Introduction

Managing employee information is a major activity of small businesses with employees. It’s important that employee information is managed efficiently, accurately, and productively to ensure the employee information you provide to external users, such as federal and state tax agencies, is correct.

This chapter provides step-by-step guidance for managing employee information.

The chapter guidance is useful to bookkeepers and personnel involved in payroll activities.  The chapter helps bookkeepers manage employee information and provides newly hired or cross-trained employees guidance for managing employee information.

Accounting Process Automation

Accounting process automation automates routine management of employee records and information. Automation improves the speed, accuracy, and reliability of managing employees and information.

This chapter uses accounting process automation, when possible, to manage employee records and information efficiently, accurately, and productively with QuickBooks Payroll.

Managing Employee Information Tools

The following tools are needed to manage employee information:

• QuickBooks
• QuickBooks Workforce
• QuickBooks Payroll

Bookkeeper Tasks

Managing employee information tasks include:

1. Manage employee information
2. Set up new employees

Accountant Tasks

Your accountant’s managing employee information tasks include:

1. Provide managing employee information training
2. Support managing employee information questions or problems
3. Review your managing employee information

Who is Considered an Employee?

It’s important for an employer to properly classify a worker as an employee or independent contractor. An employee is an individual hired by a company to perform work for compensation. The IRS states that anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is still the case when an employee is given freedom of action.  

The other classification for a worker is an independent contractor. In most cases, an individual or organization is a contractor if the payer is only able to specify the end result of the work or service performed, and not the means by which the work or service is completed. A company then hires the contractor to perform the work or service with a contract or set of terms and provides compensation. If any employee-type benefits are offered or if any aspects of control, such as how the job is completed, are dictated by the employer, the individual would typically be categorized as an employee.

Common Law Employee Test

What is the Common Law Employee Test? The Common Law Test is a guide used by the IRS to determine if a worker should be classified as an employee or an independent contractor.

The standard Common Law test indicates that a worker is likely an employee if the employer has control over what work is to be done and how the work gets done. When employers can only direct or control the result of the work done, and not what will be done and how it will be done, then a worker is typically defined as an independent contractor.

The IRS has a set of rules for the Common Law Test that considers all information providing evidence of the degree of control and independence between an employer and worker but specifically looks at the following categories:

• Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
• Financial: Are the business aspects of the worker's job controlled by the payer? (This may include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
• Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Classifying Employees

Your small business must properly classify workers as either employees or independent contractors. Typically, an employee receives a W-2, while an independent contractor is given Form 1099 MISC.

Worker classification affects tax and reporting requirements to federal and state governments. It's an area where you'll want to pay careful attention, as misclassifying workers may result in IRS-imposed financial penalties.

It is important to keep in mind that a worker may qualify as an employee under the various IRS guidelines outlined above, but the determination of employee status may be different under laws, including wage/hour laws, workers' compensation, or unemployment insurance.

You will want to evaluate the worker's status as an employee or independent contractor under all applicable laws, including the Fair Labor Standards Act (FLSA), Workers' Compensation, Employee Retirement Income Security ACT (ERISA), Affordable Care Act (ACA), Unemployment Insurance (UI) and similar state laws in order to determine whether the worker is covered under those provisions.  

Once you determine the proper classification (employee or independent contractor), an employee is then categorized as either exempt or nonexempt. Whether an employee is classified as exempt or nonexempt is determined by the Fair Labor Standards Act (FLSA) and is based on job responsibilities and salary level.

Exempt employees are typically paid a salary and there are no minimum wage requirements or overtime pay requirements. The FLSA defines an exempt employee as one not covered under  certain FLSA regulations. Nonexempt employees are protected by the FLSA, which provides guidelines for minimum wage, overtime, record keeping and child labor.

Withholding Payroll Taxes

Worker classification determines if you need to withhold income, Social Security and Medicare taxes from a worker’s wages when processing payroll.

With an employee classification, the employer must withhold two key payroll (employment) taxes: Social Security and Medicare. Additionally, there is the employer’s share of Social Security and Medicare taxes that must be paid when a worker is classified as an employee. There are federal and state unemployment insurance contributions that also need to be made by the Employer. Employers pay the unemployment tax on their own behalf as it is not withheld from employees’ pay. Employers have minimal reporting responsibilities with independent contractors and are generally not responsible for tax withholding.

Full-Time vs. Part-Time Employees

Employees can be separated into two categories: full-time and part-time. The type of employee is determined by the number of hours of service in a given period.

An hour of service is defined by the IRS as:  

• Each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer
• Each hour for which an employee is paid, or entitled to payment, by the employer for a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence.

A full-time employee is, for a calendar month, an employee employed on average at least 30 hours of service per week or 130 hours of service per month. A part-time employee is an employee employed on average less than 30 hours of service per week or 130 hours of service per month.

This is an important distinction if you are an Applicable Large Employer or ALE (an employer with at least 50 full-time employees on average during the prior year), as you are obligated to either offer minimum essential coverage for full-time employees and their dependents or make an employer shared responsibility payment. You should plan in advanced when hiring an employee as to whether they should be part-time or full-time to manage the company’s costs.

IRS Form SS-8 Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding

An employer or worker can file Form SS-8 and receive a determination on the status of a worker from the IRS. When the IRS receives the request, they will begin research and may come back to the employer or worker for further information. At the end of the process, which might take up to six months, the IRS will either (a) issue a determination letter, which is binding on the IRS, or (b) issue an informational letter, which is advisory but not binding.

To file form SS-8, go to irs.gov/forms-pubs/about-form-ss-8.

Note: The form must be submitted by mail (not photocopied, faxed, or electronically filed).  

Managing Employee Records

You manage employee information on the Employees page.

To go to the Employees page:

1. Select Payroll on the left menu
2. Select Employees

Employees Page

The Employees page is where you manage employee information. The page displays an Employees list.

The page allows you to do the following:

1. Find an employee
2. List Active, Inactive, or All employees
3. Make employee pay rates private
4. Add an employee (discussed in Setting Up New Employees below)
5. Customize the Employee list columns
6. Edit employee information

The page also allows you to process (run) payroll, lists the next payroll due date (for Direct Deposit), and provides a link to the Paycheck list page as of the last pay date. However, we’ll address processing payroll in Chapter 5 – Processing Payroll.

Find an Employee

To find an employee:

1. Select Payroll from the left menu
2. Select Employees
3. Enter the employee’s name in the Find an Employee field
4. Select the search icon.

List Active, Inactive, or All Employees

To change the employee list to active, inactive, or all employees:

1. Select Payroll on the left menu
2. Select Employees
3. Select the drop-down menu to the right of the “Find an employee” field.
4. Select Active, Inactive, or All employees

Make Employee Pay Rate Private

To make all employee pay rates private:

1. Select Payroll on the left menu
2. Select Employees
3. Select the Privacy radio button (the button is green when it is on)

Customize the Employee List

To customize the columns on the employee list:

1. Select Payroll on the left menu
2. Select Employees
3. elect the Gear icon
4. Select the columns (Pay rate, Pay method, or Status) you want the Employee List to display

Edit Employee Information

To edit employee information:

1. Select Payroll from the left menu
2. Select Employees
3. Select the employee’s name from the Employee List or select Find an employee, enter the name, and select the Search icon
4. Select Employee details, then select Edit employee
5. Select Pay, Profile, or Employment and edit the employee’s information
6. Select Done

Set Up New Employees

Setting up a new employee involves the following steps:

1. Employee complete Form I-9
2. Gather the employee’s information
3. Add the employee in QuickBooks Payroll
4. Set up the employee to track their time
5. Complete and submit New Hire Form

Note: Your state, county or city may require additional payroll forms. To review your state’s payroll form requirements, see Appendix 6.a – Tax Forms and Filing Methods for Each State.

Form W-4

Employers are required to have new employees complete IRS Form W-4 Employee’s Withholding Certificate.

Form W-4 is completed so an employer can withhold the correct federal income tax from an employee’s pay. If too little is withheld, the employee will generally owe tax when they file their tax return and may owe a penalty. If too much is withheld, the employee will generally receive a refund. Employers should also have their employees complete a new Form W-4 when changes to the employee’s personal or financial situation would change the entries on the form. This is done during the Add the Employee in QuickBooks Payroll step.

Note: The IRS updated Form W-4 Employee’s Withholding Certificate for 2020. To ensure employee federal income tax withholding accuracy, we suggest employers have their employees complete the new 2020 Form W-4.

To obtain a copy of Form W-4, go to https://www.irs.gov/pub/irs-pdf/fw4.pdf.

Employee Complete Form I-9

Employers are required to have new employees complete U.S. Department of Homeland Security Form I-9 Employment Eligibility Verification.

Form I-9 is completed so an employer can verify the person is legally eligible to work in the United States. Once the employer has made a job offer (but not before), the new employee must demonstrate eligibility to work in the U.S. by completing Form I-9. It is the employer’s responsibility to see that the form is completed by the employee and the employer. The employer retains the form with their other employment records. The employer is not required to file it with the government.

To obtain Form I-9, go to https://www.uscis.gov/system/files_force/files/form/i-9-paper-version.pdf.

Gather the Employee’s Information

To add an employee, you need to gather the following basic employee information:

• First and Last Name
• Email address
• Pay schedule
• Pay rate
• Deductions
• Hire Date

Some of the employee’s information will be included on the I-9 form.

Add the Employee in QuickBooks Payroll  

To add an employee:

1. Select Payroll on the left menu
2. Select Employees
3. Select Add an employee

The Add Employee page has three sections:

1. Pay
2. Profile
3. Employment

Pay

1. Select the Pay tab
2. For item 1, Personal info, enter the employee’s personal information

Check the box to ask the employee to enter their own information. This will send them an email that will direct them through the process of entering their own information, including Form W-4 information. Once the employee has completed the self-setup, the information will be automatically uploaded into QuickBooks Payroll.

Note: Entering the employee’s email address sets the employee up on QuickBooks Workforce. Workforce enables your employees to view and print their pay stubs and W-2s from the current tax-filing season. Each time you run payroll, employees set up on Workforce get an email letting them know they can view their pay stubs and W-2 online.

3. Scroll down to item 3, How often do you pay your employee?, and select the pay schedule from the drop-down menu.

If the employee will be using a pay schedule that has not been set up, select the Pencil icon and enter the information to create a new pay schedule.

4. For item 4, How much do you pay this employee?, select the employee’s pay type from the drop-down menu and enter the employee’s pay
5. (Optional) Enter the default hours per day and days per week if the employee works the same schedule each week. This can help automate certain payroll tasks
6. Select Add additional pay types to enter additional pay type information (overtime, sick pay, vacation, etc.)
7. Select the check boxes next to any applicable Common pay types
8. For Time off pay policies, select the appropriate option from each drop-down menu
9. Complete any additional pay information, then select Save
10. For item 5, Does this employee have any deductions?, if the employee has a deduction, select a deduction from the list of deductions you have added and enter the deduction information.

If the deduction isn’t listed, select Add deduction and enter the deduction information.

11. Select Add a deduction/contribution to add a new deduction or contribution
12. On the Add deduction/contribution page, fill out the fields as shown below.

Note: Different fields will appear depending on the deduction or contribution selected.

13. Select Save, then continue to add additional deductions or contributions as needed
14. Select Add garnishment to add a new garnishment
15. On the Add deduction/contribution page, fill out the fields as shown below
16. Select Save, then continue to add additional garnishments as needed
17. Once all deductions, contributions, and garnishments have been added, select Done
18. Scroll down to item 7, Just a few more details, and enter the Hire date

Profile

1. Select the Profile tab
2. Enter any remaining employee Profile information not provided through the self-setup

Employment

1. Select the Employment tab
2. Enter the employee Employment information

If your company uses employee ID number, enter an Employee ID in the field provided.

Set Up the Employee to Track their Time

See Chapter 3 – Set Up Payroll, Additional Payroll Settings, Set Up Employees to Track their Time.

Complete and Submit New Hire Form

New Hire reporting is a process by which you report information on newly hired employees to a designated state agency within 20 days after the date of hire.

It is estimated that more than 30 percent of child support cases involve parents who don’t live in the same state as their children. By matching this New Hire data with child support case participant information at the national level, the Office of Child Support Enforcement assists states in locating parents who are living in other states. Upon receipt of New Hire information from other states, state child support agencies can take the necessary steps to establish paternity, establish a child support order, or enforce an existing order.

States match New Hire reports against their child support records to locate parents, establish a child support order, or enforce an existing order. In addition to matching within a state, states transmit the New Hire reports to the National Directory of New Hires.

State agencies operating employment security (unemployment insurance) and workers' compensation programs have access to their state New Hire information to detect and prevent erroneous benefit payments.

In addition, each state can conduct matches between its own New Hire database and other state programs to prevent unlawful or erroneous receipt of public assistance, including welfare, food stamps and Medicaid payments.

To file a New Hire Report:

1. Select Taxes from the left menu, then Payroll Tax
2. Select Filings, then select Employee Setup
3. Select the New Hire Form (this form may have slight name variations depending on the state)
4. You have two options to submit the form:

You can Print and mail or fax to the address or number on the form

You can select the link “new hires online” and submit the form online