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  • Choosing the correct payroll tax form is an important part of staying compliant with Internal Revenue Service (IRS) requirements. While both Form 944 and Form 941 are used to report federal payroll taxes, the form your business uses depends primarily on the size of your payroll tax liability.

    Typically, employers file Form 941 on a quarterly basis. However, certain small businesses with an annual payroll tax liability of $1,000 or less may qualify to file Form 944 once a year if authorized by the IRS.

    Understanding the differences between these forms can help you avoid filing errors, ensure compliance, and reduce the risk of penalties.

    Key Takeaways

    • Form 941 is the payroll tax form most employers use to report federal employment taxes each quarter.
    • Form 944 is an annual payroll tax return available to certain small businesses with an annual payroll tax liability of $1,000 or less.
    • Businesses can only file Form 944 if the IRS authorizes them to do so.
    • Both forms report federal income tax withholding, Social Security tax, and Medicare tax.
    • Payroll providers can help businesses manage filing requirements, tax deposits, and compliance responsibilities.

    What Is the Difference Between Form 944 and Form 941?

    The main difference between Form 944 and Form 941 is the frequency with which employers report payroll taxes to the IRS.

    Form 941 is filed quarterly and is used by most employers to report employee wages, federal income taxes withheld, Social Security taxes, and Medicare taxes. In contrast, Form 944, which covers similar payroll taxes, is filed annually instead of quarterly.

    For small businesses with a low annual payroll tax liability, filing once a year can help reduce administrative work while still complying with IRS reporting requirements.

    What Is Form 944?

    Form 944 is the annual federal tax return for employers, allowing certain small businesses to report their federal employment taxes once a year instead of quarterly.

    The form is intended for businesses that have an estimated annual payroll tax liability of $1,000 or less. Employers must receive notification from the IRS before they can file Form 944. Merely meeting the liability threshold does not mean that a business can automatically switch to annual filing.
    Businesses use Form 944 to report:

    • Employee wages and tips
    • Federal income tax withholding
    • Social Security and Medicare taxes
    • Certain payroll tax adjustments and credits

    It’s important to note that federal unemployment taxes are reported separately on Form 940.

    What Is Form 941?

    Form 941 is the employer’s quarterly federal tax return and is the form most businesses use to report employment taxes.

    Employers are required to file Form 941 four times a year to report the wages they have paid to employees and the taxes that have been withheld from those wages. Since most businesses exceed the annual tax liability threshold for Form 944, Form 941 is the standard payroll tax form used by employers.

    Should Your Business File Form 944 or Form 941?

    For most employers, the answer is straightforward: file Form 941 unless the IRS specifically authorizes you to file Form 944.

    • Businesses with an annual payroll tax liability greater than $1,000 file Form 941.
    • Businesses with an annual payroll tax liability of $1,000 or less may qualify to file Form 944 if approved by the IRS.

    If your business is growing, it’s worth reviewing your filing requirement periodically. A company that qualified for Form 944 in previous years may eventually need to transition to quarterly filing as payroll grows.

    Can You Change Your Filing Requirement?

    The IRS allows eligible businesses to request a change in their payroll tax filing requirements if their tax liability no longer matches their current filing situation. For instance, if a business that currently files Form 944 experiences an increase in payroll tax obligations, it may need to switch to Form 941. Conversely, if an employer filing Form 941 has an annual tax liability that decreases to $1,000 or less, they may qualify to file Form 944 instead.

    Because filing requirements can affect payroll administration, employers should review IRS guidance carefully before submitting a request for a change.

    What Information Is Required on Forms 944 and 941?

    Although the filing schedules differ, both forms require similar payroll information. Employers typically report:

    • Business identification information, including EIN and business name
    • Employee wages and compensation
    • Federal income tax withheld
    • Social Security and Medicare taxes
    • Total tax liability
    • Certain payroll tax adjustments and credits, when applicable

    Maintaining accurate payroll records throughout the year can make completing either form significantly easier.

    What Happens If You Make a Filing Mistake?

    Payroll tax errors can occur, particularly for business owners who handle payroll internally. The IRS offers correction forms for employers to amend previously filed returns. Generally, businesses that identify errors on Form 941 will use Form 941-X, while those correcting a Form 944 will typically use Form 944-X. Addressing payroll tax errors promptly can help minimize penalties, interest, and compliance issues.

    Why Payroll Tax Compliance Can Be Challenging for Small Businesses

    Payroll tax reporting involves more than filing forms. Employers must also calculate withholdings correctly, manage tax deposits, track deadlines, maintain documentation, and keep up with regulatory changes.

    Partnering with payroll experts can help employers reduce errors, improve compliance, and spend more time focusing on running their business.

    Simplify Payroll Tax Compliance With GMS

    Understanding whether your business should file Form 944 or Form 941 is only one part of managing payroll compliance. Employers must also monitor tax deposits, meet IRS deadlines, maintain accurate records, and stay current with changing requirements.

    GMS helps businesses simplify payroll administration through payroll processing, tax filing support, compliance guidance, and HR expertise. Our team can help ensure your payroll taxes are handled accurately so you can focus on growing your business instead of managing paperwork.

    Ready to simplify payroll and tax compliance? Contact GMS today to learn how our payroll experts can support your business.

    Frequently Asked Questions

    Can I choose to file Form 944 instead of Form 941?
    Not automatically. Employers must receive approval from the IRS before filing Form 944.
    What payroll taxes are reported on Forms 944 and 941?
    Both forms report federal income tax withholding, Social Security tax, and Medicare tax.
    How often is Form 941 filed?
    Form 941 is filed quarterly, while Form 944 is filed annually.

  • Payroll is an important part of every business. While some small business owners take the time and effort to handle payroll administration in-house, certain factors can signify that outsourcing payroll with a PEO might be in your best interest. Here are some signs that it may be time to consider a switch.

     Image of a business owner considering online payroll services.

    1. When You Just Don’t Have Enough Time

    Business owners have plenty of work to do, and managing payroll is just another task that fills up your schedule. According to business counseling nonprofit SCORE, over half of small business owners spend at least 3-to-5 hours each month to manage payroll in-house. 

    Those are valuable hours that could be spent focusing on ways to grow your business. Depending on how much you work each week – The Alternative Board cites that half of small business owners work more than 50 hours per week – outsourcing these services can save you that precious time that owners constantly need.

    2. When You’re Worried About Payroll Tax Compliance

    Compliance issues can come about in a couple of different ways.  As discussed, processing payroll is a time intensive and tedious process, which can cause certain compliance requirements to slip through the cracks.

    Additionally, you may lack the expertise in knowing exactly what you need to do to keep your payroll compliant with any related regulations. Either way, mistakes can happen when you haven’t been trained to handle payroll.

    Just how big of a concern are payroll tax penalties? In 2013, the IRS doled out 6.8 million penalties, costing business owners a combined $4.5 billion in fees. These penalties range from simply not filing your payroll taxes on time to more complicated issues like not weighing multi-state payroll compliance needs for minimum wage and other regulations. If you’re not careful, you might be subject to some fines, on top of the time and money spent managing your payroll.

    3. When You’re Tired of Dealing with Paper

    After years of managing payroll, a business can go through a lot of paper. While some owners are attached to handing out physical checks, paper documents build up over time and take up plenty of storage space. That also means that you have to dig through all those files when you or your employees need to reference old documentation. With online payroll, those hassles are eliminated, as everything is securely stored online and can be accessed 24/7 with an internet connection. 

    There’s also the monetary benefit of cutting out paper payroll. Offices tend to save “roughly $80 per employee (annually) in costs related to paper, ink, toner, storage space, and postage” by switching to paperless payroll. Also, many PEOs won’t charge you extra for direct deposit services, so you’ll save a decent chunk of money for switching to a service that makes the payroll process simpler for both you and your employees.

    4. When Your Business Starts to Grow

    Business growth is great, but it comes with some extra responsibilities. As your business grows, so does your payroll. That means that payroll management will take longer, involve more chances for error, and make for even more paper printouts. Of course, it also means that other parts of your business may require more attention as well. It’s a good problem to have, but one that requires your full attention for your business to continue to grow.

    Whether your business is growing or you’re noticing another sign that it’s time to outsource your payroll, Group Management Services can help. As a Professional Employer Organization, we specialize in providing comprehensive HR solutions for businesses, including online payroll services. Contact GMS today to talk to one of our experts about how we can help your business through payroll management.

  • Let’s be honest; what business owner looks forward to managing payroll? While payday may be exciting for your employees, it’s likely that you’re not thrilled about having to put together payroll reports, track deductions, and oversee every other critical aspect of payroll administration, especially if you do everything by paper. 

    For some small business owners, payroll administration is just a necessary part of business life and the business isn’t big enough to justify its own HR department. While payroll administration is necessary, it doesn’t have to be a big burden. Online payroll software can give you the tools to take some of the pain out of payday preparation. Here are a few questions you should consider when evaluating your payroll management process.

    Small business owner using online payroll software. 

    Do You Spend Too Much Time on Payroll Administration?

    Payroll management takes time. A survey conducted by the National Small Business Association found that more than half of owners who handled payroll internally spent at least three to five hours per month on the administration of payroll taxes alone. That time doesn’t even include other key payroll functions like processing paychecks, keeping records, and answering questions from employees. 

    Five hours per month may not sound like a lot, but it adds up to 60 hours of payroll administration per year. That’s more than a full work week of time solely dedicated on payroll, and that’s if you only spend five hours per month. Depending on your situation, you could easily spend more time to try and keep your business compliant with payroll tax requirements. If you cut down the time you had to spend on payroll administration, it would free you up to focus on other key projects that can help you grow your business (or even take a well-deserved break every now and then).

    Are You Afraid of Payroll Taxes?

    It’s important to spend time to make sure your payroll is managed correctly, as noncompliance can be costly. According to the Federal Register, the Department of Labor increased the penalties for payroll tax violations effective Jan. 13, 2017, making penalties even more expensive now than they were in the past. 

    When you aren’t a trained payroll professional, mistakes can happen even if you spend more time on payroll tax management. A miscalculation or missing piece of information is all it takes to incur a penalty. Payroll software allows you to easily keep track of deductions online without having to shuffle through old sheets of paper to determine if you did everything right.

    Is Your Business Growing?

    Even if you have a handle on your business’ payroll now, that may not be the case in the future. The more employees you add, the more work will be necessary to complete payroll. If you handle payroll offline, that means more storage space for documents, more potential for mistakes, and more strain on your schedule. 

    Just because your business grows doesn’t mean that your already-hefty workload needs to get bigger. Online payroll allows you to manage everything from any location as long as you have an internet connection. Thanks to the ability to complete payroll in a fraction of the time, you can add more employees without worrying nearly as much about how much longer it’ll take you to handle payroll administration each month.

    Online Payroll for Small Businesses

    Small business owners wear many hats, but you don’t have to be on your own when it comes to payroll management. Outsourcing payroll administration to a Professional Employer Organization allows you to lessen your workload while gaining the benefits of online payroll services. Not only does this mean you can make the move to online payroll, but you also have access to a dedicated payroll specialist who can provide you with help when you need it.

    Considering investing in online payroll software? Contact GMS today to talk to one of our experts about how payroll software can help you and your business.

  • Whether you have a single paid employee or run a small business with many employees, you need to pay attention to payroll. However, payroll involves more than cutting a few checks. Good payroll management is comprised of several different functions that help you properly pay your employees and keep your business compliant with government regulations.

    Payroll documents for a business handling payroll management. 

    Processing Paychecks

    While payroll management involves more than just paying people, proper paycheck processing is still a critical function. Employees don’t appreciate paycheck errors, so a payroll manager needs to verify several details that go into an employee’s compensation. This includes verifying salary and hourly rates while also accounting for regular and overtime hours. Additional compensation in the form of vacation time, holiday pay, and other factors may also apply.

    Another part of processing paychecks is applying any necessary deductions. Some of these deductions, such as federal income tax, are mandatory. Other are optional depending on the employee. For example, an employee who has opted into a company’s group health insurance and 401(k) plans will have insurance premiums and retirement contributions deducted from his or her paycheck.

    Handling Payroll Taxes

    Your employees aren’t going to be the only people upset if you don’t correctly process payroll. Roughly 70 percent of the IRS’ annual revenue is made up of payroll taxes. This means failing to pay payroll taxes can be a costly mistake, as businesses are hit with billions of dollars in payroll tax penalties each year. 

    Payroll managers need to weigh several factors to determine tax deductions, as different regions will have different tax rates. Then they must complete several forms documenting payroll taxes, which includes filing W-2s for each employee by Jan. 31 and completing a 941 form that reports the employment taxes an employer withholds and contributes each quarter. Not only do these files need to be filed accurately, they need to be filed on time, which can be difficult for someone without any training in payroll tax management.

    Keeping Records

    In addition to payroll tax compliance, payroll management also includes a great deal of recordkeeping. The Fair Labor Standards Act (FLSA) requires employers to keep accurate records for every non-exempt worker. These records include:

    1. Employee’s full name and social security number
    2. Address, including zip code
    3. Birth date, if younger than 19
    4. Sex and occupation
    5. Time and day of week when employee’s workweek begins
    6. Hours worked each day
    7. Total hours worked each workweek
    8. Basis on which employee’s wages are paid (e.g., “$9 per hour,” “$440 a week,” “piecework”)
    9. Regular hourly pay rate
    10. Total daily or weekly straight-time earnings
    11. Total overtime earnings for the workweek
    12. All additions to or deductions from the employee’s wages
    13. Total wages paid each pay period
    14. Date of payment and the pay period covered by the payment

    The FLSA also states that payroll data should be kept on file for three years. Records that involve wage computations should be kept for two years, such as work schedules, time cards, and other related documents. A payroll manager can ensure that these documents are stored electronically in case the Department of Labor [DOL] ever decides to check in on a business.

    Employee Accessibility

    It’s important to have financial documents readily available for the DOL, but employees should also be able to access key payroll information. An online employee portal like GMS Connect gives workers a secure online place where they can access personal information, such as:

    • Benefits summaries
    • 401(k) summaries
    • Check history and deduction totals
    • Direct deposit details
    • Time clocks
    • Paid time off 

    In addition, GMS Connect allows employees to download and print out important documents such as W-2s, change tax settings, and make payroll inquiries, which gives your employees the power to answer their own questions come tax season.

    Simplify Payroll Management with the Help of a PEO

    Payroll isn’t easy. As a small business owner, you may not have an HR department to deal with the responsibilities and liabilities of payroll management. However, that doesn’t mean you need to manage payroll on your own.

    Outsourcing payroll administration to a Professional Employer Organization can help you ease the burden of managing payroll for your business. GMS can help you handle all the important financial details, allowing your business to effectively manage payroll and stay compliant. Contact GMS today to talk to one of our experts about how outsourcing payroll administration can benefit your business.

  • Payroll taxes are complicated, especially when you don’t have any payroll training. Small business owners have several tax responsibilities that they must manage throughout the year, which can take up hours of your time each month. Of course, if you incorrectly calculate the tax withholdings for someone’s paycheck, both the employee and the federal or state government may have a bone to pick with you.

    One of the most time-consuming and difficult parts of payroll tax management is that there is more than one type of tax that you need to handle. You are responsible for withholding multiple types of taxes from your employees’ wages, including income tax and payroll tax. These taxes each have specific rules in terms of how you and your employees contribute to them and what groups regulate them. Here’s a rundown of the difference between income tax and payroll tax.

    Income tax and payroll tax documents for a small business.

    What is Income Tax?

    Income tax is part of what the IRS deems as employment taxes, which also includes items like unemployment taxes. In all, income tax is comprised of federal, state, and local income taxes, depending on where your business and employees are located. These taxes are used to fund public services such as parks, education, and other programs.

    Federal income tax is mandatory for employees in all states. The amount of federal income tax you withhold from each employee’s paycheck will depend on the allowances they selected on Form W-4, which is required for each employee after they’re hired. The more allowances an employee claims, the less you’ll generally have to withhold from his or her paycheck. The IRS’ Publication 15 provides calculation methods and table so that you can determine what needs to be withheld from each employee’s paycheck.

    State and local income tax are regulated by individual state and local governments. However, only 41 states require employers to withhold state income tax from employees’ wages. Two states—New Hampshire and Tennessee—have income taxes that don’t apply to employment income. The seven other states simply don’t have any income taxes to worry about at all:

    • Alaska
    • Florida
    • Nevada
    • South Dakota
    • Texas
    • Washington
    • Wyoming

    Local income taxes are not nearly as common as state income taxes. There are only 16 states that require you to withhold local income taxes in addition to state and federal income taxes:

    • Alabama
    • Arkansas
    • Colorado
    • Delaware
    • Indiana
    • Iowa
    • Kentucky
    • Maryland
    • Michigan
    • Missouri
    • New Jersey
    • New York
    • Ohio
    • Oregon
    • Pennsylvania
    • West Virginia

    While you can use Publication 15 for instructions on how to calculate federal income tax, state and local income taxes are dependent on the location of your business and your employees. Each state has its own rates for state and local income tax (if applicable), some of which will be a flat percentage while others have their own personal allowance system that require additional calculations. You’ll need your state government’s site to find specific details in terms of withholding rates and depositing schedules.

    It’s also important to note that while your business may be in one state, out-of-state employees may be subject to different payroll regulations depending on their location. This can affect the amount of income tax you withhold from these employees’ wages and open you up to non-compliance penalties, so make sure you stay up to date with the regulations for different states and local governments if they apply to your employees or multiple business locations.

    What is Payroll Tax?

    While multiple taxes affect payroll, the IRS does have a more specific definition for “payroll taxes.” These taxes are also known as FICA taxes and are a combination of Social Security and Medicare taxes, both of which fall under the Federal Insurance Contributions Acts (FICA). As expected, these taxes are used to fund Social Security and Medicare programs.

    Unlike federal income tax and some state and local income taxes, payroll taxes are based on a flat percentage. However, FICA taxes also call for both employees and employers to contribute to them. For Social Security tax, both parties contribute 6.2 percent of an employee’s wages up to a wage base of $128,400 for 2018. Medicare tax is similar in that both the employer and employee contribute 1.45 percent of the employees wages up to the following wage base limits:

    • $200,000 for employees who are single
    • $250,000 for employees who are married and file jointly
    • $125,000 for employees who are married and file separately

    However, Medicare also requires you to withhold an additional 0.9 percent of wages once an employee passes those wage base thresholds. As an employer, you are not required to match this additional 0.9 percent contribution.

    Stay on Top of the Payroll Process

    The multiple types of taxes involved in the payroll process are just one reason why one third of small businesses spend at least 40 hours per year managing payroll taxes. Add in the potential for mistakes that can lead to fines from the IRS and it makes sense why many small business owners turn to outside companies to help them manage their payroll.

    As a Professional Employer Organization, GMS has a team of experts that can help decrease your payroll responsibilities and liabilities while saving you valuable time. Contact GMS today to talk to one of our experts about how outsourcing payroll administration and other HR functions can benefit your business.

  • Whether you’re trying to find a way to save time and energy by outsourcing payroll administration or your old payroll partner just isn’t cutting it, you’re going to have to deal with the process of switching to a new payroll system, also known as payroll conversion. A rough transition to a new payroll system can lead to serious issues, including IRS penalties for non-compliance. Fortunately, there are some ways to help alleviate some potential issues that can arise when you convert your payroll process to a new system.

    A small business owner going going through the payroll conversion process with a PEO. 

    Conversion Timing

    Once you’ve decided that it’s time to switch to a new payroll provider, it’s important to consider when you want to start the process. Planning a conversion at a certain point in the year can help simplify the conversion process. 

    Typically, the end of the calendar year is one of the best times to undergo payroll conversion as it allows you to start the new system off fresh regarding balances. You can also convert payroll at the end of a quarter, but you’ll have to enter historical data like employee earnings, taxes, and deductions based on the time of the year. If you decide to convert in the middle of a quarter, you’ll have to make sure everything matches up on the exact dates, which can leave you open to a greater potential for errors and a longer conversion process. 

    Data Transfer and Verification

    No matter when you decide to undergo payroll conversion, you’re going to need to transfer a lot of data to your new payroll company. A good payroll partner will have a set list of information you need to provide and how it should be delivered. Some companies may ask you to manually enter data yourself, but others will simply ask you to provide your information physically or electronically and they will transfer it to the new system for you. 

    Depending on the company, they may even tailor your setup checklist to your company or the payroll company you worked with previously to simplify the process. In general, the more your new payroll company takes off your hands, the easier the conversion process will be on your end.

    Once the information is in the system, it’s important to ensure that everything is set up properly and that all the data provided is correct. A new payroll company can test the accuracy of both the system and the data by running your old system at the same time as your new system to cross-reference key details so that everything runs as it should once you’re completely switched over to your new payroll process.

    Payroll Tax Management

    There are many different functions of payroll management, and handling payroll taxes is an extremely important one. One third of small businesses spend at least 40 hours per year managing payroll taxes, so you want to make sure that your new payroll partner has a payroll process that doesn’t complicate payroll tax management and reporting. 

    When you’re ready to switch to a new payroll partner, ask about how potential vendors update tax table information and convenient options for sharing information so that you aren’t left in the dark when it’s time to manage payroll through your new payroll system. In fact, you may find that some payroll partners can take on some of the responsibilities and liabilities involved with payroll taxes. This not only can help simplify the payroll conversion process by lowering the number of tasks you need to manage, it can save you time and energy for years to come.

    Customer Support

    Your new payroll partner is there to make your life easier, so don’t be afraid to ask questions and find out just what level of support they offer. These questions include:

    • Do you have any relevant clients that I can call for a reference?
    • Will I have a consistent contact during the payroll conversion process?
    • What hours is customer support available and how are they available?
    • Do you provide a checklist or timeline for what happens during the transition and who is responsible for these tasks?
    • How much do you help with payroll compliance issues?
    • Will you keep me up to date with any new payroll laws or changes to current regulations?
    • How will my employees access their payroll information and documents?

    If a potential payroll partner appears to dodge your questions, that could be a sign that they aren’t the right fit for your business. Instead, they should provide clarity as to how they’ll simplify the conversion process, which should include assigning you a dedicated point person and a detailed setup checklist. This list should clearly lay out the payroll conversion process, including meetings, system training, and other demos to make sure that you know how to work with the new system and avoid any early hiccups during the transition.

    The Advantages of Payroll Management Through GMS

    At GMS, we know that the process of switching to a new payroll partner and online payroll software can be stressful. That’s why any new GMS client is assigned a dedicated coordinator who will help guide you through the payroll conversion process, which includes gathering necessary documentation, entering data into the system, and communicating key details to ensure a smooth transition to GMS.  

    While some companies solely handle payroll, payroll administration is just one of many vital HR services that GMS offers. We provide comprehensive HR solutions for small business owners, including benefits administration, risk management, and other functions. As your business grows, your time becomes an increasingly valuable commodity. We help you reclaim that time to focus on building your business while strengthening your company through expert HR management.

    Ready to make the switch to a new HR partner? Contact GMS today to talk to one of our experts about payroll administration and other key HR functions.

  • Calculating payroll and income tax deductions requires employers to determine an employee’s gross pay, withhold the appropriate federal, state, and local taxes, and deduct any applicable pre-tax or post-tax benefits. Accurate payroll calculations are essential for maintaining compliance, avoiding penalties, and ensuring employees are paid correctly.

    Payroll calculations can quickly become complicated, especially when employers must account for tax withholding requirements, benefit deductions, overtime pay, and changing tax regulations. Understanding the payroll process can help businesses reduce errors and improve compliance.

    Let’s walk through the key components of payroll and tax deduction calculations.

    What Is Gross Pay?

    Gross pay is the total amount an employee earns before taxes and other deductions are withheld.

    For hourly employees, gross pay is typically calculated by multiplying hours worked by the employee’s hourly rate.

    For salaried employees, gross pay is generally calculated by dividing annual salary by the number of pay periods in the year.

    Gross pay may also include:

    • Overtime wages
    • Commissions
    • Bonuses
    • Shift differentials
    • Tips (when applicable)

    Gross pay serves as the starting point for all payroll tax calculations.

    What Payroll Deductions Must Employers Withhold?

    Employers are responsible for withholding certain payroll deductions before paying employees their net wages.

    Required deductions often include:

    • Federal income tax
    • Social Security tax
    • Medicare tax
    • State income tax (where applicable)
    • Local income taxes (where applicable)

    The specific deductions vary based on employee tax elections, location, and individual circumstances.

    Failing to withhold required payroll taxes can expose employers to penalties and compliance issues.

    How Is Federal Income Tax Withholding Calculated?

    Federal income tax withholding is generally determined using information employees provide on Form W-4.

    The amount withheld is influenced by factors such as:

    • Filing status
    • Income level
    • Dependents claimed
    • Additional withholding requests

    Employers should use current IRS withholding guidance and payroll tax tables when calculating federal income tax deductions.

    Because tax obligations vary by employee, withholding amounts often differ from one worker to another.

    What Are FICA Taxes?

    FICA taxes fund Social Security and Medicare programs.

    Both employers and employees contribute to these taxes.

    FICA includes:

    Social Security Tax

    Social Security taxes support retirement, disability, and survivor benefits programs.

    Medicare Tax

    Medicare taxes help fund healthcare benefits for eligible individuals.

    Employers must withhold the employee portion and contribute the employer portion of these taxes.

    Accurate FICA calculations are a critical part of payroll compliance.

    What Other Payroll Deductions May Apply?

    In addition to mandatory tax withholdings, employees may have voluntary deductions taken from their paychecks.

    Common voluntary payroll deductions include:

    • Health insurance premiums
    • Dental insurance
    • Vision insurance
    • Retirement plan contributions
    • Flexible spending accounts (FSAs)
    • Health savings accounts (HSAs)
    • Life insurance coverage
    • Charitable contributions

    Some deductions may be pre-tax, while others are deducted after taxes have been calculated.

    Understanding the distinction can affect an employee’s taxable income.

    What Is Net Pay?

    Net pay represents the amount an employee receives after all deductions have been withheld.

    The basic formula is:

    Gross Pay – Taxes – Other Deductions = Net Pay

    Net pay is often referred to as “take-home pay” because it reflects the amount employees actually receive on payday.

    What Payroll Mistakes Do Employers Commonly Make?

    Payroll errors can create frustration for employees and lead to costly compliance issues.

    Common payroll mistakes include:

    Misclassifying Employees

    Incorrectly classifying workers as employees or independent contractors can result in tax and labor law violations.

    Incorrect Overtime Calculations

    Employers must ensure overtime is calculated correctly based on applicable wage and hour laws.

    Missing Tax Deadlines

    Late tax deposits and filings can lead to penalties and interest charges.

    Failing To Update Employee Tax Information

    Changes to employee withholding elections should be reflected promptly.

    Manual Calculation Errors

    Manual payroll processes increase the risk of mistakes and inconsistencies.

    Implementing reliable payroll procedures can help reduce these risks.

    Why Is Accurate Payroll Processing Important?

    Accurate payroll processing impacts both compliance and employee satisfaction.

    Payroll errors can result in:

    • Tax penalties
    • Wage and hour disputes
    • Employee complaints
    • Compliance violations
    • Increased administrative work

    When payroll is processed correctly and consistently, employees can trust they are being paid accurately and on time.

    How Can Payroll Software Help Simplify Payroll Calculations?

    Many businesses use payroll software to automate calculations and reduce administrative burdens.

    Payroll systems can help:

    • Calculate taxes automatically
    • Track employee hours
    • Manage direct deposits
    • Generate payroll reports
    • Maintain payroll records
    • Support tax filing requirements

    Automation can significantly reduce the likelihood of payroll errors while saving valuable administrative time.

    Simplify Payroll Administration With GMS

    Calculating payroll and income tax deductions accurately is essential for maintaining compliance and keeping employees paid correctly. However, managing payroll internally can become increasingly time-consuming as a business grows.

    GMS helps businesses streamline payroll administration, navigate payroll tax obligations, and reduce compliance risks. Our payroll experts help employers manage the complexities of payroll so they can focus on running their business.

    Contact GMS today to learn how our payroll solutions can help simplify payroll processing and support your business in 2026 and beyond.

    Frequently Asked Questions

    How long should employers keep payroll records?

    The length of time payroll records should be retained depends on federal and state requirements. Maintaining payroll documentation can help support compliance, audits, and employee inquiries.

    Can payroll deductions be made without employee authorization?

    Some deductions, such as required tax withholdings, can be made without additional authorization. Voluntary deductions, however, often require employee consent depending on applicable laws and policies.

    What happens if an employer withholds the wrong amount of tax?

    Incorrect withholdings can create issues for both employers and employees. Employers may need to make payroll corrections, update records, or submit amended tax filings when necessary.

    What’s the difference between pre-tax and post-tax deductions?

    Pre-tax deductions reduce an employee’s taxable income before taxes are calculated, while post-tax deductions are withheld after taxes have already been applied.

    Are payroll tax requirements the same in every state?

    No. State and local tax obligations vary significantly. Employers should understand the payroll tax requirements that apply in each location where they have employees.

  • When you’re thinking of starting a business, your passion is ultimately what drives you to provide the best product or service. The first thing that comes to your head is not about the technology you need for payroll, or how you are going to recruit top talent. Need an employee handbook? “I’ll type something up real quick.” 

    These are just a few of the many human resource topics you can easily put on the backburner without realizing the full scope of responsibilities you now carry as a business owner. As for the future of HR, it’s only getting more crucial for businesses to stay compliant with laws and stay protected.

    Two small business owners responsible for many HR functions, including payroll and taxes. 

    HR Responsibilities for New Business Owners

    The U.S. Small Business Administration puts the followings tasks under human resources:

    • Recruitment and hiring
    • Payroll and benefits
    • Employee retention and compensation
    • Laws and regulations

    Recruiting can be a difficult and frustrating process. Doing it the right way, the first time, will save you time and money to produce the best results down the line. This can result in hiring committed, talented, and loyal employees that will benefit your company and your bottom line. “Where do I even start,” you may ask. A job description and an employee handbook can get the ball rolling, but you must write both correctly to save yourself in the long run. According to HR Dive, 72 percent of hiring managers say they provide clear job descriptions, while only 36 percent of candidates agree.

    Once you have employees, you must have a system for payroll. Again, you may not know where to start. You know how much you want to pay your employees, but now you must log hours, file taxes, and keep up with your own finances. This is where retention and compensation come into play as well. Keeping up with workers’ compensation, healthcare, 401k, and all other benefits go hand in hand with retention and compensation. According to MetLife, 51 percent of employers say using health and wellness benefits to maintain employee loyalty and retain talent will become even more important in the next three to five years.

    Lastly, staying on top of laws and regulations can be overwhelming because of how often they change. Failing to put these new regulations into place can result in legal issues, which is why it is essential to stay on top of them. Dozens of new laws take effect yearly and as an owner, you are responsible for making sure your company is compliant. 

    Set Your Business up for HR Success

    Preparing for the future of HR can be simple with the right resources. Being able to embrace change, technology and the new workforce is essential. Now what can GMS do for you? GMS is a Professional Employer Organization that puts all of your HR responsibilities under one roof for your company. We have the HR experts who will keep your organization up to date with the latest regulations, making sure you and your workforce are protected. 

    GMS has you covered when it comes to areas like payroll, tax, human resources, risk management, benefits, and healthcare. We help you reduce costs, limit your business risk, and save time and money when it comes to HR administration. Contact GMS to see how we can help manage and benefit your organization!

  • It’s already difficult to manage payroll for a small business, but it can get even trickier if you have employees who work out of state. Whether you have remote employees, live near a border, or have any other reason for an employee to complete their work in a different state, there are certain rules set by the Department of Labor (DOL) and other federal and state agencies that you need to follow when handling payroll for those workers.

    A map of the U.S. for out-of-state employees with certain payroll requirements.

    Who is Considered an Out-of-State Employee?

    Identifying an out-of-state employee is pretty simple – it’s an individual whose primary work is completed outside of the state where your business is registered. However, the tax implications of out-of-state employees aren’t quite so simple.

    An employee’s resident state is where that person makes their permanent home. On the flip side, a nonresident state is any state where that employee commutes to or spends some time in for work. While it may be easy to assume that out-of-state employees live and work remotely in their resident state, that’s not necessarily the case. Any of the following workers count as an out-of-state employee.

    • Someone who lives and works in a state outside of your business’ registered state
    • Someone who lives in the same state as your business, but travels to and works in another
    • Someone who lives outside of your business’ state, but travels to a separate state and works there

    For example, let’s say your business is registered in Ohio and you have an employee who lives and works remotely in Florida. That individual is an out-of-state employee. However, let’s pretend that the employee lives right by the Ohio border and rents office space in the Buckeye state. In this case, the employee would technically be an in-state employee since he or she completes his or her primary work in Ohio, despite it not being the resident state. There’s also the case that if your employee lives in Ohio, but travels to and works in Michigan, that person is an out-of-state employee. 

    In general, an employee whose primary work is not in your business’ state is essentially an out-of-state worker. This makes it important to ask your employer where they perform the majority of their work – the answer will play a big role come tax time.

    Key Differences When Handling Payroll for Out-of-State Employees

    Once you’ve identified which of your employees qualify as out-of-state workers, it’s time to handle your payroll. When it comes to out-of-state employees, there are three big steps you need to take.

    Register with any necessary state tax agencies

    While your business is already registered in your home state, that’s not enough for employees in other states. You’ll need to register your business with the tax agency of every state where any official employees complete their primary work, whether that’s one additional state or several. 

    You’ll also need to check with that tax agency to see if you’ll also need to register with that state’s labor and unemployment agency. If not, that state government may come calling at some point, and they won’t be pleased.

    Follow the local laws of applicable states

    While you may understand all of your state’s laws regarding payroll policies, outside regulations can create a whole new challenge. There are several different pay and labor laws that can impact your out-of-state employees’ paychecks. As such, it’s important to make sure you look into several different areas to see if you need to modify your payroll.

    Minimum wage

    If you have out-of-state employees who make minimum wage, you’ll need to make sure that you don’t just follow your own state’s rate. For example, an out-of-state employee who works in Michigan is entitled to $9.65 an hour, so that person won’t be pleased if you pay them at Ohio’s $8.70 rate.

    Certain states also have special rules aside from flat rates or have plans to escalate rates over time. South Carolina has no state minimum wage law, but employers that fall under the Fair Labor Standards Act are required to use the federal rate of $7.25. New Jersey plans to increase its rate each year until it hits $15 per hour in 2026. If you have an employee in another state, you’ll need to pay close attention to the DOL’s updated list of minimum wage laws to make sure you don’t miss a special rule or accidentally get caught paying an old rate.

    Pay frequency

    Depending on where your employee works, he or she may have a different payday than the workers in your state. Certain states have set requirements on how often you should pay employees, while others give owners leeway into setting paydays, whether it’s weekly, monthly, or some other option. The DOL tracks each state’s payday requirements, including if employers need to provide written notice or seek permission for certain pay periods.

    Overtime

    There are states that simply observe the federal overtime rules, but others apply their own laws that can add an extra wrinkle to your payroll. Some states like California have daily overtime laws that kick in when employees work more than 12 hours in a day. Others may set different weekly hour requirements. In general, the DOL notes that if state and federal rules conflict with each other “the employee is entitled to overtime according to the higher standard.” Regardless, you’ll want to check with any applicable state labor office to get a definitive answer on your obligations.

    Workers’ compensation and disability insurance

    Like the other considerations, you’ll need to check with your employee’s state to see if it has any notable differences in purchasing workers’ compensation. Texas is the only state where workers’ compensation is optional, but other states can have some disparities from your local requirements. Some states, such as Ohio, require you to purchase insurance from a monopolistic state fund. Other states ramp up the penalties for not carrying workers’ compensation. Either way, check in with the official state organization to make sure your out-of-state employees are covered.

    There are also some locations that add some payroll requirements for disability insurance. Five total states require you to withhold state disability insurance from paychecks, which means you need to factor that into your calculations if you have an employee who works in the following places.

    • California
    • Hawaii
    • New Jersey
    • New York
    • Hawaii

    Paycheck delivery

    While the Fair Labor Standards Act (FLSA) requires that employers keep accurate records of every employee’s hours and wages, it does not require you to provide those employees with pay stubs. However, certain states have different standards for how employers need to deliver pay information. Depending on location, states may:

    • Have no requirements about providing pay information statements to employees.
    • Require employers to provide or furnish a statement of pay information that each employee can at least access electronically. The majority of states fall under this group.
    • Require employers to provide written or printed pay statements and give employees the ability to print electronic statements.
    • Give employees a chance to opt out of a paperless pay program and receive paper pay stubs.
    • Allow employees to opt-in to a paperless pay system if an employer wishes to offer one.

    In addition to paystubs, states can have differing rules on when you need to provide an employee’s final paycheck when he or she leaves or is terminated. As such, you’ll want to look up those terms if an out-of-state employee is no longer with your company.

    Withhold taxes based on your employee’s work location

    In addition to workers’ compensation, overtime, and other key considerations, withholding taxes plays a major part in managing payroll. Depending on where employees work, you may need to withhold state and local income taxes from their paychecks if it’s required in your employee’s city or county. 

    As you’d expect, your withholding responsibilities depend on where your employee works. Seven states don’t have income taxes or only have them on dividend and interest income. As such, you wouldn’t need to withhold income taxes for an out-of-state employee who works in Florida or any of the other six states. As a bonus, you also won’t need to register with the tax agencies for states where you don’t withhold income tax.

    There are also 16 states that require employers to withhold local taxes in addition to income taxes. As such, you’ll need to research and withhold both taxes from paycheck based on that state’s rates.

    Reciprocal states

    If that doesn’t sound tricky enough, some states have tax reciprocity. Essentially, reciprocal states have agreements in place with other specific states that allow employers to withhold taxes based on the state of residence instead of where an employee works. As such, an employee can give you a reciprocal withholding certificate if they wish to request you withhold taxes for their home state instead of the work state if both locations have an agreement in place.

    Here’s a breakdown of existing reciprocal tax agreements, listed by an employee’s home state in bold. (Note: People who work in the District of Columbia can live in any state) 

    • Illinois – Iowa, Kentucky, Michigan, Wisconsin
    • Indiana – Kentucky, Michigan, Ohio, Pennsylvania
    • Iowa – Illinois
    • Kentucky – Illinois, Indiana, Michigan, Ohio, Wisconsin, West Virginia
    • Maryland – District of Columbia, Kentucky, Maryland, Pennsylvania, West Virginia
    • Michigan – Illinois, Indiana, Kentucky, Minnesota, Ohio, Wisconsin
    • Minnesota – Michigan, North Dakota
    • Montana – North Dakota
    • New Jersey – Pennsylvania
    • North Dakota – Minnesota, Montana
    • Pennsylvania – Indiana, Maryland, New Jersey, Ohio, Virginia, West Virginia
    • Ohio – Indiana, Kentucky, Michigan, Pennsylvania, West Virginia
    • Virginia – District of Columbia, Kentucky, Maryland, Pennsylvania, West Virginia
    • Wisconsin – Illinois, Indiana, Kentucky, Michigan
    • West Virginia – Kentucky, Maryland, Ohio, Pennsylvania 

    Feeling Overwhelmed? Simplify Your Payroll with GMS

    Whether you need to plan for out-of-state employees or simply need to manage payroll for your in-state office, the process is a lot of hard work. There’s also the issue that even after investing a lot of time in payroll, a simple mistake or two can lead to upset employees and non-compliance issues with various federal and state agencies.

    If you’re fed up with the time and stress involved with managing payroll, GMS can help. As a PEO, our experts can manage your company’s payroll, decreasing your workload and liabilities so you can focus on growing your business instead of calculating paycheck deductions.

    Ready to free up your calendar while streamlining critical HR functions? Contact us today to talk to one of our experts about your company’s HR needs.

  • In response to the economic impact of the COVID-19 outbreak, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. Among many different types of loans and incentives, the CARES Act introduced tax relief for businesses in the form of payroll tax credits, enhanced net operating loss (NOL) deductions, and payroll tax deferment. However, the payroll tax deferral section of the CARES Act raised several questions for small and medium-sized businesses, especially those that received loans from the Paycheck Protection Program (PPP).

    To help answer these questions, the IRS released guidance on April 10, 2020, regarding payroll tax deferrals. Here’s what business owners need to know when it comes to paying taxes on social security this year.

     Small business owner defers payroll taxes under CARES Act.

    What deposits and payments can employers defer?

    Section 2302 of the CARES Act enables employers to defer certain payroll taxes, specifically the employer contribution of Federal Insurance Contributions Act (FICA) taxes, otherwise referred to as the employer’s portion of social security taxes. Typically, employers are required to pay 6.2 percent of social security taxes for each employee’s covered wages on a semi-weekly or monthly basis.

    The deferral applies to deposits and payments of the employer’s share of the 6.2 percent social security tax owed for 2020. Without the CARES Act, this tax would have otherwise been required to be made during the period beginning on March 27, 2020, and ending December 31, 2020. There is no dollar cap on the total amount of an employer’s social security taxes that can be deferred.

    It’s important to note that the CARES Act does not cover other payroll taxes, such as the Medicare tax (1.45 percent) or the employee’s share of the social security tax. The CARES Act does, however, outline tax deferrals in an equivalent amount for self-employed individuals subject to the Self Employment Contributions Act (SECA) and employers and employees subject to the Railroad Retirement Tax Act (RRTA).

     

    When are deferred tax payments due?

    In order to avoid penalties, the deferred payments of the employer’s share of social security tax must be deposited by the following dates:

    • On December 31, 2021, 50 percent of the deferred amount must be paid.
    • On December 21, 2022, the remaining amount must be paid.

     

    Who is eligible to defer tax payments?

    All employers, regardless of size, may defer the deposit and payment of the employer’s share of social security tax. However, employers who received PPP loans become ineligible to continue deferring tax payments after receiving notice from the lender that the loan is forgiven. The Small Business Administration (SBA) says “the loan will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent, and utilities” if you are able to maintain your workforce.

    For payments deferred through the forgiveness date, employers may continue to defer payments until the end of 2021 and 2022 as described above without incurring penalties for failure to pay. The CARES Act also states that employers who have had a loan forgiven under the U.S. Treasury Program Management Authority are also ineligible to defer payments.

     

    Do employers need to make special elections to defer tax payments?

    No, employers do not need to make any special elections to defer deposits and payments for payroll taxes. The IRS will revise the Employer’s Quarterly Federal Tax Return (Form 941) for the second quarter (April through June 2020). The IRS says information will soon be released regarding deposits and payments otherwise due on or after March 27, 2020, for the first quarter (January through March 2020).

    Contact us if you have any HR or payroll-related questions on how to keep things running smoothly through this transition.