Payroll FAQs Every Business Owner Should Know

Even when payroll is outsourced, many business owners still want to understand the basics. And for those handling payroll themselves, that knowledge becomes even more important. Below are seven common payroll questions explained in clear, practical terms to help you navigate key responsibilities with confidence.

How do I handle overtime pay correctly?

Non-exempt employees (often hourly workers) must be paid “time and a half” for any hours worked over 40 in a week. Exempt employees, such as certain salaried managers, may not qualify for overtime, but their classification must meet specific criteria. Errors here can lead to wage claims and penalties, so accurate classification is essential.

What payroll taxes am I responsible for?

Employers must withhold and pay federal income tax, Social Security and Medicare taxes, Additional Medicare tax (depending on income), and unemployment taxes at both the federal and state levels. Local taxes may also apply. You’re responsible for withholding Social Security and Medicare from employee paychecks and matching those amounts yourself unless the employee has reached the annual Social Security wage limit. Filing deadlines vary, making timely reporting crucial.

What happens if I misclassify a worker?

Misclassification—treating someone as a contractor when they should be an employee—can result in penalties, back taxes, interest, and potential issues with workers’ compensation or labor laws. Ensuring classifications are correct from the beginning is far easier and far less risky than trying to fix mistakes later.

Do I classify workers as employees or independent contractors?

An employee works under your direction: you control their schedule, provide training or tools, and guide how the work is done. Employees are paid hourly or salaried and have taxes withheld.

An independent contractor operates more independently, typically using their own tools, deciding how the work gets done, and often serving multiple clients. Contractors are usually paid per project and have no taxes withheld.

If you’re unsure which applies, seeking professional guidance can help prevent problems. The IRS has clear rules—and getting it right helps you avoid future complications.

Can I offer benefits through payroll?

Yes. Payroll can process deductions for health insurance, retirement contributions, and other employee benefits. Knowing the difference between pre-tax and post-tax deductions is important because it affects reporting and taxation.

What payroll records do I need to keep and for how long?

The IRS recommends keeping payroll-related documents such as timecards, pay stubs, W‑2s, tax filings, and benefit deduction records for at least four years. These records support compliance and help resolve employee questions when they arise.

How do I classify workers as employees or independent contractors?

Classifying staff correctly is crucial. Employees work under your direction with taxes withheld, while contractors operate independently without tax withholding. When in doubt, seek guidance to avoid compliance issues later.

While payroll can feel overwhelming, understanding these core concepts helps prevent costly mistakes. Review how you classify workers, manage taxes, and maintain records—and don’t hesitate to seek support if you need help navigating the details.