Top 10 Payroll Questions Business Owners Ask (With Straightforward Answers)

Payroll. For many small business owners, it’s more than just a task—it’s a weekly source of stress. You’re likely juggling compliance issues, tax calculations, employee classifications, and ever-changing labor laws. One wrong step could mean costly fines, confused staff, or even an audit.

At Lift HCM, we understand how overwhelming payroll can feel. We’ve helped countless businesses—just like yours—go from scrambling each pay period to confidently managing payroll with clarity and control. With decades of combined experience in payroll processing, tax compliance, and human capital management, we’ve seen just about every question, confusion, and error you can imagine.

That’s why we created this article—to give you clear, honest answers to the 10 most common payroll questions we hear from business owners. Whether you’re hiring your first employee or reassessing your current process, this article will help you build a strong payroll foundation and make better-informed decisions. Let’s make payroll simpler, together.

Table of Contents

• Employee vs. Independent Contractor: What's the Difference and Why It Matters
  
• What Are Common Pay Frequencies and Which One is Right for My Business?
• Exempt vs. Non-Exempt Employees: Who Gets Overtime?
• Gross Pay vs. Net Pay: What’s the Scoop on Take-Home Pay?
• What Payroll Taxes Must Employers Withhold and Pay?
• What Are the Main Types of Payroll Deductions?
• How Long Should Payroll Records Be Kept?
• Can I Pay My Employees in Cash?
• What is the Purpose of a W-4 and a W-2?
• Should I Handle Payroll Myself or Use a Service?
• Take Charge of Your Payroll-For Good

1. Employee vs. Independent Contractor: What's the Difference and Why Does it Matter so Much?

This is the most critical decision you'll make when bringing on a new worker, and getting it wrong can lead to major trouble with the IRS. The core difference lies in the level of control and independence a worker has.

• Employees work under your direct control. You decide what work they do, when and how they do it, and where they do it. You provide them with the necessary tools and training, and they are typically paid a regular wage or salary. As the employer, you are responsible for withholding and paying a variety of taxes on their behalf.

• Independent Contractors are self-employed. They have control over their work—they use their own methods, set their own hours, and use their own tools. They often work for multiple clients and are responsible for paying their own self-employment taxes.

The IRS uses three main tests to determine classification:

• Behavioral Control: Does the company control or have the right to control what the worker does and how the worker performs the job?

• Financial Control: Are the business aspects of the worker's job controlled by the company? This includes how the worker is paid, whether expenses are reimbursed, and who provides the tools and supplies.

• Type of Relationship: Do you have a written contract? Is the relationship permanent? Do you provide benefits like insurance or a pension?

📊 Industry Reality Check: The IRS recovers an average of $1.6 billion annually from worker misclassification cases, with penalties ranging from 1.5% to 3% of wages, plus interest—not including potential state penalties and legal fees.

2. What Are Common Pay Frequencies and Which One is Right for My Business?

The frequency with which you pay employees is determined by your business needs, cash flow, and state regulations. The  most common pay frequencies are:

• Weekly: 52 pay periods per year. This is a common choice for businesses with a high volume of hourly employees.

• Bi-weekly: Every two weeks, for 26 pay periods per year. This is the most popular option in the U.S. as it simplifies payroll processing for both employees and the business.

• Semi-monthly: Twice a month (e.g., the 1st and 15th), for 24 pay periods per year. This frequency works well for salaried employees.

• Monthly: Once a month, for 12 pay periods per year. While less common, this can simplify administration but may not be ideal for employees who need more frequent payments.

When choosing, consider what is most manageable for your administrative team and what your employees expect in your specific industry. Selecting the optimal pay frequency involves balancing multiple factors. 

3. Exempt vs. Non-Exempt Employees: What’s the Key to Overtime?

This distinction is crucial for understanding overtime eligibility under the Fair Labor Standards Act (FLSA). Exempt employees are generally paid a fixed salary and perform executive, administrative, or professional duties. Because they meet specific salary thresholds and job duty tests, they are not eligible for overtime pay.

Non-exempt employees are typically paid hourly and are legally entitled to overtime pay. For any hours worked over 40 in a single workweek, they must be paid at a rate of 1.5 times their regular hourly rate. Improperly classifying employees can lead to significant legal trouble and back pay requirements.

💡 Pro Tip: The FLSA salary threshold for exempt employees is subject to periodic updates. As of 2024, the minimum salary threshold is $684 per week ($35,568 annually). Stay current with Department of Labor announcements, as these thresholds can change and impact your classifications overnight.

4. Gross Pay vs. Net Pay: What’s the Scoop on Take-Home Pay?

Understanding the difference between gross and net pay is a fundamental part of managing payroll.

• Gross Pay: This is the total amount of money an employee earns before any deductions are taken out. This includes their base salary, hourly wages, bonuses, and commissions.
  
  
• Net Pay: This is the amount an employee actually receives after all mandatory and voluntary deductions have been subtracted from their gross pay.

Example: Let's say an employee earns $1,000 in gross wages for a pay period. After subtracting federal, state, and FICA taxes, along with health insurance premiums, their net pay might be $750. The remaining $250 is not profit for the company; it's money that has been withheld and remitted to various government agencies and benefit providers.

5. What Payroll Taxes Must Employers Withhold and Pay?

As a business owner, you act as a tax collector for the government. You are responsible for withholding and remitting several key taxes from your employees' paychecks, as well as paying a matching portion yourself. 

• Federal Income Tax: The amount of this tax is determined by the employee's Form W-4.

• State and Local Income Tax: Withheld in most states and some localities.

• FICA Taxes: This includes Social Security and Medicare taxes. You withhold these from employee paychecks (currently 7.65% combined) and must pay a matching 7.65% out of your business's funds.

In addition to these, employers must also pay federal unemployment tax (FUTA) and state unemployment tax (SUTA), which fund unemployment benefits.

Important: Tax rates and wage limits are current as of 2025 and subject to annual adjustment. Social Security wage base for 2025 is $168,600. SUTA rates vary dramatically by state and employer experience rating (0.1%-12.0%). Workers' compensation is insurance, not a tax, and rates vary significantly by industry and state. Income tax withholding varies based on W-4 elections and cannot be estimated without specific employee information. Always consult current IRS publications and state agencies for exact rates. Sources: IRS Publication 15, Social Security Administration, Department of Labor.

Key Take Aways for Business Owners

 Budget Planning: Factor an additional 11-15% of gross wages for employer tax obligations 
  Cash Flow: Employer taxes are due quarterly or more frequently, requiring consistent cash reserves
 Compliance Risk: Employer taxes cannot be passed to employees—business is 100% liable
 State Variations: SUTA rates can range from 0.1% to 12% based on experience rating
Scaling Impact: As you hire more employees, total tax liability increases proportionally

6. What Are the Main Types of Payroll Deductions?

Payroll deductions fall into two key categories, which are important for both you and your employees to understand.

• Mandatory Deductions: These are required by law, such as the taxes mentioned above. Wage garnishments, which are court-ordered withholdings for things like child support, alimony, or student loans, are also mandatory.

• Voluntary Deductions: These are amounts an employee chooses to have taken from their pay. Common examples include pre-tax deductions for health and dental insurance premiums, retirement plan contributions (like a 401(k)), and post-tax deductions for life insurance or charitable donations.

In the example below, we break down gross pay to take-home earnings for an employee that is full-time, married filing jointly, with standard withholdings, and common benefit elections (health insurance, 401k participation).

Professional Disclaimer: Tax withholding amounts vary significantly based on employee W-4 elections, filing status, and state of residence. Social Security tax applies to wages up to $168,600 annually (2025 limit). Medicare tax includes additional 0.9% on wages exceeding $200,000. Illustrated voluntary deductions represent common scenarios. Consult current tax tables and qualified professionals for precise calculations specific to your payroll situation.

Insights for Business Owners

 Take-Home Reality: Employees receive 68.6% of gross pay after standard deductions—critical for salary negotiations and expectations management  
 Employer Tax Burden: Business pays additional $306 in FICA matching taxes (7.65% of gross wages)
 Pre-Tax Advantage: Health insurance and 401 (k) contributions reduce federal and state taxable income
 Total Employment Cost: $4,000 salary costs approximately $4,306 including employer taxes
 Budget Planning: Factor 11-15% above gross wages for complete employment cost calculations

7. How Long Should Payroll Records Be Kept?

The importance of meticulous recordkeeping cannot be overstated. The IRS and Department of Labor require businesses to maintain payroll records for specific periods to ensure compliance during an audit.

• Federal laws generally require employers to keep all payroll records for at least three to four years.

• State laws often have different, and sometimes longer, retention requirements.

Key Records to Keep:

• Employee information (name, address, social security number)

• Hours worked and wages paid for each pay period

• Tax withholding forms (W-4s)

• Start and end dates of employment

• Copies of all tax filings and forms (W-2s, 940, 941, etc.)

📌 Effective record retention management protects against regulatory penalties, supports audit defense, and ensures business continuity. Understanding federal requirements while recognizing state variations enables strategic compliance planning that minimizes risk and operational disruption.

💡 Pro Insight: Implement digital-first record management with automated retention scheduling to eliminate human error and ensure consistent compliance. Cloud-based systems provide secure access, automated backups, and cost-effective scalability for growing organizations.

8. Can I Pay My Employees in Cash?

While it may seem simple, paying employees "under the table" to avoid taxes is illegal and highly risky. All wages, regardless of the payment method, are subject to taxes and withholding requirements. This practice can expose your business to severe penalties, fines, and even criminal charges for tax evasion. For the safety and legality of your business, it is always best to use traceable payment methods like direct deposit or checks.

Real-World Consequences: The IRS actively pursues "under the table" payments through employment tax audits. Common penalties include:

 1.5% of unpaid wages for failure to withhold income tax
 Additional 40% penalty if the IRS determines willful neglect
 100% penalty of unpaid employment taxes (matching Social Security/Medicare)
 Personal liability for business owners, making this debt non-dischargeable in bankruptcy

These penalties compound quickly—a business paying $50,000 annually in unreported wages could face over $20,000 in penalties alone, plus interest.

9. What is the Purpose of a W-4 and a W-2?

These two forms are central to the payroll process.

• Form W-4, Employee's Withholding Certificate: An employee fills out this form to inform you how much federal income tax to withhold from their paycheck. It helps ensure the correct amount of tax is paid throughout the year, minimizing the chance of an employee owing a large sum or receiving a huge refund at tax time.

• Form W-2, Wage and Tax Statement: You provide this form to each employee and the IRS at the end of every year. It reports the employee’s annual wages and the total amount of taxes withheld (federal, state, local, Social Security, and Medicare). Employees use their W-2s to file their individual income tax returns.

10. Should I Handle Payroll Myself or Use a Service?

The way you manage payroll depends on your business's size, complexity, budget, and comfort level with tax compliance.

• Do-It-Yourself (Manual Payroll): This option is only advisable for a very small business with one or two employees. It is time-consuming and has a high risk of errors.

• Payroll Software: A great option for small to mid-sized businesses. You input the data, and the software handles the calculations, but you're still responsible for managing the process and submitting filings.

• Full-Service Payroll Provider: The most hands-off and reliable option. A provider handles everything from wage and tax calculations to direct deposits, tax filings, and year-end W-2 generation. This is the best choice for busy owners who want to minimize headaches and ensure complete compliance.

By proactively addressing these common payroll questions, you can take control of a critical business function and free yourself to focus on what you do best: running your business.

Take Charge of Your Payroll-For Good

In the past, payroll may have felt like a constant source of anxiety—uncertain classifications, confusing tax forms, and the nagging fear that you might be doing it all wrong. Those worries are not only common—they’re completely valid.

Today, you’ve taken a huge step toward clarity. By exploring these 10 essential payroll questions, you now understand the key concepts behind employee classifications, deductions, tax obligations, and payroll frequency. Most importantly, you’ve seen the real-world risks of getting it wrong—and the peace of mind that comes from getting it right.

Looking ahead, you don’t have to navigate payroll alone. With the right systems, support, and education, managing payroll can become a seamless part of your business operations. At Lift HCM, we’re here to guide you every step of the way—whether that means helping you choose the right payroll solution, streamlining your processes, or ensuring full compliance with federal and state regulations.

Take control of your payroll. Let it become a strength, not a stressor. If you're ready to simplify your payroll process and focus more on growing your business, we invite you to connect with our team at Lift HCM today.

👉 Schedule a free payroll consultation to see how Lift HCM can tailor a solution to your unique business needs!