime hours typically begin after an employee works 40 hours in a week and is one-and-a-half times their normal rate of pay. Be sure to check your state overtime requirements.
Fringe benefits are a kind of compensation for your employees, and can include anything from health insurance to retirement plans. Any benefits you offer should be included in payroll.
There are other types of pay that your employees may receive, such as tips, commission or bonuses. Employees must report all tips made to you, as there are payroll taxes applied to tips. Any commissions and bonuses should be included when you run payroll.
Deductions are any money that you subtract from an employee’s total wages. Some examples of this includes federal, state, and local taxes, health insurance premiums, and job-related expenses.
You must deduct payroll taxes from the wages of every employee. The exact amount is going to vary depending on the employee’s total earnings and how many withholding allowances they claim. Payroll taxes include federal, state and local income taxes, federal and state unemployment, medicare, and social security.
Garnishments are court-ordered, post-tax deductions. These are used to pay off the employee’s overdue debt for unpaid taxes, defaulted loans, and overdue child support. If you need to deduct a garnishment, you will receive a notice from a court.
Net and Gross Pay
Employers must show an employee’s net and gross pay on their pay stubs. Gross pay is the employee’s total pay, while net pay is what’s left after all deductions are subtracted. This is the amount that they take home each pay period. Usually, IRS forms will ask for an employee’s gross pay, while banks and loan providers will be interested in their net pay.
There are three primary ways to process payroll: In-house, using a certified public accountant (CPA), or using a payroll software. While there is no right way to process payroll, some methods will work for certain businesses much better than others.
Processing payroll in-house is often considered the cheapest option. However, this is by far the most time-consuming. Not only do you have to learn how to do payroll, but processing payroll each pay period is incredibly tedious and time consuming. What’s more, any fines or penalties you receive from mistakes made when filing federal, state, and local taxes will fall on your organization to cover. The IRS provides tax tables that can be used to calculate federal income tax withholding (found in Publication 15).
Using a CPA is a good way to free up some of that time. While they can be incredibly expensive, they will usually take care of the entire payroll process for you. The downside to using a CPA is that you don’t get the additional payroll and HR features that you do with a payroll software.
Using a payroll software is the best bet for most businesses. While they’re not as cheap as processing in-house, payroll software is going to automate a lot of your payroll processes, meaning you spend significantly less time doing payroll. All your taxes will be automatically filed on your behalf, and you have the added bonus of using the software’s additional timekeeping and HR features.
There are many factors to consider when it comes to payroll, and whether you’re new to the game or a seasoned employer, understanding this aspect of your business is important. Now that you understand what exactly payroll is, let’s take a look at why it’s important.
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.
The Perks of Payroll
In addition to making sure all your employees get paid on time, your payroll team plays a vital role in protecting your organization’s reputation by ensuring compliance with various legislations. Payroll affects every aspect of your business, from the reputation of the company right down to the morale of its employees.
Take it from somebody who has been in the payroll industry for a long time: there is no faster way to plumete your employees’ morale than to botch a payroll run. This happens most often when processing payroll in-house, due to the high chance for human error. Employees need to feel assured that they can be paid on a consistent and timely basis. A late and inaccurate payroll might cause employees to question the financial stability of the organization, which in turn could have an adverse effect on the work climate. This leads to underperformance and could even see an increase in your rate of turnover. Given that employees form the base of every organization, the importance of a reliable and accurate payroll cannot be overstated.
Reflects Net Worth
As we learned in the previous chapter, payroll is not simply limited to paying employees. An employee’s total compensation, including their salary, bonuses, and list of benefits are incorporated into payroll. This allows the employee to see and feel their net worth within the organization. Employees are often rewarded with salary increases or bonuses after their annual performance reviews, which will be reflected on their pay stubs. This in turn will likely boost an employee’s performance and overall positive outlook on your organization.
While your business has a strong financial obligation toward its employees, it also has to adhere to the structures of many employment legislations, as well as the country’s tax obligations. By following these guidelines efficiently and accurately, you can further establish a quality reputation for your organization as a stable employer. This will ultimately attract and retain the right pool of talent to your business.
We’ve already discussed how a payroll software system can improve the time and accuracy of processing payroll every pay period. In general, your software should allow for more comprehensive data management, as well as provide your organization with the option to generate customised reports. In addition, payroll software companies are likely up-to-date with the latest legislative changes, and will usually take it upon themselves to keep you in the loop so you’re always staying in compliance. With automated payroll, you can save on costs in the long run. Additionally, it frees up valuable resources so you can focus on other business areas.
You can glean a fair amount of insight by simply looking at an organization’s payroll processes. An efficient payroll department reflects the organisation's commitment to its employees and its reputation. These reasons prove how important it is to have a quality payroll process in place, so make sure you don’t overlook this key department.
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.
Step 1: 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.
Step 2: 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.
Step 3: 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.
Step 4: 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. 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.
It’s important to remember the difference between gross pay and net pay, regardless of what is deducted from your employees’ paychecks. 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.
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
5. 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 number of pros and cons when it comes to 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? In this chapter we will cover a few benefits and drawbacks to either decision.
From an in-house accountant to internal payroll software, running payroll in-house has a number of benefits. However, as we’ve discussed previously, running payroll yourself is extremely time-consuming and opens your business up to tax errors, inaccurate and missed paychecks, and filing liabilities. Here are some of the perks to processing in-house:
Affordability: 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).
Control: 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 can be incredibly beneficial for your company. Price-minded individuals with see that outsourcing payroll will generally be the more expensive option. However, most organizations agree that the benefits far outway the cost of service. Here are the perks of using a payroll software:
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.
If you’re curious about the costs and advantages of single-source payroll software, reach out to a member of Dominion to review your needs and determine the best solution for your business.
6. 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.
What to look for in a payroll service
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.
Mobile optimized: HR and Payroll tasks don’t always take place in the office. That’s why an exemplary payroll provider will offer a mobile-optimized website, as well as a mobile app. Dominion offers both. Our live site is accessible from any web browser on a smartphone and our app is available for free from the app store for all our customers.
Expert Customer Support: Payroll is always going to be complicated, and there’s a lot of pressure on payroll processors to get things right every time. That is why it’s important to have a quality customer service team that you can rely on any time you need it. Clients of Dominion have access to customer support via phone, email, or chat in order to get the answers they need easily and exactly 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.