Payroll: Getting Started Guide to Washington State

Congratulations, you're ready to hire your first employee in Washington State!

Here's a short checklist guide of the items you'll need to get set up properly for your first payroll.

When doing payroll in Washington State we have 3 main tax agencies that cover payroll taxes. (Reminder: We have no State Income Tax...yet)

1. IRS - Federal Taxes
2. WA State Employment Securities - the office of Washington State Unemployment
3. WA State Labor and Industries - the agency covering Worker's Compensation Insurance

In order to File and Pay Federal Payroll Taxes, and there are a number of them, your company must have a Federal Employer Identification Number (FEIN or EIN for short). You can apply for an EIN online or complete and submit a hard copy SS-4 Form application. The online application gives you an identification number and receipt of completion instantaneously, and tends to be the preferred option.

The Department of Employment Securities requires an assigned identification number (called an ES Reference Number), as does the Department of Labor and Industries, in order to properly pay their state specific payroll taxes. To obtain both ID numbers, a Washington State Master Business Application must be filed indicating you are now hiring on employees - in doing so, both the Department of Employment Securities and the Department of Labor and Industries will issue identification numbers upon receiving the correctly completed Master Business Application, which can be completed online.

Once you have your three tax identification numbers you'll want to be sure your new employee(s) complete(s) their W4 Form so that you or your payroll company will be able to calculate that individual's payroll taxes accordingly.

Once you've gotten your Tax ID numbers and W4 forms, you can process payroll. There may be some other tax or compliance requirements based on your employee count and/or location of your business, so be sure to consult your CPA or business advisor. Also, there are a number of compliance items to tackle like New Hire Reporting and hopefully you've had your employee(s) complete their I9 Form for Homeland Security purposes.

If you're willing to take on the burden of payroll compliance on your own be sure to review IRS Publication 15 - the Employer's Tax Guide, as well as Employment Securities and Labor and Industries filing and depositing requirements.

If you feel better served having a professional service company take over payroll duties, feel free to contact me at Randy.Harris@adp.com and we can quickly explore if some of our small business payroll services options could ease your concerns. We process payroll and file & deposit payroll taxes for companies with as few as one employee in Seattle, Bellevue, and all corners of Washington State. Reach out for a discussion today.

Payroll Taxes Ranked #2 in Top Burdens for Small Business Owners

The 2013 Small Business Taxation Survey was just released by the National Small Business Association (NSBA) in the days leading up to the 2013 April 15th Tax Filing Deadline and Payroll Taxes Ranked #2 in both the Top Administrative and Top Financial Burdens of small businesses. 


A note from the forward in the survey...

"When it comes to payroll taxes, one-third of small businesses report spending more than six hours per month on the administration of payroll taxes, which, while it may not sound overly burdensome, amounts to more than 72 hours per year, or nearly two full work weeks."


That's an eye opening amount of valuable time, and the study asked if small business owners were outsourcing payroll in order to reduce their time spent on payroll administration:

40% of the respondents said they "Use a Payroll Service Like ADP or Paychex to prepare...payroll" 

and...

"...one in three report spending more than $500 per month on payroll services"

While most of my small business clients tend to spend in the $100 to $300 per month range, it is interesting to note the amount of small business employers choosing to outsource coupled with the amount business owners are willing to pay to reduce their payroll tax administrative burden.

Most of the small business owners I work with tell me (as a reason they are choosing to outsource):

1. They have little knowledge of payroll tax compliance regulations 
2. They have some knowledge but don't have time to learn all of the payroll tax compliance regulations
3. They are knowledgable of payroll tax compliance regulations but it is more cost effective to outsource than to perform payroll administration themselves

Based on personal experience over the last ten years, most owners and accountants are interested to learn of how many small business owners outsource payroll services with just one or two employees. During our conversation, I can often reference a one or two employee company I had just set up in the current or previous week that had made the choice to outsource.

With time savings becoming ever more valuable in the struggle to operate a successful business, it seems to be becoming more justified to outsource a compliance function like payroll services - which, at the current rate of government regulation changes and requirements, may become more and more of a necessity and less of a convenience. 

Payroll Services Can Provide Check Fraud Protection

Small business owners, have you ever been afraid of check fraud against your company due to a company issued payroll check?

Seattle, like most other major cities, has had a history of this problem.

If you have 10 employees that you pay with live checks twice a month. That's twenty pieces of paper out there with your bank account information (and signature) every month, just from payroll.

In their 2012 Report to the Nations, The Association for Certified Fraud Examiners (ACFE) revealed a few key challenges...

"Check tampering was three times as common and payroll skimming schemes were noted almost twice as often in smaller organizations than in their larger counterparts"

"Most occupational fraudsters are first-time offenders with clean employment histories. Approximately 87% of occupational fraudsters had never been charged or convicted of a fraud-related offense, and 84% had never been punished or terminated by an employer for fraud-related conduct"

If you're worried, here's something to look into if you have to pay employees via check...

Most payroll services now offer a check fraud protection service whereby payroll checks are drawn off of the payroll services' bank account. The checks issued then have the payroll services' signature and bank account numbers on them instead of your company's.

The NFIB made some recommendations last year to reduce a businesses chances of experience payroll check fraud. #5, Positive Pay, is an additional service, with an additional cost, on the banking end - but your payroll services company may likely have a Check Fraud Protection Option...which you can also pair with the NFIB's recommendation #7, Direct Deposit.

Setting Up Payroll for Employees in Multiple or Different States

Setting up payroll for employees in multiple or different states can be tricky as most employers, (especially small business owners), and most people in general have likely only had experience paying payroll taxes in their home state.

Technology has made it possible for small business owners to reach across state lines, coast to coast, and beyond to find the most capable employees to fit their company vision and do 'the work.' This type of reach has expanded the wonderful possibilities of business for these companies and allowed them to find talent that may not be available to them locally, but it has also created some challenges in terms of payroll processing that can impact the business from a compliance standpoint and from an employer-employee relationship standpoint.

These types of issues can result in penalties, fines, and employee turnover - which can be costly.

The most important thing to remember is that every state is different and even some cities and local municipalities have their own taxes that may need to be deducted from the employee's pay depending on where they live, where they work, or both.

Below are some of the 'State Level Taxes' to watch out for.

State Income Tax
State Unemployment Tax
County Taxes
City Taxes
Local Taxes (School District Taxes, etc...)

These taxes may or may not apply depending on the state, city, or county the employee is employed in. Also, it is VERY important to take note of where the employee lives and where the employee works - which may be two different states (this occurs quite often in certain regions of the country) - and you will be paying different state taxes to the lived in state vs the worked in state.

The IRS and State Governments are watching you to make sure you're in compliance and your employees are counting on you to get their paycheck calculation correct.

I see a lot of small business owners in particular lean toward outsourcing in these situations. I have numerous 2 to 7 employee companies that carry employees in 2, 3, 4, or more states, and the compliance risk is often something more cost effectively managed by a payroll processing company.

If this is something impacting your small business and you have questions about what outsourcing looks like, free to reach out to me via phone or email.

Making a Mid-Year Switch in Payroll Services

Making a Mid-Year Switch to a Payroll Services Company isn't as challenging as it used to be and shouldn't cause you to lose any sleep.

Many years ago, a mid-year conversion would cause employees to receive two W2s at year end, and make the current quarter filings a potential mess.

Thank goodness technology has caught up.

I generally see the following scenarios when bringing on a new client for payroll and tax filing services...

Current System - Transitioning To - Payroll Services Company

1. In-house payroll (using software) - to - Payroll Services
2. Manual payroll (using spreadsheet docs or doing payroll by hand) - to - Payroll Services
3. Payroll Services (using another p.s. company) - to - Payroll Services
4. Accountant/Bookkeeper - to - Payroll Services

In any of these cases, the same approach is usually taken with the Payroll Company:

• You'll want to exchange copies of the Quarterly Filing Reports (Both Federal and State(s)) for any of the Quarters that have passed so far this year.
• You'll want to exchange payroll reports for each payroll so far in the current quarter, so that they can accurately file and deposit for the current quarter.
• You'll want to grab a Year to Date Payroll Report (Jan. 1st - Today)
• In both the per payroll reports and the year to date report it is important that those reports be broken down as follows:

Employee Name: Hours worked | Gross Pay - Taxes - Deductions = Net Pay

This is done to make sure the Payroll Company knows who's been paid what, and what taxes and deductions have come out of who's pay.

After that you're just looking to pass along Employee W4 information and possible Direct Deposit Information if applicable.

The Payroll Company may want to see receipts of tax payments made so far during the current quarter and may ask if there are any taxes due from previous payrolls you would like them to deposit on your behalf.

After your new Payroll Services Company has set up your account, and before you begin processing payroll with them, you'll want to verify that the data in their system matches that of the data on the reports you turned over or uploaded to them.

Verify the Employee Data as well, but its a good best practice to ask your employees to verify their W4 information on their first paystubs also.

Keep an eye out and don't be afraid to ask questions. And while service and results will always vary based on individuals and companies involved, there shouldn't be any technical reason to hold back in making a change in Payroll Services mid-year if you trust the people you're working with and they have a solid history of helping other companies make a transition.