Labor represents the largest expense for many construction companies, so it pays to have an efficient payroll system to manage the complexities involved. In this quick guide, we’ll outline the best practices for gathering payroll data, calculating withholdings, paying taxes and filing payroll.
Build a Time Tracking System
The first big problem to solve for running payroll is tracking time for your hourly employees and/or subcontractors. An error here can mean overpaying and losing money, or underpaying and having an unhappy employee.
The key here is that you need to be able to collect time on a consistent basis every payroll period. This is most often done through paper times sheets or through time tracking software.
While construction companies have run for decades using paper timesheets, they do have two big drawbacks worth mentioning. The first is getting those timesheets to the people who need them in time to be able to run payroll. Gathering a bunch of sheets of paper every pay period often creates more legwork than is necessary. The second is getting all of the time recorded correctly on the timesheets, and then dealing with errors on them which need to be corrected.
Ideally you want to move to time tracking software that can automate a lot of these processes and take some of the human error out of the equation. The less manual work you have to do, the more time you’ll have and the more accurate your reporting will be.
Finally, once you get your time tracking system in place, you’ll also want to set up some mechanisms for tracking your labor productivity rates, which will help you measure and improve your profitability on labor. This goes for both hourly and salaried employees.
Withholdings
Once you have collected time sheets from your employees, you need to calculate your withholdings. Withholdings are the amounts deducted from an employee’s gross pay to cover certain taxes and contributions. We’ll walk through the major ones you need to be aware of below.
Required withholdings
You will need to withhold the amounts out of each check as required by law and voluntarily selected to be withheld. Standard required items that will be withheld by law vary from location to location but here are the main ones:
- In the United States you will need to withhold FICA, which includes the employees portion of social security and medicare taxes.
- The amount of federal taxes owed based on the employees W-2 they have filled out.
- Certain state or local taxes.
- Child support or garnishments from a taxing authority.
- Disability insurance taxes (depending on the state).
There could be a possibility that you would withhold nothing based on the W-2 for the federal taxes they would owe.
Voluntary withholding deductions
Voluntary withholdings can cover a wide range of items. Some examples of voluntary deductions include:
- 401k contributions
- Insurance premiums
- Union dues
- FSA
- HSA
- Donations
- Loan repayment
There are many other types of voluntary deductions which could come out of an employee’s gross pay each pay period. Make sure to have the employee sign a form for the voluntary deductions they have coming out of their check.
👉🏻 Check out our guide to offering fringe benefits.
Employer Paid items
As an employer you will owe the following amounts for payroll for your employees:
- The other portion of the FICA tax for Medicare and Social Security: 6.2%.
- Federal Unemployment Tax, also known as FUTA: 6% of the first $7000 of earnings with the company. There is a credit applied for employers against the State Unemployment Tax rates which vary state to state. You need to look at your respective state for the amount of credit which would be applied, and will depend on your individual claims history.
Filing and Paying Payroll Taxes
Your payroll deadlines will be different based on the amount of payroll liability or revenue you do. Your state and federal governments will determine the amount of your reporting requirements depending on the amount of payroll liability, and it can change over time if your payroll liabilities increase. You will have to submit your payroll taxes withheld to the Treasury at least every month.
We recommend EFTPS, Electronic Federal Tax Payment System, to make these payments in a timely manner and to automate this process. As a business grows you will be required to use EFTPS.
Forms and Required Reports
941s or equivalent form
The payroll amounts you pay through EFTPS will be shown on the quarterly 941 you need to report to the IRS. The 941 is the Employers Quarterly Federal Tax Return. It is due April 30, July 31, October 31 and January 31 of each year. It is to be filed for the previous quarters activity related to the payroll taxes. Some industries file an equivalent form to a 941. These will normally not be encountered in the construction industry, and are for non-profits.
940s
You must file Form 940, or the FUTA (Employer’s Annual Federal Unemployment) Tax Return. The 940 reports your yearly information for federal unemployment purposes, which funds how employees are able to obtain unemployment insurance benefits when there is a job separation. When you electronically deposit the entire FUTA tax by the due date it gives you 10 extra calendar days to file. It is due by January 31 of each year.
State Unemployment
You will also need to report and pay for state unemployment liabilities associated with your payroll costs. Many states’ payments are done on a quarterly or yearly basis depending on the amount you owe. The amount you pay on your state unemployment returns will then be offset as a credit on your 940, in most cases.
W2s
You will also be required to send all employees a W-2 by January 31st of each year for the preceding year’s earnings. You will need to report all the W-2 information provided to employees in a form to the IRS called a W-3 along with copies of the W-2s. The W-3 is a summary of the W-2 information you have provided. Depending on how many employees you have you will likely need to do this reporting electronically. We recommend electronic filing even if you don’t meet the minimums for it.
Paying on Time
Many states and local governments have strict deadlines about when employees have to be paid depending on when they have worked. Please consult with the state or localities you operate within to make sure you are following the laws and regulations for these dates.
Certified Payroll and Construction
Certain kinds of construction jobs will require a certified payroll report for the work done on a weekly basis. The certified payroll would show many of the items written about here like the gross pay, tax withholdings, voluntary deductions and more.
👉🏻 Read more about meeting the certified payroll requirements.
Don’t Get Caught Flat Footed
Running payroll carries a lot of complexity beyond just getting people their paychecks. There are all sorts of federal and state taxes and regulations that can create a headache for contractors. What’s more, a lack of organization can lead to critical requirements getting missed and a bigger financial burden being placed on the company. Or worse, it can cause contractors to be unaware of their inability to make payroll until it’s too late.
👉🏻 Read about what to do if you can’t make payroll.
Make sure you build an efficient system for running payroll and tracking your business’ financial health so you’re always prepared to pay.
Payroll is just one piece of your construction accounting functions. For more on building profitable accounting practices, read the Ultimate Guide to Construction Accounting for Contractors.