What's up, tax savers?
I wanna talk with you today about the basics of payroll.
This is a huge topic for business owners.
In fact, it's so important
that QuickBooks actually reached out
and asked me to make a couple videos
to help simplify the entire topic of payroll.
So let's get right into it.
For those of you that don't know me,
I'm Tyler McBroom.
I'm the CEO and managing partner
of a firm called Measured Results out in California
where we work with business owners around the country
to help them pay as little tax as legally possible,
help them know where their numbers are going,
and to be as profitable as possible,
basically help them keep as much of their money
that they make as possible.
And I'm excited to dive into this important topic today.
What is payroll?
So let's start with that.
So payroll is, essentially, it's the total amount of wages
that a company pays its employees.
Running payroll involves a couple of things.
First you take an employee's gross pay,
and then you subtract out federal, state, and local taxes,
and then, of course, any withholdings
or other potential deductions.
Whereas, an independent contractor,
you just literally cut them a check,
and then you issue them a 1099 at the end of the year.
So why is keeping payroll so important?
Well, number one, it keeps you compliant legally.
If you did pay everyone through 1099,
you could end up getting in trouble
and owing a lot of payroll taxes and penalties
from doing it wrong.
The other thing it does is paying them correctly
keeps your employees protected.
If you're not running them through payroll,
they're not eligible for unemployment
or any of the other plethora of benefits
that comes from being paid as an employee
when those unfortunate times hit.
So it doesn't just keep you protected.
It's important to keep your employees protected as well.
So what are the essential components of payroll?
Well, first you've got your employee's information.
When you have your employee fill out the W-4
on the first day they start,
that's where you gather all of their basic information,
their name, date of birth, Social Security number,
address, all of that essential information.
Next is what you pay them,
either their salary or their hourly wage.
So a salary is a fixed amount that you pay them
every pay period.
And then a wage is what you pay them based on the hours.
Overtime pay varies a little bit from state to state,
depending on your specific rules.
Generally speaking, it's anytime you pay someone
above 40 hours a week that they work.
And in some states,
it's above eight hours in an individual day.
Next is the employee's time.
This is a critical one
for not just figuring out what you should pay them
but also figuring out how profitable you are
in certain areas of your business.
Next is deductions.
So these are any income tax amounts
that you take out of their paycheck
when they fill out the W-4
and they claim how many exemptions
or kind of how much they wanna deduct from their paycheck.
Next is benefits, and this, of course, varies
from company to company, depending on your actual policies.
But generally speaking,
it's health insurance, any retirement matching.
And some more progressive companies offer other things like
paying for a gym membership or any other little benefits
like a life insurance policy, disability insurance policy.
And then next, payroll taxes,
essentially, Social Security and Medicare,
they're funded through payroll taxes.
And then state unemployment
and disability insurance varies from state to state,
but those are all payroll taxes.
There's employee portions of it
and then employer portions of it.
The employee portions are withheld from the paycheck.
And then you take the employer portion
and add to that and send it into the taxing authorities.
And payroll withholding is a term that you may hear.
It's very similar.
It's kind of interchangeable with deductions
in that it's amounts that are withheld from the paycheck
on behalf of your employee
and then sent to the various authorities.
So when people are thinking of payroll,
oftentimes, they think of the net pay, which is the amount
that actually hits the employee's bank account.
And then what the gross pay is, it's that actual salary.
So someone might make $60,000 a year.
That's their gross pay.
Their net pay, they might get
actually hitting their bank account $40,000
that actually hits their bank account.
That's their net pay.
So speaking of that, how do you calculate payroll?
And when somebody asks how to calculate payroll,
usually what they're really asking
is how do you calculate your employees' net pay?
Net pay is calculated by taking an employee's gross pay,
then you subtract out those payroll taxes,
those withholdings, and those deductions.
And then that gives you your net pay.
Now, there are a few different ways to process payroll.
And ultimately, what you decide on the method
that is best for you is gonna depend on the size
and stage of your business.
So the first method is do it yourself.
And that is, essentially,
we get out the chicken scratch and the calculator.
We pull up the payroll tax form.
We calculate the numbers
and then figure out what we think the net check should be
based on the calculations that we come up with ourselves.
That's option one.
Option two is to outsource payroll
to a different service provider.
So that might be an accounting firm
or a different payroll company
that specifically focuses on running payroll.
You give all your information to them,
and they do it for you.
Last is you use a payroll software
to get the basic information that you need,
so the same types of things that you would send
to the outsourced payroll provider.
But in today's ever-evolving, automated world,
software can do that for you.
So basically, you take that basic information,
plug it into the software.
And then it would calculate the net checks,
send in the payments and the payroll taxes for you
and then also pay your people.
So those are the three different ways.
We covered the difference between a gross check
and a net check, the basics of payroll.
On the next video, we're gonna discuss the best practices
on how to make sure you stay compliant, both on your side,
what to do as a business owner, and make sure
you're keeping your employees protected, of course, as well.
We'll see you next time.
(upbeat rock music)