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~by Christine Schoaff~

You turned your great idea into a business. Now it is growing to the point where you need extra help, and you have enough cash in hand, or projected to come in, to pay someone. You considered the options for business relationships (see ‘What Business Relationships are Best for Your Business?) and you have decided to hire a W-2 based employee. Another situation is that you have reached the cash flow point where, as an owner, you will begin to take a salary.

Now how do you decide how much you can afford to pay in salary? One important consideration is the overall cost of payroll. As a rule of thumb, basic payroll has additional costs of 10% to 20% of the payroll amount or total salaries paid.

Here are five costs included in running payroll:

1) Payroll processing: You can decide if you want to run payroll yourself or pay a service to do so. Some on-line options are in between. Usually, the do it yourself is set up in Quickbooks or another accounting program. Costs can be one-time for software, monthly, or per payroll. With a service, there is often an additional per-employee charge.

2) Direct deposit, paper checks or cash: You can require your employees to provide banking information to allow direct deposit. If you use paper checks, you need to buy check stock for your payroll account at the bank; this may be your operations account or a separate account. If it is paper checks, be sure to let your employees know if you will mail the check to a home address or require them to come and personally pick it up. It is no longer common to pay employees with cash. A check written at a local bank can often be cashed there, and is better because it provides built-in documentation.

3) Federal taxes: You must withhold some money for the employee paid portion of taxes from each paycheck. This will be federal income tax withholding and other employee paid taxes. As the employer, you must also provide an additional amount of money to cover the employer’s portion of the taxes. For example, in 2015, Social Security tax is 12.4%, with half, or 6.2%, paid by the employer, and 6.2% paid by the employee. Medicare taxes are similar. Federal unemployment is paid only by the employer. Payroll systems have the various tax rates and calculations included.

4) Other tax authorities: If the state in which the employee resides has a state income tax, it will work much like the federal tax. In some places, cities and counties also levy taxes. If you must also withhold due to a court order specific to an employee, that is similar to another taxing authority and you must follow the appropriate forms, filing deadlines, and other administrative processes. States also require the employee to pay unemployment taxes. This covers the costs to the state when an employee files with them for unemployment benefits.

5) Other costs in time and money: At the end of the year, you will need to provide your employees with W-2 statements. Note that you need to send all taxes you collect to the appropriate taxing authority — federal and state, usually monthly to start, and then more frequently as the amount of payroll taxes increases. There are also quarterly and annual tax forms that need to be filed.

Bonus: Always consider the time you will spend running payroll. You need to decide if you will pay weekly, every other week, monthly, or some other time frame. Every payroll run will require time and costs from you or a service.

The 5 Costs of Running Payroll 1Meet the Author: Christine Schoaff

Christine Schoaff has been an entrepreneur and intrapreneur in opportunities from start-up to mid-size to Fortune 500. She has worked extensively with family run businesses in a variety of industries.

Christine Schoaff