Even if you’ve never hired an employee, you may need to run payroll for your therapy practice.
When you’re a solo therapist filing as an S corporation, you’re technically your own employee. That means you need to pay yourself as an employee—and do all the paperwork that comes with it.
Using a third-party payroll solution is usually the easiest way to get the job done. But if you prefer a hands-on approach—or if you’d just like a peek behind the scenes at how employees are paid—then read on.
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What is payroll?
Payroll is the set of documents and routines you use to pay employees and contractors.
That includes:
- Calculating each employee’s pay for the pay period
- Withholding income tax and FICA (Social Security and Medicare) and unemployment tax
- Withholding state and local taxes
- Deducting contributions to employee benefits plans like 401(k)s
- Distributing funds to employees
- Providing employees with pay stubs
There are a number of ongoing tasks that go hand-in-hand with payroll, including:
- Updating the books each time you pay employees
- Making (and tracking) your practice’s share of FICA contributions
- Calculating and paying overtime
- Reporting and remitting income tax and FICA to federal and state tax authorities
- Keeping payroll records
Because payroll has so many different moving parts, small- and medium-sized businesses typically outsource the job to a third party. Larger companies may have in-house payroll departments that handle it for them.
For a closer look, check out How to Set Up Payroll for Your Therapy Practice.
Is payroll the same as accounting?
“Accounting,” considered broadly, refers to all your bookkeeping, financial planning, and tax filing activities.
Payroll impacts your accounting, and vice versa. When you pay employees, withhold and remit taxes, and make FICA contributions, it’s recorded on the books. At the end of the year, this impacts your tax filing in the form of deductible expenses. It also shows up on financial reports (like your profit and loss statement (P&L)), in your budget, and in any financial projections you make.
Every therapy practice has to deal with accounting; only therapy practices with employees have to deal with payroll.
Is payroll the same as HR?
Human resources (HR) encompasses all of a business’s relationships with employees.
That includes recruitment, hiring, onboarding, firing, and layoffs; codes of conduct and ethical standards; professional development and promotions; compliance with state labor standards; and day-to-day relationships between different members of staff.
It also includes the management of employee health and retirement plans, and benefits like paid vacation and parental leave.
You can think of payroll as a subset of HR. But even if you don’t have a full-blown HR team—and even if you yourself are your only employee—you still have to run payroll.
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What do you need in order to run payroll?
When you hire an employee, you need to collect personal information that you will use to fill out and file the appropriate tax forms. You’ll also need their bank information if you plan to pay them with direct deposit. More on that shortly.
The process of collecting this information is called onboarding. Outside of payroll, onboarding may also refer to employee training, staff reorganization, and other tasks when a new member joins your team.
During onboarding, you collect information and forms you will use to run payroll later.
Employee information
For each employee on your payroll, you keep these forms on hand:
You should also have:
- Basic personal information: Name, address, and SSN.
- Banking information: For direct deposit transfers.
- Deductions: Information on contributions to retirement plans, health savings accounts (HSAs), and other employee benefits requiring deductions from each paycheck.
- Wage garnishments: If you are required by law to garnish a portion of an employee’s pay (e.g. for child support payments), you should have this information on hand.
- Job application: The employee’s original application before they started their position.
Necessary forms
The following forms are necessary for paying employees and withholding payroll taxes. Some of them you only use if you pay contractors as well.
- Form I-9: Certifies that an individual is legally entitled to work as your employee.
- Form W-9: Used by you (the employer) to request an employee’s information, including their name, address, and taxpayer identification number (TIN). The employee fills out this form.
- Form W-2: Filed annually, this form includes the total amount paid to an employee over the course of the year and the total amount withheld from their wages as income taxes and payroll taxes. You send one copy to the employee and another to the Social Security Administration (SSA), which forwards it to the IRS.
- Form W-3: Summarizes data from all W-2s you have filed for the year.
- Form W-4: Includes information you use to calculate an employee’s payroll tax withholdings. The employee fills out this form.
- Form 1099: A record of the total funds paid to a contractor over the course of the year. You send one copy to the contractor and another to the IRS.
- Form 1096: This form summarizes information from Form 1099s and several other less common types of form. You only need to complete Form 1096 when filing your taxes by mail.
- Form 940: Filed quarterly, this form lists the total amount of unemployment taxes you have paid for your employees.
- Form 941: Filed monthly or semi-weekly, Form 941 reports the total income taxes and payroll taxes you have withheld from employees’ income and remitted to the IRS over the course of the relevant period.
- Form 944: This form includes the same information as Form 941, but it’s filed annually instead of monthly or semi-weekly. You’re eligible to file Form 944 instead of Form 941 if the total taxes you withhold from employees’ wages come to $1,000 over the course of the year.
- Form 1095-B: You file Form 1095-B if you provide an employee with employer-sponsored healthcare coverage.
- Form 1094-B: This form summarizes the information on all of the Form 1095-Bs you have filed for the year.
Note: Your state may require you to file additional forms in order to withhold and pay state taxes.
Payroll schedule
Typically, you pay employees on a monthly, semimonthly, biweekly, or weekly schedule. Running payroll more frequently is liable to lead to unnecessary paperwork.
Depending on your location, state and federal laws may impact which schedule or schedules your payroll needs to follow. You can contact your local tax authorities or state labor relations office for more information.
Semimonthly vs. biweekly pay
Semimonthly and biweekly pay schedules pay employees on roughly the same schedule, but they differ in important ways.
With a semimonthly schedule, you pay each employee twice each month, resulting in 24 paychecks over the course of the year. Since some months are longer than others, employees receiving hourly wages may receive different amounts from one paycheck to the next. Salaried employees typically receive the same amount with each paycheck.
With a biweekly schedule, you pay each employee once every two weeks, resulting in 26 paychecks over the course of the year. Salaried employees receive the same amount each paycheck. Hourly employees’ pay may differ from one check to the next if they work different hours for each pay cycle.
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How to run payroll for your therapy practice
Exactly how you run payroll for your practice will depend on the number of employees, how they’re paid (whether hourly, per session, or by salary), and whether any of your staff are contractors.
Generally, though, these are the steps to follow.
Calculate gross pay
Each employee’s gross pay consists of their normal wages or salary before any income tax or FICA deductions are made.
For wage employees the formula for gross pay is:
(Regular hours worked during pay period x hourly wage) + (Overtime hours worked during pay period x number of overtime hours)
For per-session employees the formula is:
Number of sessions worked during pay period x Per-session pay rate
And for salaried employees the formula is:
Annual salary ÷ Number of pay periods per year
Calculate deductions
For the sake of withholding and remitting federal taxes, you need to calculate two deductions from each employee’s gross pay:
- FICA, which consists of Social Security and Medicare taxes. These are also referred to as “payroll taxes”. The total FICA tax rate is 15.3% of gross pay, half of which is deducted from the employee’s gross pay and half of which the employer pays.
- Income tax, which varies according to the employee’s tax bracket, which is in turn based on their total earnings for the year. You can calculate the amount to withhold with help from an income tax calculator.
Depending on your location and other factors, you may also need to deduct:
- State taxes
- Local or municipal taxes
- 401(k) contributions
- Contributions to worker’s compensation
- Other benefits, such as HSA contributions
While calculating FICA and income tax deductions is fairly straightforward, state taxes and employee benefits like 401(k) contributions tend to complicate things. A comprehensive payroll solution will calculate these for you based on your location and employee benefits package.
Net pay calculation
To calculate each employee’s net pay, subtract their total deductions from their gross pay.
Issue payment
To pay employees, you may opt either for physical paychecks or for direct deposit. To use direct deposit, you’ll need your employees’ banking information (usually provided on a void check) and an account with an automatic clearing house (ACH) service.
If you use the direct deposit, you should issue each employee a pay slip (also called a pay stub). This short document must include:
- Your practice information, including business name and mailing address.
- Employee information, including their name, position, department, and employee ID (if any).
- Pay period, or the work period for which the employee is being paid. This is usually written as a date range.
- Payment date, or the date on which you initiate the payment
- Income sources, which may include wages, per-session payments, salary, overtime, and bonuses.
- Deductions, including a breakdown of all federal and state withholdings and contributions to 401(k)s or other employee benefit plans.
- Net income, or total pay after deductions.
Enter payroll on the books
Each time you run payroll for your therapy practice, you (or your bookkeeper) should record it in your bookkeeping system.
Exactly how this looks in your general ledger will vary according to what type of system you use, as well as your chart of accounts. But a summary entry for payroll typically follows a format like this:
- Debits to “Wages or direct labor expense”, “Salaries expense”, and “Payroll taxes expense” denote funds paid out (added to each account).
- Credits to the sub-ledgers under “Payroll taxes expense” denote increased liability for each withholding.
This entry shows funds paid to the employee (under debits) and liabilities for the employer in the form of deductions that need to be remitted to tax authorities (under credits).
Once the employer pays these remittances, each of the sub-ledgers under “Payroll taxes expense” is credited, balancing out the liability.
The entry above is adapted from an AccountingTools article which goes into more depth about payroll ledger entries.
If you have a bookkeeper working for you, or if you use Heard, you don’t need to make these payroll entries yourself—so don’t worry if this example is a bit confusing. Still, it’s helpful to know what you’re looking at when a payroll entry shows up in the general ledger.
Remitting deducted pay
Each time you pay an employee, you deduct and withhold taxes and remit them (that is, pay them) to tax authorities.
For federal payroll taxes (FICA and income tax), you do this either monthly or semi-weekly depending upon the total amount in taxes you’ve withheld over the past year. Federal unemployment taxes are filed quarterly.
State and municipal tax authorities follow their own rules and schedules for withholding and remitting pay.
While closely connected to running payroll, remittance is a process in its own right, with rules to follow, forms to file, and payments to be made. IRS Publication 15 is a comprehensive guide, but consulting a qualified accountant or payroll professional can help to break down the process.
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Payroll recordkeeping
Like anything else where the IRS is involved, you should plan to keep detailed records of all your payroll activities.
But good recordkeeping not only keeps on the straight and narrow with tax authorities. It can also help you track and manage your own finances.
According to IRS Publication 15, you should keep all records of payroll activity on file for at least four years.
Here’s a list of what you need to hold on to, adapted from the IRS publication:
- Your EIN.
- Amounts and dates of all wage, annuity, and pension payments.
- Names, addresses, SSNs, and occupations of employees and recipients.
- Any employee copies of Forms W-2 and W-2c returned to you as undeliverable.
- Dates of employment for each employee.
- Periods for which employees and recipients were paid while absent due to sickness or injury and the amount and weekly rate of payments you or third-party payers made to them.
- Copies of employees' and recipients' income tax withholding certificates (Forms W-4, W-4P, W-4R, W-4S, and W-4V).
- Dates and amounts of tax deposits you made and acknowledgment numbers for deposits made by EFTPS.
- Copies of returns filed and confirmation numbers.
- Records of fringe benefits and expense reimbursements provided to your employees, including substantiation.
If you’re planning to set up payroll because you’re hiring yourself as an employee, take a deeper dive with How to Pay Yourself as a Therapist.
Key takeaways:
- Running payroll is a routine task when you have employees or contractors working for you.
- To pay employees, you calculate their gross pay and then deduct withholdings.
- Withholdings from gross pay typically includes federal and state taxes and employee contributions to benefit programs like 401(k)s.
- For tax purposes, keep detailed records of payroll activities on file for at least four years.
- Running payroll—and especially remitting withholdings—can get complicated. Rather than handling payroll yourself, consider using a comprehensive payroll solution for your therapy practice.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult their own attorney, business advisor, or tax advisor with respect to matters referenced in this post.
Bryce Warnes is a West Coast writer specializing in small business finances.
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