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paying employees in any business is a difficult task and it could be extremely stressful if you don't know what you're doing mostly because there's three sides of paying your employees correctly number one determining how much to pay them in the first place number two not only paying them but designing a comp plan to actually motivate them to work hard and retain them and number three compliance which is making sure you're paying them correctly to avoid big hefty tax penalties from the government i've been through it all from trying to figure out how to do payroll for my very first employee to trying to figure out how much i should pay my employees in general and i suffered the consequences of getting this wrong i've paid thousands of dollars in payroll tax penalties i've lost employees and i've lost a lot of money luckily we were able to flip this around in our companies and create systems to not only hire employees but also incentivize them to work towards our business objectives as well that's why in today's episode i'm going to show you how to do this in your business so you don't make the same mistakes hi my name is sherman a cpa with life accounting a full service accounting firm that helps small businesses grow and manage their finances in this episode i'm going to go over employee compensation the different types of employee compensation and the easiest way to start paying your employees if you're doing it for the first time if you're looking for ways to pay your employees or you're hiring an employee for the first time and just don't know where to start this video was made for you by the way if you're new to our channel then be sure to subscribe so you don't miss out on future content that can help you grow your business also if you extract any value from this video at all please help me out by hitting the like button below we put out so much content every single week and your likes is what helps us to continue to push this content out to help you grow all right now let's talk about how to pay your employees i remember when i first hired my first employee well at least i thought they were employee anyway it was when we first started our first company life marketing when we first started our business we couldn't hire any employees like most bootstrapped small businesses and when we did start making some money the very first group of people we hired were interns we hired some college students as interns and paid them a few hundred dollars a month to help us with some of our client projects eventually this evolved into us needing someone full time so we did away with the internship program and hired a single full-time person to absorb their responsibilities at the time we could only afford to pay that person ten dollars an hour now with this full-time person you're probably thinking that they were a full-time employee well in the beginning we did as well but no we learned that this person was actually an independent contractor because we had no payroll system at the time and was literally paying this person by check this person was not a w-2 employee this meant that their wages were not taxed at all so if they made sixteen hundred dollars a month that's the exact amount that went into their bank account and while that might sound good in theory it did not sound so good when tax time came because they were a contractor they received a 1099 at the end of the tax year and ultimately had to pay taxes all at once to the irs instead of piece by piece with w-2 wages obviously that wasn't ideal so we converted this person into a w-2 employee and then as we grew as a company we were able to increase our wages to match that of our market and now we're doing so much better so there are a few things to unpack here that my clients ask me all the time number one what's the difference between an independent contractor and an employee number two what's the easiest way to set up a payroll system for employees and number three what is the best way to set up compensation plans to motivate your employees alright so let's dig in what is the difference between an independent contractor and an employee an independent contractor provides specific services to your company as defined by a written contract independent contractors might be freelancers consultants or any company or individual you choose to hire for a specific job now when you hire an independent contractor they generally have complete control over how they perform the job that you hired them to do the moment when you start controlling the way they perform the work then technically they are unemployed ing to the irs a worker is an employee when the business has the right to direct and control the work performed by the worker the worker is also an employee if you have financial control or provide employment type benefits to that person such as insurance or tools to perform their job an employee is an individual who works for your business you provide all the tools training benefits and other items that they need to perform their job but most importantly you have control over the end product if you hire a contractor they must complete a w9 form and receive a 1099 form at the end of the tax year if you want the expenses you paid them to be tax deductible if you hire an employee then they must complete a w-4 form and then receive a w-2 at the end of the tax year to report their wages taxes paid and other items to learn more about this then check out our video on 1099 versus w-2 employees now let's move on to the next major question which is what is the easiest way to set up a payroll system to pay your employees let me first describe the payroll process when you hire an employee you must pay payroll taxes the employee is taxed and the employer is taxed as well so in order to do this you need to do a few things first number one you need to have a federal identification number also known as a ein for your business you can set this up online with the irs if you already do not have one number two you need to set up a state income tax account number you can set this up on your state departments of revenues website and the number three you need a state unemployment account number you can set this up on your state departments of labor's website each department will require monthly or quarterly tax payments and tax filings at a specific frequency you should be familiar with them to make sure you comply with those requirements and if you don't you can end up paying big tax penalties now in the old days employers had to do this entire process manually imagine keeping up with all the tax payments tax filings and mailing this to each department separately or i guess you could have hired an accountant to do this for you but if that accountant is anything like us they probably don't want anything to do with it not because we don't want to help it's not that necessarily but it's because there are many payroll tools that can do this for you automatically all you have to do is set up the correct accounts that i mentioned with each department that you're liable to and then connect those account numbers to a very specific payroll system then if you choose the right payroll provider they will automatically calculate your payroll taxes pay them on your behalf and file your payroll taxes each month or quarter when i first started doing payroll i tried to do everything myself i logged into each department's website to try to file my payroll taxes electronically and i did my very best to stay on top of it but one time i was late by just one day and i received the tax penalty for over one thousand dollars and ever since that day i completely automated my payroll process so that i did not have to worry about that ever again now there are several full service payroll providers out there like adp gusto and quickbooks full service payroll just to name a few of the popular ones and if you want to know which one i use i have been using quickbooks full service payroll which has been working perfectly well for me and automatically syncs with my accounting system anyway choose whichever works best for you and your business but make sure that you automate this process so it doesn't cost you an arm and a leg down the line alright now let's move on to the last but possibly the most important aspect you need to consider how to create compensation plans for your employees how you pay your employees will determine how much of your talent you will retain in your company so in order to do this correctly you need to determine the best methods to pay your employees whether that be with hourly pay or salary pay or with commissions bonuses or profit sharing let's quickly discuss the differences and the things that you need to consider we'll start with hourly pay hourly pay is one of the simplest ways to pay your employees they log time and you pay them a flat rate per hour to perform the job with hourly pay you have to keep overtime in mind when you hire full-time employees they may take longer to do their job to try to rack up their pay in addition many high skilled workers don't love hourly pay they'd rather receive a fixed salary to deliver specific results to your company regardless of if it takes 35 or 45 hours per week regardless hourly paid does have its place for many straight 4 positions that are not super complicated now let's talk about salary pay salaries are fixed payments to your employees for performing their job salaries are normally used to hire for highly skilled jobs it's also a very simple way to pay your employees and you don't have to keep track of employee hours and time logs in order to do this now there is a fundamental flaw with salary paid and that is motivation in the words of dave ramsey salary is the most boring way to pay people paying your employees by salary could result in your employees becoming unmotivated lazy or just doing the bare minimum to receive their paycheck with that said a hybrid model is normally recommended you should try to pay your salary based employees with not just a fixed salary payment but also with some bonuses or commissions that will motivate them to work harder to reach your business objectives so then let's discuss commissions and bonuses as an example think about the sales profession most sales jobs are a blend of salary and commission or just flat out commission based now this makes sense for the sales rep because you're ultimately paying them to generate sales and if they aren't generating sales for you then they are effectively useless in your company now with this in mind you may design commissions or bonuses to incentivize your full-time employees that are not sales reps as well you should design incentive plans around the kpis or key performance indicators that drive your business results and if you do not know what your business kpis are then check out my video on small business kpis in short every single job in your business should be connected to a quantifiable result then you can create bonus-based pay for your employees to hit that quantifiable result that is also contributing to your business growth for example if you're hiring a customer service rep then that kpi for that job might be customer satisfaction if your employee hits a certain level of customer satisfaction then you might have a big bonus for them for hitting that target now let's move on to the ultimate incentive to unify your whole company which is profit sharing profit sharing or revenue sharing is a single incentive that can unify and motivate your entire company to work towards your business goals the purpose of profit sharing plans is to get everyone in your company feeling like a partner in your business they essentially have some skin in the game to be able to look at your business from your eyes and not as someone who's just coming in to work to pick up a paycheck now while profit sharing is a great incentive you need to design it in a way that your employees do not feel so entitled to it and because there are so many ways to set up profit sharing plans we'll save that for another episode so be sure to subscribe to our channel for many businesses just starting out you probably won't be able to afford a profit sharing right off the bat but as you grow and start hiring irreplaceable people like executives and managers in your company you'll probably want to consider having this in place as a way to motivate them and retain them for their loyalty to your company so that's the various types of compensation hourly pay salary pay bonuses commissions and profit sharing the last thing we need to discuss is how much you should actually pay your employees they say in order to be rich you have to always have three times more money than what you already have today and while i don't know if this is necessarily true or not what i do know is as a business owner your employees will demand more money from you and no matter how much you pay them they will always want more and more as they grow in their career path especially your top talent if they don't feel like they have the ability to grow in your company they might jump back into the job market to find growth opportunities elsewhere so what can you do the best thing you could do is to find out the market rate for the positions you're seeking to hire in your company that way if an employee is demanding more money than anyone else is willing to pay for them to do the same job you can confidently reject your employee's demand for more money and if they don't like it and go into the job market they'll be met with similar or lower payment options than they thought they were worth in the first place on the flip side you also need to make sure that you're not underpaying your employees and paying them below the market rate because if you're paying them below the market then it will be very easy for someone to just message your employees on linkedin and the next day they'll be leaving your company to join someone else and it happens i can't count how many times has happened to me i've just came into work and heard hey sherman i'm putting in my two weeks notice and then when i ask what's going on it's normally something like hey i wasn't looking in the market someone contacted me with an amazing opportunity that i could not reject and trust me you'd rather lose your best employees to anything other than money now for some people i know what you're thinking you're probably wondering as a small business how in the world am i going to be able to pay what the market is paying as a small business owner myself i've been there and i used to think the exact same thing but you actually have more options than you think first and foremost if you can't afford to hire a single employee for what the market is demanding what makes you think that'll change when you have 10 employees or 100 employees that are below the market you see finding the money to hire good employees is normally not a business stage issue it's normally a budget or pricing issue when you decide on the prices for your products and services and the budget for how you will allocate the money you receive you should have already considered your cost of labor if you haven't then stop what you're doing right now and watch my video on small business budgeting in short you need to plan for growth in advance i made the same mistake with one of our businesses we grew quickly to over 30 employees but we still did not have enough money to pay each employee what the market was paying and unfortunately as a result we ended up having to reorganize our entire company and lay off most of our staff to rebuild back the right way and honestly i don't wish this task upon any business owner laying off my employees was one of the most darkest days of my entrepreneurial life so on a more positive note make sure you pay attention to the market when it comes to determining how to pay your employees and plan in advance you can easily do this by using tools like glassdoor to get a general idea of what the market is paying and be sure to filter it down to your exact business size area and the years of experience you're seeking for your job to get the most accurate results so there you have it this is how you pay your employees from a to z now let's quickly recap everything we went over in this episode today we answer three big questions number one what's the difference between a contractor and an employee number two what's the easiest way to set up a payroll system and number three what is the best way to set up compensation plans for your employees as we discussed the difference between a employee and a contractor all comes down to control if you exercise full control over the individual working for you then they are an employee next we discuss the easiest ways to set up a payroll system you need to set up the correct accounts with the appropriate federal and state departments then i recommended that you automate the payroll process with a platform like quickbooks or gusto for example finally we discuss the compensation plans and how much to pay your employees the best compensation plan is a hybrid model that includes salary and additional bonuses to incentivize behavior towards your business goals and in terms of how much to pay your employees we recommend that you study your market to make sure you're not underpaying your employees and also not getting taken advantage of by overpaying your employees so that's it for today's episode i truly hope that you found this video useful and interesting if you did then please help me out by giving this video a thumbs up or comment below with any questions you have and also don't forget to subscribe to our channel so you don't miss out on other accounting content we're putting out to help you grow and manage your business until next time take care you