There are many terms associated with running payroll. Here are a few payroll terms you should familiarize yourself with:

• Compensation: Everything you give employees in exchange for their work, like wages, bonuses, and small business employee benefits.
• Deduction: The money you withhold from an employee’s wages for taxes, benefits, etc.
• Gross wages: An employee’s wages before deductions.
• Net wages: An employee’s wages after deductions are taken out.

Direct deposit is one type of payment you can offer employees. It is used by 82% of workers, making it the most popular payment method. Many business owners like direct deposit because it is convenient. You can pay employees without having to hand them a physical check, which also makes it a safe payment option. You don’t need to worry about employees losing paychecks with sensitive business information. Some states let employers implement mandatory direct deposit.

Supplemental wages are dollars you give employees in addition to regular wages. A few examples of supplemental wages are bonus payments, commissions, and severance pay. Because supplemental pay is not part of an employee’s regular wages, you withhold taxes differently from them. You can choose between the percentage and aggregate methods. With the percentage method, you must withhold a flat rate of 25% on the employee’s supplemental wages. With the aggregate method, you must add the employee’s supplemental wages to their regular wages and withhold tax from the updated tax bracket.

As an employer, you are not off the hook when it comes to taxes. But, how you pay taxes depends on your business structure. If you are incorporated and receive a salary, payroll and income taxes are deducted from your gross wages. If you are self-employed, you do not receive a salary, but you still need to pay taxes on your income. Instead of FICA tax, you must pay self-employment tax. With self-employment tax, you pay the entire 15.3% for Social Security and Medicare taxes. And, you need to pay income tax. Self-employed individuals pay estimated taxes, which includes both self-employment and income taxes.

FSAs (flexible spending accounts) and HSAs (health savings accounts) are great benefits you can offer employees. While both are healthcare plans that reduce an employee’s income tax liability, you need to understand the difference between FSA vs. HSA. Employees can contribute up to $2,650 per year to their FSAs and $3,450 for self-only coverage / $6,900 for family coverage to their HSAs in 2018. There are other differences, including ownership, eligibility to contribute, access to money, rollover rules, and more.

All employees are required to fill out Form W-4, Employee’s Withholding Allowance Certificate, and Form I-9, Employment Eligibility Verification, before they can start working at a business. Use Form W-4 to determine how much to withhold from an employee’s wages for federal income tax. Use Form I-9 to verify that an employee is legally allowed to work in the United States. Employees might also need to fill out state tax withholding forms, benefits forms, and more.

Filing forms needs to become second nature when you run a business. The most common forms you should keep track of include:

• Form W-2, Wage and Tax Statement: Create a form for each employee you paid wages to. Send a copy of this form to the Social Security Administration; state, city, or local tax departments (if required); and to the employee by January 31. You also need to keep a copy for your records.
• Form W-3, Transmittal of Wage and Tax Statements: This is a form that summarizes your Forms W-2. Send Form W-3 to the Social Security Administration along with Forms W-2 by January 31.
• Form 940, Employer’s Annual Federal Unemployment: File this form annually to report your FUTA tax payments.
• Form 941, Employer’s Quarterly Federal Tax Return: Report federal income and payroll taxes on this form quarterly OR
• Form 944, Employer’s Annual Federal Tax Return: An alternate to Form 941, file this once a year to report federal income and payroll taxes. You can only use this form if the IRS notifies you.

Hanging onto records is also part of being a small business employer. You need to keep all payroll records for at least three years, according to the FLSA. And, you must keep all records of employment taxes for at least four years after filing the fourth quarter of the year, according to the IRS. Basically, your payroll record retention should last for a long, long time.