the definitive guide to payroll processing in michigan

PAYROLL IS MORE THAN ISSUING CONSISTENT PAYCHECKS

While accurate and timely pay stubs are important, there are a number of critical factors to account for when running payroll. On top of accurate wages, payroll also consists of proper tax withholdings, responsible filing, handling deductions such as garnishments, retirement contributions, benefits, and much more.

If you’re running payroll in Michigan or setting up payroll for the first time, this guide will define what payroll is, why it’s important, how to set payroll up for your business, and the benefits of outsourcing payroll.

1. What is Payroll?

Payroll is defined as “The sum total of all compensation that a business must pay to its employees for a set period of time or on a given date,” according to Investopedia. Any business that has at least one employee will have to process payroll. Chances are, if you’re reading this, you fall into this category. But what is it exactly?

Essentially, payroll can refer to one of three things:

1.       The employees you pay, as well as all of their employee information.

2.       The amount you pay employees during each pay period.

3.       The process of actually calculating and distributing all wages and taxes.

Along with compensating employees, payroll also consists of tax withholdings. Tax withholdings are the taxes employees must pay and employers must withhold from the wages of each employee. Tax Withholdings in Michigan include MI income tax, city tax, Social Security, and Medicare. Your income and city tax will depend on your income and which city you live in. The current tax rate for Social Security is 6.2% and Medicare is 1.45% for both the employer and the employee. These rates apply until you hit the wage threshhold; Social Security tax stops after an employee receives $168,600 in year-to-date wages, while Medicare tax on wages in excess of $200,000 year-to-date increases the rate by 0.9% for employees (2024).

COMPONENTS OF A PAYCHECK

Outside of wage and tax calculations, it is important to take special care to ensure the rest of the data being calculated is accurate as well. Below, you will find a breakdown of many common components of an employee’s check. It is vital to familiarize yourself with each component to ensure data validity with each payroll.

DEDUCTIONS

Deductions are any money that you subtract from an employee’s total wages. Some examples of this include federal, state, and local taxes, health insurance premiums, and job-related expenses.

  • As mentioned before, you must deduct payroll taxes from the wages of all non-exempt employees. The exact amount is going to vary depending on the employee’s total earnings and how many withholding allowances they claim. Additionally, there are certain payroll taxes that only apply to the employer. Payroll taxes include federal, state and local income taxes, federal and state unemployment, Medicare, and Social Security.

  • Garnishments are court-ordered, post-tax deductions. These may be used to pay off the employee’s overdue debt for defaulted loans or child support. If you need to deduct a garnishment, you will receive a notice from a court.

  • Employers must show an employee’s net and gross pay on their pay stubs. Gross pay is the employee’s total pay, while net pay is what’s left after all deductions are subtracted. This is the amount that they take home each pay period. Usually, IRS forms will ask for an employee’s taxable gross pay, while banks and loan providers will be interested in their net pay.

PAYROLL OPTIONS

There are three primary ways to process payroll: in-house, using a certified public accountant (CPA), or using a payroll software. While there is no right way to process payroll, some methods will work for certain businesses much better than others.

  • Processing payroll in-house is often considered the cheapest option. However, this is by far the most time-consuming. Not only do you have to learn how to do payroll, but processing payroll each pay period is incredibly tedious and time consuming. What’s more, any fines or penalties you receive from mistakes made when filing federal, state, and local taxes will fall on your organization to cover.

  • Using a CPA is a good way to free up some of your time. While they can be expensive, they will usually take care of the entire payroll process for you. The downside to using a CPA is that you don’t get the additional payroll and HR features that you do with payroll software.

  • Using payroll software is the best option for most businesses. While they’re not as cheap as processing in-house, payroll software is going to automate a lot of your processes, meaning you spend significantly less time doing payroll. All your taxes will be automatically filed on your behalf, and you have the added bonus of using the software’s additional timekeeping and HR features. There are many factors to consider when it comes to payroll, and whether you’re new to the game or a seasoned employer, understanding this aspect of your business is important. Now that you understand what exactly payroll is, let’s take a look at why it’s important.

2. Why Payroll is Important

It may seem obvious to state, but payroll is important for legal and ethical reasons, as well as the health and longevity of your business. Payroll is subjected to various laws and regulations, so it’s vital to keep organized, precise records of your payroll.

PAYING MICHIGAN EMPLOYEES

A payroll system ensures salaried and hourly employees are paid accurately and according to schedule. Failing to pay employees their due wages is not only unethical, but it’s also illegal. Michigan’s Bureau of Employment Relations outlines laws and regulations related to minimum wage, fringe benefits, overtime pay requirements, and deductions. Employees are subject to state income tax, while employers in Michigan are responsible for unemployment taxes and are federally responsible for FUTA, Social Security, and Medicare.

FILING AND WITHOLDING TAXES

The federal government requires businesses to withhold a percentage of every paycheck for employees. Certain taxes are also required to be paid by the employer. These taxes must be paid at specific times over the course of the year.

THE PERKS OF PAYROLL

In addition to making sure all your employees get paid on time, your payroll team plays a vital role in protecting your organization’s reputation by ensuring compliance with various legislation. Payroll affects every aspect of your business, from the reputation of the company right down to the morale of its employees. You can glean a fair amount of insight by simply looking at an organization’s payroll processes. An efficient payroll department reflects the organization’s commitment to its employees and its reputation. These reasons prove how important it is to have a quality payroll process in place, so make sure you don’t overlook this key department.

  • Take it from somebody who has been in the payroll industry for a long time: there is no faster way to plummet your employees’ morale than to botch a payroll run. This happens most often when processing payroll in-house, due to the high chance for human error. Employees need to feel assured that they can be paid on a consistent and timely basis. A late or inaccurate payroll might cause employees to question the financial stability of the organization, which in turn could have an adverse effect on the work climate. This leads to under-performance and could even result in an increase in your turnover rate. Given that employees form the base of every organization, the importance of a reliable and accurate payroll cannot be overstated.

  • While your business has a strong financial obligation toward its employees, it also has to adhere to the structure of employment legislation, as well as the country’s tax obligations. By following these guidelines efficiently and accurately, you can further establish a quality reputation for your organization as a stable employer. This will ultimately attract and retain the right pool of talent for your business.

  • In general, your software should allow for more comprehensive data management, as well as provide your organization with the option to generate customized reports. In addition, payroll software companies are likely up-to-date with the latest legislative changes, and will usually take it upon themselves to keep you in the loop so you’re always staying in compliance. With automated payroll, you can save on significant costs in the long run. Additionally, it frees up valuable resources so you can focus on other business areas.

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3. Setting up payroll for your michigan business

Now that you’re aware of the responsibilities, laws, and tax information regarding Michigan payroll, it’s time to decide on which payroll system suits your business and budget. However, a few steps must be taken regardless of your chosen method of processing payroll.

  1. Complete and file an I-9 to verify the legal status of your employees. Additionally, your employees must also fill out a W-4 for accurate tax withholdings.

  2. Determine how your employees will get paid: by check, direct deposit, or paycards.

  3. Research and decide what payroll processing method is best for your business. Our all-in-one platform can help!

A BREAKDOWN OF PAYROLL

There are many different aspects of payroll, such as employee information, hours worked, salaries and wages, deductions, gross pay, and net pay. In this section, we’re going to take a closer look at each of these components and how they affect payroll.

Employee Information
In order to process payroll, you have to compile a lot of information from your employees. Each employee must fill out Form W-4 which has been recently updated to be more intuitive. You’ll also get employee names, addresses, and Social Security numbers from this document. All of this information is necessary to have in order to effectively process payroll. Each new employee you hire will have to fill out Form W-4.

Hours Worked
There are three different kinds of employees: hourly, salary exempt, and salary non-exempt. For your hourly employees, you have to keep track of all hours worked in order to pay them the proper amount. This is less important for salaried employees; however, you may still want to track their time in order to ensure they are putting in their time.

Time Off
If you offer any kind of paid time off (PTO) options to your employees, you’ll want to track that time for each employee. PTO can take many forms, from vacation time to sick time to holidays. With the 2018 Mandatory Paid Sick Leave Act, this is more important than ever. Make sure you have a detailed description of your policy that informs employees about how much time they are able to take off.

Salaries & Wages
A salary is a fixed amount that you pay an employee. Typically, an employee is given a yearly salary, which is then divided by the number of pay periods in the year. A wage, on the other hand, is what you pay an employee based on the hours worked and include benefits such as paid holidays and paid time off. You will set a specific rate of pay for each hourly employee. To calculate an employee’s total wages, you will multiply the rate of pay by the number of hours the employee works.

Overtime Pay
In addition to hourly and salary employees, you also have exempt and non-exempt. Non-exempt employees must receive overtime pay, regardless of whether they are hourly or salary. Overtime hours typically begin after an employee works 40 hours in a week and is one-and-a-half times their regular rate of pay. Exempt employees, on the other hand, do not receive overtime pay. Always be sure to correctly classify employees as exempt or non-exempt and check your state overtime requirements when setting up the time policies for your business.

Additional Pay
There are other types of pay that your employees may receive. Examples of additional types of pay include tips, commissions, or bonuses. Employees must report all tips made to you, as there are payroll taxes applied to tips. Any commissions and bonuses should be included when you run payroll.

A STEP-BY-STEP GUIDE

  • Your FEIN is a tax ID assigned to you for your business. It is required to open a checking account and to facilitate other financial transactions. It also identifies a business for federal and state tax purposes. After you have obtained your FEIN, you will need to register with the state of Michigan for income taxes, unemployment taxes, and worker’s compensation insurance. Keep in mind that some businesses may be exempt for having to provide worker’s comp. Also, note that all of these are related to Michigan payroll taxes and must be withheld from your employees’ paychecks or paid by you as the employer.

  • There are major differences between how you pay employees and independent contractors. It’s important to classify and pay your employees correctly. Improperly classifying an employee as a contractor and failing to withhold and pay their taxes will make you, the employer, liable for back taxes and penalties.

  • There are four main pay schedules to choose from: weekly, bi-weekly, semi-monthly, and monthly. The payroll schedule you choose for your employees will depend on the industry you’re in, the kind of workers you employ (contractors vs. freelancers vs. fulltime employees, etc.), and how much administrative work you’re willing to tackle.

  • Precise, accurate, and accessible payroll records are crucial for your business’ long-term success. Regardless of the payroll system you choose, make sure you can track employee hours, compensation, how paid time off is calculated and issued, and business deductibles.

    Employee payroll data management is important because federal and state laws require you to keep certain records for a specific amount of time. For example, W-4s must be kept for all active employees and for four years after they leave your organization. Keep W-2s and copies of tax forms and dates as well. The US Small Business Administration is an excellent resource for document management.

4. Explaining Deductions

At this point, we’ve mentioned the various federal, state, and local taxes taken out of your employees’ paychecks. Below is a breakdown of these taxes and other potential deductions so employees can fully understand what is being taken out of their paycheck, what these deductions are used for, and what employers have to withhold by law.

PAYROLL DEDUCTIONS

Before discussing payroll deductions, it’s important to remember the difference between gross pay and net pay. Gross pay is the total amount of wages earned before any deductions are taken out. Net pay is the amount you walk away with after all of the deductions have been taken out. Keep this difference in mind while you read over the following deductions, as these will be what facilitate the process of calculating the final net pay from the original gross pay.

  • Federal Tax: Federal tax is taken out of each paycheck. The amount is going to vary depending on how much your employees make annually, their marital status, and any dependents they may be claiming via the dependent tax credit. They may also choose to contribute an additional amount each payroll.

  • Michigan State Tax: The Michigan statewide income tax rate is 4.25% of an employee’s compensation after deducting personal and dependency allowances. Local withholding taxes vary depending on which city the employee resides in. Residents of Detroit pay one of the highest percentages at 2.4%, followed by residents of Highland Park at 2%, and Grand Rapids at 1.5%. For in-depth Michigan tax information, go to Michigan.gov.

  • Federal Insurance Contributions Act: The Federal Insurance Contributions Act (FICA) was created to act as a safety net for retirees and spawned the Social Security Administration. FICA is a combination of both employee and employer Social Security and Medicare taxes. Both the employer and employee pay 7.65% of the employee’s income for a final contribution of 15.3% until the wage thresholds mentioned in section 1 has been reached.

  • Retirement: Many employees choose to have a percentage taken out of their paycheck for retirement. Common options include 401(k)s and IRAs.

  • Health: Employees eligible for health insurance can elect to have funds withheld from each paycheck to enroll in their employer’s health plan. This deduction is typically withheld pre-tax.

  • Life: Some employers offer life insurance. Additional life insurance is typically paid to the provider semi-annually, but deductions are usually taken out every payroll.

  • HSA Deductions: HSA deductions are deductions where employees choose to contribute a certain amount to an account dedicated to medical costs. These contributions are tax-free and can be accessed at any time without penalty.

  • Flexible Spending Accounts: Flexible Spending Account (FSA) deductions are amounts employees choose to contribute to an account dedicated to medical costs. These contributions are tax-free and can be accessed at any time without penalty.

  • Employee Stock Option Plans: A few organizations offer Employee Stock Option Plans (ESOPs). With these, a percentage of a paycheck is deducted to purchase company stock.

  • Other: Garnishments, union dues, meals, and other miscellaneous deductions may appear on an employee’s paycheck if applicable.

5. The Decision to keep payroll in-house or to outsource

The decision on where to host your payroll processing system is important for every business. There are a number of pros and cons when it comes to internal and outsourced payroll solutions. In order to determine the best solution for your business, you’ll have to take into account a number of factors. How many employees do you have? Are you experienced in tax law? Can you offer benefits to your employees? In this chapter, we will cover a few benefits and drawbacks to both options.

IN-HOUSE PAYROLL

From an in-house accountant to internal payroll software, running payroll in-house has many benefits. Here are some perks to processing in-house:

  • Affordability: For small businesses, it’s almost always cheaper to run payroll in-house or pay an accountant instead of paying for an outsourced payroll system.

  • Data access: In-house payroll guarantees you have immediate access to your payroll information (assuming it’s well-organized and managed).

  • Control: You know how to do the work: If you’re running payroll by yourself currently, you may think it’s unnecessary to pay another business to do a job you’re already performing.

However, as we mentioned above, running payroll yourself is extremely time-consuming and opens your business up to tax errors, inaccurate and missed paychecks, and filing liabilities.

OUTSOURCE PAYROLL

Outsourcing payroll can be incredibly beneficial for your company. Price-minded individuals will see that outsourcing payroll will generally be the more expensive option. However, most organizations agree that the benefits far outweigh the cost of service. Here are the perks of using a payroll software:

  • Accuracy: Payroll software companies are experts in processing tax codes, staying up-to-date on the latest laws, and can handle all manners of deductions, pay frequencies and any other specialized request.

  • Efficiency: Businesses of all sizes benefit by delegating payroll processes. Outsourcing payroll allows you to stay focused on managing your employees and achieving company goals.

  • Long-term savings: While an outsourced payroll solution may seem expensive upfront, it’s more affordable in the long-term. Paying for a single-source payroll solution eliminates tax errors and the need for an accountant solely focused on payroll processes.

If you’re curious about the costs and advantages of single-source payroll software, reach out to a member of AAB Payroll to review your needs and determine the best solution for your business.

 
 

6. Features of an exemplary payroll processor

If you’re responsible for running payroll, you’re probably all too familiar with the stress and headaches that come with managing deductions, understanding federal, state, and local tax laws and much more. We’ve talked a lot about the perks of outsourcing your payroll provider, so if this is something you’re considering, you’ll want to know what features to look for.

Below you’ll find an outline of a few of the essential features associated with single-source payroll software like AAB Payroll’s that simplify payroll and HR management tasks.

WHAT TO LOOK FOR IN A PAYROLL SERVICE

  • Automatic Tax Payments: A payroll processor should have no problems accurately submitting local, state, and federal taxes when you submit payroll.

  • Multiple Pay Options: A suitable payroll processor should give you the choice of picking between popular payment options, such as direct deposit, checks, or pay cards.

  • Stress-free compliance: Whether you’re worried about tax payments or filing for the Affordable Care Act, a payroll processor should have you covered.

  • Professional Implementation: The process of switching payroll providers, or switching from an in-house process to an outsourced processor is daunting. An installations team should help your team transfer all the important data you need for a smooth conversion.

  • Centralized Data: A proper payroll processor will allow you to access important employee data all from one online location. From pay rates to time off to benefits, all data should be easily accessible at any time.

  • Mobile optimized: HR and Payroll tasks don’t always take place in the office. That’s why an exemplary payroll provider will offer a mobile-optimized website, as well as a mobile app. AAB Payroll offers both. Our live site is accessible from any web browser on a smartphone and our app is available for free from the app store for all our customers.

  • Expert Customer Support: Payroll is always going to be complicated, and there’s a lot of pressure on payroll processors to get things right every time. That is why it’s important to have a quality customer service team that you can rely on. Clients of AAB Payroll have access to customer support via phone, email, or chat in order to get the answers they need easily.

Ready to learn more about AAB Payroll? Request a personalized demo tailored to your business needs.

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