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How to Do Payroll in Massachusetts for Small Businesses
If you’re just starting a business in Massachusetts and expecting to hire employees, you’ll soon need to tackle the challenge of payroll. Managing payroll can be tricky, so it’s important to have a thorough understanding of the processes before you begin.
Lucky for you, this guide lays out all the steps for successful payroll processing in Massachusetts.
1. Get an EIN
Your Employer Identification Number, or EIN, is like a social security number for your company, enabling the IRS to identify your business. It’s also known as a Federal Tax Identification Number (FTIN), or sometimes for corporations just Tax Identification Number (TIN).
An EIN is used to identify US businesses and the taxpayers required to file the relevant tax returns. The EIN also contains information about the state in which the company is registered.
Employers use their EIN to file taxes, so in order to process payroll and ensure the proper withholdings and tax payments, you’ll need to first obtain your EIN. The application is free and can be found on the IRS website.
The application is form SS-4, and it can be printed out and mailed to the IRS, or submitted electronically. Once your information on the application has been validated, your EIN is assigned immediately. The EIN will never expire and is never duplicated, even if you go out of business.
In Massachusetts, you’ll need to register for state withholdings with the Department of Revenue. To pay state unemployment insurance taxes (SUTA), you’ll register with the Department of Unemployment Assistance.
Your municipality may also require certain tax registrations, so check with your local government for requirements.
2. Employee Tax Information
You’ll need to collect several forms from your employees, starting with a W-4 and an I-9 for all W-2 employees. In Massachusetts, your employee will also need to fill out this form to enable tax withholding. You may also need to register with your city and municipality, so, again, be sure to check with your local governments.
These forms are necessary to withhold taxes from payroll checks and must be kept on file. They are not submitted to the IRS or the state. You’ll also need these forms to issue W-2s, or in the case of independent contractors, 1099s.
To pay your employees via direct deposit you’ll need to collect their bank information, including account and routing number, address, and phone number. You’ll also need an Automated Clearing House (ACH) account with your bank in order to make direct deposits. An ACH account allows you to transfer payroll funds to your employees’ bank accounts.
3. Establish Your Payroll Schedule
In Massachusetts, the law states “Hourly workers must be paid every week or every other week (bi-weekly). The deadline to pay depends on how many days an employee worked during one calendar week.”
If the employee worked five to six days, they must be paid within six days of the end of the pay period. If the employee worked one to four days, or seven days, they must be paid within seven days of the end of the pay period.
You can choose to pay your employees more often, such as weekly, as long as you meet state requirements.
4. Calculate Gross Pay
If you have salaried employees, gross pay is simply their contracted fixed pay amount, such as $2,000 per week. For hourly employees, calculating gross pay is easy.
First, review their timesheets to make sure they have accurately tracked their hours. Then simply multiply their hours for that week, or month, by their hourly rate.
For example, if Jane works 40 hours in a week at $15 per hour, her gross pay (40 x 15) is $600.
Keep in mind that in Massachusetts, the overtime law dictates that any hours over 40 in a week must be paid at 1.5 times. If you fail to pay your employees the correct overtime rate, your business could face serious fines and other penalties and be required to back pay unpaid overtime.
To calculate overtime pay, take the number of hours worked over 40 and multiply it by their hourly overtime pay rate.
So if Jane worked 10 overtime hours at $22.50 ($15 x 1.5), she would be owed (10 x 22.5) $225.
Adding in her normal hours, Jane’s total gross pay for that week would be $600 + $225 = $825.
These calculations can be easily done in a spreadsheet, which should then be kept in your records in case any pay disputes arise.
5. Determine Withholdings, Deductions, and Allowances
Exemptions are the same as allowances — both refer to money taken out of an employee’s paycheck. Allowances are specified on the employee’s W-4.
Deductions, which are specified by the employee on their tax returns, are amounts that can be deducted from taxable income. When determining withholding amounts, you’ll need to refer to your employees’ tax forms, and be sure they filled them out correctly.
Deductions may include the following:
- Federal taxes
- Social Security
- State taxes
- Local taxes
- 401(k) contributions
- Workers’ compensation contribution
- Unemployment withholding
- Other benefits, such as company-subsidized health insurance
Jane, for instance, might pay $130 in federal taxes, $15 in social security, and $40 in state taxes, in addition to $30 in 401(k). Thus, her total withholdings would be $215.
Again, it’s a good idea to use a spreadsheet to record the totals for each employee, as it makes calculating and remembering much easier.
6. Calculate Net Pay
To calculate net pay, simply deduct withholdings from the gross pay you previously calculated.
Gross pay – Withholdings = Net pay
So, Jane’s net pay for the week detailed above would be $825 minus $275, which equals $550.
7. Pay Employees
To offer direct deposit, you’ll need to first set up an ACH account with your bank, which will require a business bank account. You can usually set up ACH online following your bank’s instructions. Once your account is set up, just add your employees as payees.
Then, you’ll process the ACH payments through your bank and provide every employee with a pay stub detailing itemized withholdings. This also applies if you issue paper checks.
8. Keep Records
It’s important to keep detailed payroll records, which can be used in the event of an error or dispute. You’ll also need these records to calculate your own payroll tax payments.
If you do your own payroll and tax calculations by hand, you’ll want to keep ledgers of everything you withhold and pay. But keep in mind that most accounting software tools, like QuickBooks or Freshbooks, incorporate payroll accounting capabilities and will do all this work for you.
If you’re just starting your business and planning to do your own accounting and payroll, you may want to consider purchasing some quality accounting software. It will not only save you a great deal of time, but ensure error-free payroll and tax calculations.
9. Pay Federal Payroll Taxes
Following IRS guidelines for depositing withheld taxes and paying your payroll taxes is absolutely crucial. Here are the instructions from the IRS website:
Depositing Employment Taxes
In general, you must deposit federal income tax withheld as well as employer and employee social security and Medicare taxes.
There are two deposit schedules, monthly and semi-weekly. Before the beginning of each calendar year, you must determine which of the two deposit schedules you are required to use. To determine your payment schedule, review Publication 15 for Forms 941, 944 and 945. For Form 943, review Publication 51.
Deposits for FUTA Tax (Form 940) are required for the quarter within which the tax due exceeds $500. The tax must be deposited by the end of the month following the end of the quarter.
You must use electronic funds transfer (EFTPS) to make all federal tax deposits. See the Employment Tax Due Dates page for information on when deposits are due. If you fail to make a timely deposit, then you may be subject to a failure-to-deposit penalty of up to 15 percent.
Reporting Employment Taxes
Generally, employers must report wages, tips and other compensation paid to an employee by filing the required form(s) to the IRS. You must also report taxes you deposit by filing Forms 941, 943, 944, 945, and 940 on paper or through e-file.
Federal Income Tax and Social Security and Medicare Tax
In general, employers who withhold federal income tax, social security or Medicare taxes must file Form 941, Employer’s Quarterly Federal Tax Return, each quarter. This includes withholding on sick pay and supplemental unemployment benefits.
File Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees, if you are filing to report agricultural wages.
File Form 944, Employer’s Annual Federal Tax Return, if you have received written notification about the Form 944 program.
File Form 945, Annual Return of Withheld Federal Income Tax, if you are filing to report backup withholding.
Federal Unemployment Tax Act (FUTA)
Only the employer pays FUTA tax and it is not withheld from the employee’s wages. Report your FUTA taxes by filing Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.
10. Pay Massachusetts Payroll Taxes
In Massachusetts, the process for tax deposits and payroll taxes is as follows:
To pay your state withholding taxes, you’ll need to sign into your account on the Department of Revenue MassTaxConnect website. Taxes are due either monthly or annually, depending on the total amount of your withholdings.
To pay your SUTA taxes, you’ll need to log in to your Department of Unemployment Assistance account. Taxes are due quarterly.
Again, be sure to check with your local government to find out about paying any local payroll taxes.
Using a Payroll Service
Processing payroll can be terribly complex, which is why many business owners turn to a payroll service provider. It’s often less expensive than creating a new staff position for managing payroll.
Payroll and payroll taxes come with countless laws and restrictions, and a payroll service can ensure your business remains in compliance at the federal, state, and local levels. You’ll just send over your digital timesheets and relevant information and the service provider will take care of the calculations, payments and taxes, freeing you up to focus on growing your business.
We highly recommend hiring a payroll service — as a busy entrepreneur, you won’t regret it!
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