If that scenario describes where you are in your entrepreneurial journey, you’re likely considering hiring employees. And as much as the thought of help may bring you a sense of relief, it might also elicit the feeling of being a deer caught in headlights! I understand — and you’re not alone. Payroll, because it has many moving parts, can be intimidating.
Running payroll entails a number of tasks businesses must perform to pay employees correctly and on time. Encompassing everything from calculating salaries and wages to withholding taxes and other deductions from gross pay to preparing paychecks to filing tax reports and remitting funds to various tax authorities and more, payroll responsibilities demand accuracy, timeliness, and ongoing attention.
Fortunately, you can approach payroll more confidently if you educate yourself and get guidance from knowledgeable tax professionals. This article covers some payroll basics to help you in your self-education endeavors.
Payroll rules differ among state and local government agencies, so therapist practice owners must review the specific requirements for where their business is located. Common payroll components include:
1. Tax ID Numbers
Therapists and counselors who hire employees must have an Employer Identification Number (EIN) from the IRS. An EIN is a federal tax ID number used for payroll, income tax reporting, and other business purposes (such as opening a bank account and applying for business licenses). Employers must also obtain the required state or local tax ID numbers for conducting payroll activities where their practice resides.
2. Employee Tax Documents and Other Info
Before placing employees on the payroll, practice owners must ask workers to complete some paperwork:
- IRS Form W-4, Employee’s Withholding Allowance Certificate – The W-4 form is essential for workers who will be classified as employees. It collects the individual’s personal information for tax reporting purposes and determines the federal income tax the therapy practice should withhold from an employee’s pay. Some states use the federal W-4 as well, while others have their own versions of the form that employers must request workers to complete.
- IRS Form I-9, Employment Eligibility Verification – The federal government uses this form to document that a hired employee (citizen or non-citizen) is authorized to work in the United States.
Different paperwork is required if your practice opts to use independent contractors (e.g., freelancers) rather than hire employees. Instead of a W-4, you must request the contractor to fill out IRS Form W-9, Request for Taxpayer Identification Number and Certification. A W-9 is necessary for any non-employee to whom you paid $600 or more during the tax year. Employers do NOT withhold taxes or other deductions from an independent contractor’s pay. The individual must report and pay all their tax obligations via their personal tax returns.
3. Employee Wages and Salary Information
A therapy practice’s employee’s pay can include more than just wages or salaries; there might also be overtime pay, paid time off compensation, bonuses, tuition reimbursements, or commissions. Processing payroll involves calculating and reporting employees’ gross pay and net pay (the take-home amount after deductions for tax withholdings and benefits contributions).
If paying independent contractors, that compensation is based on the contracted rates agreed upon between a therapy practice and the contractor. No taxes or other deductions are withheld from payments to independent contractors.
4. Employee Banking Information
If your therapy practice will pay employees via direct deposit, you’ll need information about their bank account so that you can transfer funds to them from your payroll bank account.
- Bank name
- Bank routing number
- Account type (e.g., checking or savings)
- Account number
Depending on your state, you might need to ask employees to sign a consent form that confirms their permission to allow you to deposit money into their bank account.
5. Retirement Plan and Health Insurance Documents
Counseling centers must also verify the voluntary deductions their employees have authorized to be withheld from their pay.
Here are a few examples of voluntary deductions your employees might have:
- 401K and profit-sharing plans
- Pension plans
- IRA Plans
- Health insurance
For employees participating in these types of plans, employers must retain participant records — e.g., account balances, earnings and contributions, compensation data, and statements and notices to participants.
6. Workers’ Compensation
Workers’ compensation (workers’ comp) is a form of insurance coverage that most states require employers to have. Workers’ comp policies cover the costs associated with employees’ work-related injuries and illnesses. Typically, workers’ comp is administered through a state-mandated program.
Employees may not sue their employer for lost wages and injuries if they collect workers’ compensation benefits. Still, workers might be able to sue for costs not covered by the employer’s workers’ comp policy.
Payroll Deductions and Withholdings
I’ve provided a rundown of different withholdings and deductions subtracted from employees’ net pay below. The specific items your therapy practice must deduct will depend on the laws applicable to where your business is located and the benefits you provide to your employees.
Income Tax Withholdings
Federal Income Tax
The federal income tax you withhold from an employee’s pay is based on the information the worker provided on their IRS Form W-4, Employee’s Withholding Certificate. The withholding amount is determined by the employee’s marital status, number of dependents, and Form W-4 adjustments.
State Income Tax
In states with a state income tax (SIT), a therapy practice must also withhold that tax from its employees’ pay.
Local Income Tax
Some counties charge local income tax, which employers must withhold.
Payroll Tax Withholdings
This federal payroll tax funds the U.S. Social Security and Medicare programs. FICA tax is taken as a percentage of an employee’s wages. 12.4 percent for Social Security tax and 2.9 percent for Medicare. Half of Social Security and Medicare taxes are withheld from employee’s wages and salaries and employers pay the other half. All gross income is subject to Medicare tax. The government caps the amount of an employee’s compensation subject to Social Security tax. For the tax year 2023, that cap (the taxable maximum) is $160,200.
Federal Unemployment Taxes (FUTA)
The Federal Unemployment Tax Act and state unemployment systems help workers financially — through unemployment compensation — if they lose their jobs through no fault of their own.
Employers pay FUTA tax entirely; no monies are deducted from employee pay to fund FUTA. Employers must file federal unemployment taxes when they meet the threshold of paid wages of $1,500 or more to employees during any calendar quarter in the current year or the one before. The six percent FUTA tax applies to the first $7,000 paid to each employee during a calendar year.
Most states have their own unemployment insurance programs — known as state unemployment tax (SUTA) or state unemployment insurance (SUI). Each state sets the taxable wage threshold and the unemployment tax rate for its jurisdiction. In many states, employers are responsible for paying the full SUTA amount. In others, employees must also contribute.
State and Local Payroll Taxes
Some states and municipalities have other payroll taxes, too. Check with your state’s Department of Revenue and local tax authorities about additional withholdings or payments your therapy practice might be responsible for (e.g., family medical leave or short-term disability insurance).
Other Voluntary and Involuntary Payroll Withholdings
In addition to taxes, your therapy practice may have other withholdings to make from your employees’ paychecks. Some are voluntary — such as contributions to retirement plans, health insurance, life insurance, and other benefits. Others are involuntary — such as wage garnishments for alimony, child support, loan payments, and bankruptcy payments.
Monies from those withholdings must be sent to the appropriate providers and government agencies.
Managing Your Private Practice’s Payroll
Below, I’ve listed the general steps involved in handling payroll. Before getting started, it can be helpful to ask a tax professional for guidance to ensure you understand your obligations and don’t miss any requirements.
1. Register Your Business for Payroll
Your practice must register for business accounts with the appropriate tax authorities before it can withhold, report, and file employment-related taxes. Typically, each agency will assign your business a tax ID number.
While registering for payroll taxes isn’t terribly difficult, it can be confusing for those unfamiliar with the process. Different states have different requirements and procedures, so do your homework and reach out for professional assistance to ensure the filings are handled accurately.
2. Calculate Gross Pay, Deductions, and Net Pay
Here’s where you do the math! Below are payroll items that need to be factored into the equation:
- Gross Pay – Employers must calculate their employees’ gross pay amounts. For an exempt (salaried) employee, gross pay is their salary. For a non-exempt (hourly) employee, determining gross pay involves multiplying the individual’s time “on the clock” by their hourly wage rate. Other potential elements of gross pay include bonuses, reimbursements, and commissions paid to employees.
- Pre-Tax Deductions – After figuring out gross pay, employers must calculate pre-tax deductions and subtract them. Pre-tax deductions might include medical insurance premiums, 401K contributions, and health savings account (HSA) contributions.
- Tax Deductions – Next, employers should deduct federal, state, and local income taxes and Social Security and Medicare taxes (FICA) from the employee’s pay. You might also need to deduct state and local payroll taxes. Careful attention to the state and local payroll tax rates and information on the employee’s W-4 form is essential for withholding the correct amounts.
- Additional Deductions – Some employees may have voluntary or court-ordered deductions — such as charitable contributions, Roth IRA contributions, and wage garnishments — that must be withheld from their pay. They are subtracted after pre-tax and tax deductions are taken from gross pay.
- Net Pay – What’s left is the employee’s net pay — i.e., take-home pay.
3. Process Payroll
The next step is to get money into the hands of your employees and the tax agencies, benefits providers, and organizations that should receive monies withheld:
- Pay Employees – Employers typically issue a paper check or direct deposit funds into employees’ bank accounts to provide them with their net pay.
- Report Taxes – Employers must report federal tax withholdings to the IRS, state tax withholdings to the state’s Department of Revenue (or comparable agency), and local income tax withholdings to the appropriate local tax authority.
- Remit Withholdings – The money withheld from employees’ pay must be sent to the appropriate federal, state, and local tax authorities and benefits providers such as retirement plans and health insurance. State and local tax agencies’ methods for paying taxes vary. For federal payroll taxes, employers use the Electronic Federal Tax Payment System (EFTPS) to remit funds electronically.
Options for Processing Payroll
Basically, you have three possible ways to handle payroll.
Do It Yourself Manually
Doing it yourself might be a good choice if you’re savvy about payroll and confident with calculating, processing, and tracking everything involved. It’s absolutely essential to understand all of the payroll rules that apply to your therapy practice and that you have the time to complete payroll-related tasks on time and accurately.
Pros and Cons:
- Low-cost because of no software fees or outsourcing expenses
- Greater chance of errors, which could end up costing a practice more in the long run
Do It Yourself Using Payroll Software
This option costs more — but requires less time — than doing your own payroll manually. Many payroll software programs exist to automatically calculate withholdings and streamline the process.
Still, using payroll software requires attention to detail to ensure that the system is set up correctly for your practice and that you input the correct data.
Pros and Cons:
- Saves time by automating aspects of the payroll process
- Minimizes the chance of errors
- Helps ensure compliance with federal and state payroll rules
- Costs more than doing payroll manually in-house
- Can result in errors if data inputted is not accurate
Outsource to a Professional
This option ensures someone with specialized knowledge will handle most or all of your practice’s payroll tasks.
Payroll processing companies have focused expertise in efficiently using software to calculate wages, benefits, taxes, and deductions as well as experience handling the other aspects of payroll like benefits management, tax filing, direct deposits, and reporting.
Pros and Cons:
- Provides peace of mind that experts who understand the many facets of payroll are handling everything.
- Minimizes the chance of errors and missed deadlines
- Frees up the therapy practice owner’s time to concentrate on other aspects of the business
- Costs more than other payroll processing options
Among the payroll solutions available for small businesses, below are several with solid reputations:
- Paychex Flex
If You Need Help
I’ve given you a lot of information to digest about what goes into payroll, and I hope you find it helpful.
If you feel you need assistance with payroll setup or processing, there are many companies that can provide assistance. From CorpNet’s payroll tax registration service to Gusto’s payroll processing, you have solid resources to help make payroll setup and ongoing management easy.