Even when payroll is outsourced, many business owners still want a clear grasp of how it works. And for those handling payroll themselves, understanding the basics becomes even more essential. Below, you'll find straightforward explanations to seven of the most common payroll questions—no jargon, no confusion.

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

The IRS recommends keeping all payroll-related documents—timecards, pay stubs, W‑2s, tax filings, and benefit deduction information—for at least four years. These records aren’t just helpful for audits. They also provide clarity when employees have questions later on.

Do I classify workers as employees or independent contractors?

This is one of the most frequent payroll questions, and getting it right is critical. Here's a simple way to think about it:

Employees work directly for you. You set their schedule, define how their work is done, and supply the tools or training they need. They’re paid hourly or on salary, and you withhold taxes from every paycheck.

Independent contractors operate with more autonomy. They decide how they complete the work, provide their own tools, and often work for multiple clients. They’re typically paid per project and receive payment without tax withholding.

If you’re uncertain how someone should be classified, now is a great time to ask for support. The IRS has clear guidelines, and proper classification helps you avoid future issues.

How do I handle overtime pay correctly?

Non‑exempt employees—usually hourly workers—must receive “time and a half” for any hours worked beyond 40 in a week. Exempt employees, such as many salaried managers, may not qualify for overtime, but only if they meet specific criteria. Misclassifying overtime eligibility can lead to wage claims and penalties.

Can I offer benefits through payroll?

Absolutely. Payroll often includes deductions for health insurance, retirement contributions, and other benefits. Just be sure to properly categorize deductions as pre‑tax or post‑tax, as each has different tax and reporting implications.

What payroll taxes am I responsible for?

As an employer, you’re responsible for withholding and paying several key taxes, including:

• Federal income tax
• Social Security and Medicare taxes
• Additional Medicare tax for higher earners
• Federal and state unemployment taxes
• Applicable state and local taxes

You must withhold Social Security and Medicare from employee paychecks—and match those amounts yourself—until the employee reaches the annual Social Security wage limit. Filing schedules vary, so timely reporting is essential.

What happens if I misclassify a worker?

Mistakenly treating an employee as a contractor can lead to costly consequences, including back taxes, penalties, interest, and potential issues with workers’ comp or labor laws. Correct classification upfront is much easier—and far less risky—than fixing mistakes later.

How do I handle payroll documentation and compliance?

Consistently reviewing your payroll processes—classification, tax practices, record retention, and reporting—can help prevent errors that may become expensive down the road. When in doubt, reach out for guidance. Having expert support can make a world of difference.

Payroll may feel overwhelming at times, but understanding these basics provides a strong foundation. By staying proactive about compliance and organization, business owners can avoid many common pitfalls—and operate with more confidence.