PAYROLL your business

1. What is payroll?

“Payroll” means payments to employees, where those payments are required to be reported to state and federal agencies, such as the IRS, Social Security Administration, Washington Employment Security Department, and Washington Department of Labor & Industries.

2. Do I need a payroll?

Most individuals you hire are considered “employees” by law. These include:

• Temporary workers
  • Unless hired through a temporary services company that has the worker on its payroll
• “Casual labor” and many “1099 workers”
• Friends, relatives, and others receiving anything of monetary value in exchange for their work
• Many independent contractors
  • Independent contractors must meet specific requirements to be considered exempt from employment laws.
  • There are several laws defining independent contractors, each with different requirements.
  • You can’t assume someone who meets the independent contractor definition and is exempt from one set of employment laws is therefore exempt from other laws.
  • The burden is on you to prove someone who works for you is not an employee or a worker entitled to unemployment or workers compensation coverage.
  • Independent contractor laws that affect payroll tax responsibilities
    • U.S. Internal Revenue Service
      To determine if you have responsibilities for Social Security and Medicare taxes, income tax withholding, federal unemployment taxes, and W-2 reporting
    • Department of Labor & Industries
      To determine if you have responsibilities for providing workers’ compensation insurance
    • Employment Security Department
      To determine if you have responsibilities for state unemployment taxes
    • Paid Family and Medical Leave
      To determine if you have responsibilities for participating in the program
    • The WA Cares Fund
      To determine if you qualify for benefit see contributions requirements.

3. Can I handle payroll myself, or do I need a professional?

• Payroll calculations and related taxes aren’t necessarily difficult; however, the recordkeeping, filing and payment responsibilities are significant. 
• Learning all you need to know, keeping up on changes, and taking the time necessary to meet your requirements is time you’re not spending building your business.
• If a business hires just one person early in a year, there will be 18 forms to complete that year, plus the legal responsibility for creating and maintaining employment and payroll records. That’s a lot to keep track of!
• Because of all the requirements and time involved, many businesses contract with bookkeepers, accountants or payroll services to handle the process and required reporting for them.
• Please do not overlook working closely with your payroll professionals because business owners are ultimately responsible for the accuracy, completeness and timeliness of payroll calculations and related taxes.  

4. What payroll reporting and tax responsibilities do employers have?

Most responsibilities are summarized in this chart. Detailed explanations follow the chart.

Federal income taxes  – employee paid

• Employers withhold income taxes from employee paychecks.
  • Withholding amount is based on each employee’s total wages and the latest IRS Form W-4 the employee completed. 
  • For amount to withhold, see tax tables in IRS Publication 15 – Employer’s Tax Guide.
• Send amounts withheld to the IRS electronically using EFTPS (Electronic Federal Tax Payment System) at the time due (typically quarterly or monthly for small businesses, depending on total taxes)
• Include information about employee withholding in your IRS Form 941 – Employer’s Quarterly Federal Tax Return. Form 941 due dates:
  • 1st Quarter - April 30
  • 2nd Quarter - July 31
  • 3rd Quarter - October 31
  • 4th Quarter - January 31 the following year

NOTE: The IRS encourages everyone to use the Withholding Calculator to perform a quick “paycheck checkup.” The Calculator helps employees make sure they have the right amount of tax withheld from their paycheck at work, and helps them determine whether they need to give their employer a new Form W-4, Employee's Withholding Allowance Certificate.

Federal Social Security and Medicare taxes – employee and employer paid

• Withhold 7.65% of employee total wages and other compensation from employees’ paychecks (use the same gross payroll figure as used for determining income tax withholding)
  • 6.2% for Social Security
  • 1.45% for Medicare
• The employer portion matches the amount withheld from the employee.
• Employer pays both employee and employer shares to the IRS.
• Send both employee and employer tax amounts to the IRS electronically using EFTPS (Electronic Federal Tax Payment System) at the time due (typically quarterly or monthly for small businesses, depending on total taxes)
• Include information about Social Security and Medicare Taxes in your IRS Form 941 – Employer’s Quarterly Federal Tax Return.  Form 941 due dates:
  • 1^st Quarter - April 30
  • 2^nd Quarter - July 31
  • 3^rd Quarter - October 31
  • 4^th Quarter - January 31 of the following year

Federal Unemployment Taxes (FUTA) –  employer paid

• Calculate tax based on the employee’s total wages plus other compensation.
• FUTA is paid until the employee’s wages and other compensation add up to $7000 during the calendar year.
• If an employee earns more than $7000 in the calendar year, no further FUTA tax is due for that year.
• Send tax payment to the IRS electronically using EFTPS (Electronic Federal Tax Payment System) at the time due (typically quarterly or annually for small businesses, depending on payroll).
• Complete IRS Form 940 – At the end of the calendar year complete the Employer’s Annual Federal Unemployment Tax Return and submit it by January 31 the following year.

Federal Wage and Tax Statement (Form W-2) and Transmittal (Form W-3)

• By January 31, provide each employee copies of their W-2 Form, which summarizes that employee’s earnings and federal withholdings for the preceding calendar year.
• Complete Form W-3 – Transmittal of Wage and Tax Statements, which summarizes all W-2 Forms issued by the employer.
• By the last date of February, send Form W-3 and all original W-2 forms for the preceding calendar year to the Social Security Administration.

Paid Family and Medical Leave – employee and employer paid

• Calculate your premiums using the state plan.
• Employers may withhold employees’ premium from their paychecks or pay some or all of the premium on the employees’ behalf.
• Employers cannot collect missed premiums in later pay periods.
• Premiums are calculated based on an employee’s gross wages.
• Premiums are shared between employee and most employers.
• Premiums are capped at the Social Security Wage Base.
• Create an account with the business UBI number, business name and contact information.
• Employers can report through manual filing, single filing or have an employer agent use an ICESA file.
• Complete quarterly reports and pay online.
• Due dates
  • 1st Quarter – April 30
  • 2nd Quarter – July 31
  • 3rd Quarter – October 31
  • 4th Quarter – January 31 of the following year.

• Employers may follow an approved voluntary plan or use the state plan. Premium calculations may be different if using a voluntary plan.

State Unemployment Taxes (SUTA)  –  employer paid

• Use the tax rate provided to you by the Washington Employment Security Department.
• SUTA is paid on wages and other compensation, up to a maximum per employee during each calendar year (the “taxable wage base” is $56,500 for 2021). 
• If an employee earns more than the taxable wage base, no further tax is due for that year.
• Complete quarterly reports and pay online.
• Due dates
  • 1st Quarter - April 30
  • 2nd Quarter - July 31
  • 3rd Quarter - October 31
  • 4th Quarter - January 31 of the following year.

State workers’ compensation insurance premiums – employer and employee paid

• Use the rate or rates provided to you by the Washington Department of Labor & Industries (L&I).
• In most cases, rates are per hour worked, and are based on risk classes as assigned by L&I for the nature of your business.
• Calculate premiums by multiplying employee hours, as reported on timesheets, by the rate for the appropriate risk class assigned by L&I.
• Don’t include vacation time, sick leave or holiday hours in the calculation of premiums.
• Employers can choose to report salaried employee hours at 160 hours per month, or 480 hours per quarter. If employers choose this option, all salaried employees must be handled the same way, and timesheets for those employees aren’t required. (If in the trucking industry, please contact L&I for special instructions.)
• Withhold the allowable employee portion (provided by L&I) from your employees’ paychecks.
• Complete quarterly reports and pay online.
• Due dates
  • 1st Quarter - April 30
  • 2nd Quarter - July 31
  • 3rd Quarter - October 31
  • 4th Quarter - January 31 of the following year.

Washington Cares Fund – employee paid

• Beginning July 1, 2023, you’ll collect premiums from your employees the same way you do now for Paid Leave.
• If you’re self-employed, you can choose to opt in.
• Calculate the total premium amount for each of your employees. The premium for 2023 is 0.58 percent of an employee’s gross wages, so: Gross Wages x 0.0058 = premium for employee. Premium Calculator
• Employees may choose to apply for an exemption from the WA Cares Fund. It’s the employee’s responsibility to apply and if approved – to notify you and provide you with a copy of their approval letter from ESD.
• Other exemption categories are conditional upon the employee continuing to meet the requirements of the exemption. It is the employee’s responsibility to notify their employer of any changes to their exemption status and failure to do so can result in required back-payment of premiums and additional penalties.
• Employers must keep a copy of the employee’s approval letter on file, and not deduct WA Cares premiums from exempt workers. Read more about that here.

Do you have employees based out of Washington State?

• Follow the same federal requirements
• Learn and follow the requirements for each state where you have employees.

5. What payroll records do I need to create and keep?

• Payroll records are essential.  Many government agencies have the right to view and audit payroll records.  In the absence of records, agencies have the authority to estimate taxes due, plus assess penalties for failure to keep records.
• Payroll records must be kept. Different agencies have different retention requirements but 6 years should be sufficient. 
• Payroll records include:
  • Employee information (name, hire date, job title and duties, address, social security number, job change dates, termination date)
  • W-4 form for each employee
  • Pay rate
  • Basis of pay (hourly, monthly, commission, bonus, piece rate, etc.)
  • Timesheets (include dates and hours worked; include activity if multiple workers’ compensation risk classes or prevailing wage “scopes of work” apply)
  • Noncash compensation (such as apartments, vehicles, etc.)
  • Overtime pay calculations
  • Paid sick leave accrual, usage and balance.  Calculate accrued sick time based on regular and overtime hours worked.  Minimum required is 1 hour of sick leave per 40 hours of work (or 0.025 hours of sick leave earned per hour of work).
  • Gross payroll calculations
  • Tax withholdings from the employee
  • Other payroll deductions authorized by the employee (such as medical insurance, gym memberships, charity deductions)
  • Payroll check registers
  • Employee pay records (pay stubs)
  • Bank statements
  • Tax reports and payments

6. What payroll records do I need to create to give my employees?

• For each paycheck, you need to provide the employee an itemized pay statement, or check stub, which includes the following information
  • Pay period dates
  • Basis and rate of pay (Examples of basis include hourly, salary, piecework, etc.)
  • Gross pay
  • Itemized taxes and other payroll deductions
  • Net pay (gross pay minus deductions)
  • Sick leave accrual, usage and balance (notice may be provided separate from pay stub. If you have employees working in Seattle, Tacoma please check with the city for local requirements)
• The information can be provided electronically if the employee can access it on the established payday.

Note: If you have workers in Seattle, Tacoma or SeaTac, check with your city for minimum wage and other employment requirements.

7. What do I need to have in place before issuing pay checks?

• Establish a standard 7-day workweek for purposes of overtime calculations.
  • Many employers choose Monday 12:00 a.m. to Sunday 11:59 p.m.
  • Employers can’t change their standard work week to avoid paying overtime, but they can change it for business reasons if they provide employees advance notice.
• Establish standard payperiods and paydays, no less often than monthly.
  Some examples:
  • Weekly:
         payperiod Monday through Sunday
                         --> payday the following Wednesday
  • Every two weeks (biweekly):  
         payperiod Monday through 2^nd Sunday
                         --> payday the following Friday
  • Twice per month (semimonthly):
         1^st payperiod the 1^st through the 15^th  of the month
                         -->  payday the 25^th
            2^nd payperiod the 16^th through the end of the month
                         -->  payday the 10^th of the following month
  • Monthly
         payperiod the 25^th of one month to the 24^th of the next month
                         --> payday the 1^st of the following month

• Establish a basis of pay
  • Hourly:  Paid a set amount for each hour worked
  • Salaried:  Paid a set amount each pay period
    • Salaried as a basis of pay doesn’t mean an employee doesn’t earn overtime pay when their hours exceed 40 in a workweek.  See “calculation of overtime” below
    • If paid twice per month or monthly, overtime calculations may require you to look at the previous payperiod to determine if an employee’s hours exceeded 40 in a workweek.
  • Piecework:  Paid a set amount for each item produced or service provided
  • Commission:  Paid a percentage of sales or profits
  • Hybrid: Paid on more than one basis

8. What else do I need to know about paying employees?

• Provide these details to your employee each payday to show how you calculated their paycheck:
  • Gross pay
  • Taxes withheld
  • Other payroll deductions
  • Paid sick leave accrual, usage and balance
• Read the Dept. of Labor & Industries’ Pay Requirements web page to understand employer payroll requirements.
• Overtime eligible employees versus overtime exempt workers:
  • Most workers are eligible to receive overtime pay for hours they work in excess of 40 in a week, at a rate of 1½ times their regular rate of pay.
  • To determine the overtime pay amount for workers paid hourly
    • Take the number of hours an employee worked in excess of 40. 
    • Multiply that number by the employee’s hourly rate
    • Multiply the result by 1.5.
  • To determine the overtime pay amount for workers paid two or more hourly rates, a regular salary, or a piece rate, read Calculating Overtime, from the Dept. of Labor & Industries.
  • Federal and state laws require you to pay overtime.  Employees who are eligible for overtime cannot choose to have time off as an alternative.
  • The addition of overtime pay will affect payroll tax calculations.
  • See the Dept. of Labor & Industries Understanding Overtime web page for more information.
  • Employers do not have to pay overtime to certain managers, administrators and professionals who have significant decision-making authority, outside sales representatives, some live-in care givers, certain farm workers, and a few other types of workers. Before determining that an employee is exempt from overtime, read L&I’s Jobs Not Paid Overtime web page.
• Deductions from paychecks
  • See L&I’s Paycheck Deductions web page 

9. How can I estimate payroll costs?

• To calculate the cost of Washington state’s Paid Family and Medical Leave Benefit, use the Employment Security Department’s calculator.
  • For employers: https://paidleave.wa.gov/estimate-your-paid-leave-payments/
  • For employees: https://paidleave.wa.gov/question/how-much-money-will-i-receive/
• Use the online “Payroll Estimator” to estimate payroll costs (see below). There are two different calculators, one for hourly employees and the other for salaried employees. 
• You’ll need to enter the appropriate information into the white cells.  The shaded cells will calculate automatically.
• Starting January 1, 2018, employers in Washington are required to provide their employees with paid sick leave. This calculator does not include a line-item for paying this requirement. 
• In addition to wage or salary and hours worked, you’ll also need to enter the state unemployment insurance (UI) tax rate provided by the Employment Security Department and the workers’ compensation insurance rate provided by the Department of Labor & Industries. 
  • If you don’t yet know your UI rate, you can use 2% as a reasonable approximation, or contact Employment Security if accuracy is important.
  • If you don’t yet know the workers’ comp rate, you can go to Rates & Risk Classes and find the rate for a similar business activity, or call L&I at 360-902-4817 if accuracy is important.

10. What other responsibilities do I have as an employer?

• Employers have many responsibilities beyond what’s required for payroll. These include development and implementation of an employee safety program, posting required posters, providing breaks and meal periods, getting a minor work permit and authorizations when hiring workers under 18, and a number of others. Attending the Department of Labor and Industries workshops is highly recommended.
• You are also obligated to report all new employees to the Department of Social and Health Services. Instructions are available at http://NewHire.wa.gov
• Learn more about employer responsibilities in the GROW and RUN chapters of the Washington Small Business Guide.

11. Need assistance?

State of Washington Small Business Liaisons can help you get the information and resources you need. Also, help us improve the Small Business Guide by filling out a short, confidential survey.