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Payroll CPA provides a 2014 Comprehensive Example of Typical Payroll Cost

payroll cpa form 941 cpa from 940 cpa

I know it’s strange to have a payroll CPA urging your company to keep payroll in house. But I prefer to train the bookkeeper and then stay available for support if needed. For a free payroll consult call (910) 399 2705.

Hi I’m Gary Bode, a payroll CPA. I think most businesses could and should keep payroll in-house, except for a few special circumstances below. I’ll also cover how much an employee truly costs you besides just net pay and how roughly estimate true employees costs with a rule of thumb. Here’s why I suggest keeping payroll in-house.

  • The cost of payroll services is high.
  • Honestly, you already do most of the work; e.g. like tracking employee hours. I worked at a place that used ADP. I estimate they only saved me about 20-25% of payroll administration time.
  • Payroll services don’t cut the federal and State liability of your  company that much. You’re still on the hook if a payroll service doesn’t make your payroll deposits.
  • There are payroll related issues that a third-party payroll administrator doesn’t do, like calculating Workman’s Compensation premiums.
  • Third party payroll administration delays detection of payroll fraud within the company.

So when it’s feasible, per the following caveats, I prefer training your staff in the payroll process, monitoring a few payroll cycles and being on call for support when needed. I understand that’s an unusual stance for a payroll CPA.

When should you outsource your Company’s payroll?

  • Your company has poor cash flow, please read below.
  • Your company isn’t detail oriented.
  • When your company has past or ongoing issue with the IRS.
  • When your company is too busy to produce payroll.
  • When the stress of handling payroll is high.

The net pay mentality trap

One advantage of a payroll service? They collect all your payroll expenses up front. So your company’s cash flow matches the tax liability. This can be a huge issue. Thinking of your payroll expense only in terms of net pay is dangerous. Every payroll CPA sees companies that begin a downward cash spiral once they can’t make a payroll deposit. Since some payroll taxes, like federal withholding, are held in trust by the company until the payroll deposit, it’s criminal too. My example shows that the expenses, for just one employee in one calendar Quarter, might be $4,500 or so low if you thought of cash flow only in terms of net pay.

“If your Company has poor cash flow management, outsourcing payroll is worth the expense because all your payroll tax liabilities get collected up front.”
– Gary Bode, payroll CPA accountant

What an employee cost the company beyond net pay

Here’s the components included for the comprehensive payroll administration example:

  • Gross Wages of Employee.
  • Social Security, Employer.
  • Social Security, Employee.
  • Medicare, Employer.
  • Medicare. Employee.
  • Federal Withholding.
  • State Withholding.
  • FUTA (Federal Unemployment Tax).
  • SUTA (State Unemployment Tax).
  • Workman’s Compensation Insurance.
  • Pension Plan Expense.
  • Health Insurance Premiums.
  • IRS Form 941 Deposits. Including EFTPS.
  • IRS Penalties.

Comprehensive payroll administration example specifics

Joe Employee earned Gross Wages of $1,000 on June 26th, 2014 bringing his total 2nd 2014 Calendar Quarter Gross Wages to $10,000 (#1). This makes the math easier.

Employee Paid Taxes

During the 2nd Quarter of 2014, the Company withheld the following amounts  from Joe Employee’s gross pay, as required by the IRS and State. These amounts were held in trust and eventually deposited to the US Treasury (for the IRS-see below) and the State.

  • $620 (6.2%) of Social Security tax (#2).
  • $145 of Medicare tax (1.45%) (#4).
  • $1,200 of Federal Income Tax (#6).
  • $200 of State income tax withholding.

 Employer Payroll Taxes and Related Extortions

In addition, the Company simultaneously “matched” $620 (#3) and $145 (#5), for Joe Employee, with Social Security and Medicare deposits of its own.

There is a Gross Wage cap for the Social Security tax, which increases every year. $115,500 for 2014. In other words, once the Gross Wages exceed cap in the calendar year, no further Social Security tax is required from the employee, or employer, on the excess wage base. This can be a valuable tax avoidance tool for highly paid employees, unless they believe in the Social Security system. But remember, the Medicare tax never stops.

In addition, there are federal and State unemployment taxes, FUTA and SUTA, which the employer pays.  Federal unemployment is .006 times the first $7,000 (a wage cap) of wages in the calendar year.  So, this is another $42 of employee expense per year for the business.  You must make a FUTA deposits when the liability exceeds $500. FUTA deposits are made separately from the 941 deposits described above.  We’ll say the State unemployment taxes (SUTA) are 1.2%, of Gross Wages with a calendar wage cap, which generally increases annually. Say $20,000 for conversational purposes. After Joe Employee’s wages exceed the wage cap, no further unemployment is due on the excess wages: an incentive to retain employees. The exact SUTA rate is based on the State’s unemployment experience with the employer. Consider any increase in the SUTA rate a cost of poor human resource management and subsequent attrition of employees. So each ex-employee that receives unemployment payments from the State increases the SUTA percentage you pay. The highest rate I’ve seen? 6.8%, ouch.

Moral of the story? Employee turnover costs the company more than just the hiring and training expenses. SUTA can eat your lunch.

Five components, the matching employment tax components (#3 and 5) and Gross Wages (#1), and the FUTA and SUTA described above, are actually paid by the employer.  The other four components (# 2, 4 and 6), and the State Income tax with holding, were deducted from Goody’s gross wages to reduce the her payroll check’s net pay.

If you’d like a free consult with a CPA payroll service accountant, please consider giving us a call at (910) 399-2705. Our virtual office means we serve your company regardless of where you’re located. While we offer full payroll accounting services, our philosophy is to make your company as payroll self-sufficient as you want it to be.

Deposit Obligations and Potential Penalties

Five components, #2-6, are required to be deposited simultaneously, periodically and regularly to the US Treasury for the IRS. The timing depends, in general, on the amount of accrued taxes:  it can be every pay period or only Quarterly.  In recent years, the IRS has encouraged online deposits through their EFTPS, Electronic Federal Tax Payer System, program. The IRS requires a day for online processing, essentially mandating an earlier deposit date.

The IRS considers not depositing funds held in trust (components #2, 4, and 6) as embezzlement and a criminal offense.  The IRS rules by intimidation. Occasionally, a whipping boy is selected, severely punished, and then widely publicized.

Deposit penalties start at 2% of the accrued tax if late  less than three days. At three days it becomes 10%. These penalties are huge and severely impede cash flow, resulting in a downward spiral for the business. In addition they bring detrimental IRS attention.

Remember the State also expects the employer to deposit Joe Employee’s withholding with them, usually monthly or quarterly.

Reporting Requirements

  • IRS tax Form 941, which reconciles the amounts withheld, and, matching employment taxes (#2-6) to deposits. Form is due quarterly e.g. the October 31st, 2013 Form 941 covers July, August and September. With larger payrolls, Schedule 941 B is also required.
  • State withholding tax forms. Usually due or quarterly with an annual recap form due in January of the following year.
  • Form 940 (FUTA) is due January 31st of the following year.
  • The related, familiar W2s must be sent to employees on January 31st, with copies to the Social Security division March 15th.
  • IRS tax Form w-3, which summarizes the Company’s annual for the past coincides with the W-2 above.
  • State unemployment reports are generally due quarterly e.g. the report due July 31st covers April, May and June.

Other Payroll Tax Like Creature

  • Workman’s Compensation Insurance is based on a (usually) two tiered, Gross Wage related percentage basis.
  • The employer may make a pension plan contribution for Joe Employee, usually a capped percentage of Gross Wages.
  • The employee’s portion of healthcare insurance payments.

Other Impositions – Garnishments

In addition, Joe Employee has a student loan payment garnished from his wages. This is extra work for her employer. Lots of different garnishments exist: back taxes, child support, student loans, etc.

Beware the Cash Flow

Better to think in terms of Gross Wages plus all other costs. Don’t let the other costs be a cash flow management surprise when due.

“One rough payroll expenses rule of thumb is to think of your total payroll expense as 115% of gross pay with net pay just being the first and largest payroll expense component.”
– Gary Bode, payroll CPA accountant

Actual and Hypothetical Costs of Employing Joe for the 2nd Quarter:

  • $10,000 Gross Wages.
  • $620 in employer Social Security.
  • $145 in employer Medicare.
  • $0 in Federal Unemployment, assuming the cap was reached during the 1st Quarter.
  • $100, perhaps, in SUTA, depending on the State.
  • $100, perhaps, in pension plan contribution.
  • $150, perhaps, in Workman’s Compensation Insurance premiums.
  • $750, perhaps, in Health Insurance premiums.

So Joe costs the Company a hypothetical total of $11,865, $1,865 above his Gross Wages.

Net pay to poor Joe, after withholding federal income taxes, Social Security, Medicare, State income taxes (if any), Joe’s pension plan contribution and student loan garnishment, might be only $7,335.

If you thought of cash flow in terms of Net Pay, you would be $4,530 low for the 2nd Quarter, for just this one employee.

 

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