Setting up payroll for your therapy practice is essential whether you’re planning to team up with other therapists and start a group practice or hire support staff to keep your solo practice running smoothly.
As an umbrella term, “payroll” is the collection of documents and processes your business uses to make sure employees get paid accurately and on time, and to ensure you withhold the right taxes and Social Security contributions for each employee. It’s also the process of paying your employees each pay period.
Even if you don’t have anyone else working for you, you may need payroll for your therapy practice. For instance, if your business is an S corporation, in which case you likely pay yourself as an employee.
Here are nine steps for setting up payroll for your therapy practice.
Make sure your employees are really employees
Payroll takes care of wages and salaries for employees. It doesn’t involve payments made to contractors. That’s taken care of by accounts payable.
For tax purposes, contractors are treated differently from employees. When you hire a contractor, you pay them for their services, and they take care of their own income tax and employment taxes. When you hire an employee, it’s up to you to withhold and remit those taxes for them.
If you’re not sure whether someone working for you is an employee or a contractor, check the table below.
Some businesses try to avoid the effort and cost of dealing with payroll by paying employees as independent contractors. Doing so is against the law and could land you in trouble with the IRS. Learn more about the difference between employees and contractors.
Get federal and state employer ID numbers
In order to report information about your employees to federal and state tax authorities—including how much you’ve paid them, and how much you’ve paid in taxes on their behalf—you need an employer identification number (EIN). Depending on your state, you may also need a state employer ID number.
Getting an EIN
To get an EIN, you can apply directly through the IRS website.
The IRS uses your EIN to identify and your therapy practice when you file and pay taxes.
Getting a state employer ID number
Some states allow you to use your EIN when you file taxes and report information about your employees. Others—like New York, for instance—require you to apply for a separate number that functions only on the state level. Check your Secretary of State’s website for more information.
Compile payroll information for each employee
As part of your payroll system, you’ll need to compile and store information on each of your employees.
That information includes:
- Their full name
- Their SSN
- Their start date
- Their salary
- Relevant tax forms
Yes, this is super basic information. And yes, it’s 100% essential. Whether you use payroll software, track this information by hand, or hire a third party to take care of payroll for you, it’s important to have it all stored securely in one location.
Collect employee tax forms
For each employee, you need completed tax forms on file that tell you how much to withhold from their pay in taxes, and to confirm that they’re legally entitled to work in the USA.
These tax forms are:
- A Form W-4, which tells you how much to withhold when you pay your employee
- A Form I-9, which confirms your employee is legally entitled to work in the USA, and which includes legal means of identification
In addition to these forms, make sure you’ve run social security verification for each employee, to ensure you aren’t accidentally listing someone with a similar name or SSN on your tax return. The Social Security Number Verification Service is free. Your business just needs to register.
Research state and federal employment laws
The best place to learn about federal employment laws relevant to your business is from the US Department of Labor website. These laws apply to all employers in the USA, regardless of which state you’re based in.
State employment laws vary. Some are more thorough, and more strict, than others. Your state’s employment laws may determine:
- How and when employees must be paid
- Rules about when employees can take paid leave
- How overtime is tracked and paid
- Breaks and meal times for employees
Visit the Employment Law Handbook to find your state’s employment laws.
Get a crash course on federal employment taxes
It’s up to you to withhold federal taxes from your employees’ pay. That includes:
- Income tax
- Federal Insurance Contributions Act (FICA) taxes
- Unemployment taxes
Keep in mind that, in the case of income taxes and unemployment taxes, you’ll also have to pay on the state level. These taxes vary according to state.
To report income and FICA taxes you withhold as an employer, you’re required to file Form 941 on a quarterly basis.
Technically, you’re not responsible for paying an employee’s income tax on their behalf. What you’re really doing is withholding the amount of tax owed, and remitting it to the federal government.
When they start their employment with you, your employee will fill out a Form W-4, which tells you how much to withhold and remit.
Federal Insurance Contributions Act (FICA) taxes
FICA taxes pay for Social Security and Medicare. You withhold from the employee’s pay one half of the total amount of FICA tax owed, and remit it to the federal government. Your business pays the other half.
In total, FICA is 15.3% of an employee’s earnings. That’s 12.4% for Social Security, and 2.9% for Medicare. It’s paid when you file Form 941.
Unemployment taxes (both state and federal) are not taken from your employees’ paychecks—they’re paid by you, the employer. However, the amount you’re required to pay for each employee depends on how much they earn.
The good news is that states typically pay a credit towards federal unemployment tax. Total federal unemployment tax is 6.0% of an employee’s earnings, and states provide a credit of 5.4%. That leaves just 0.6% for you, the employer, to pay.
To pay federal unemployment tax, you need to file an annual Federal Unemployment Tax Act (FUTA) return, using Form 940.
Decide on a pay schedule
Since many states have payroll schedule laws, the power to set a payroll schedule is not entirely in your hands.
Some states require you to pay employees at least twice a month, for instance, meaning a monthly paycheck is out of the question. Your payroll schedule may also depend on the kind of work your employees do. In New York, for instance, pay schedules are partly determined by whether or not employees do manual labor.
Once you’ve researched your state’s payroll schedule laws, set a payroll schedule that provides you with the most cash flow. For instance, if you pay rent on the first of every month, it may make sense to schedule payday on alternating Fridays—so you aren’t always paying your employees on the same day you pay your rent. This lets you keep more cash on hand to cover incidental expenses.
Draft your payroll policy
At its simplest, your payroll policy is a document that explains:
- When employees are paid
- How they receive payment
- Your benefits program
- The breaks and meal times to which employees are entitled
- Procedures for sick days, vacation, paid leave, etc.
This is enough information to get started running payroll for your practice. Beyond these items, you can expand your payroll policy into an employee handbook, with more in-depth HR resources.
Your payroll policy should be shared with all employees.
Choose a payroll service provider for your therapy practice
Even if your private practice only has a few employees, managing payroll can be a weighty task. Calculating tax withholdings, filing quarterly 941 forms, writing checks or making ACH transfers, and tracking it all in your books: these jobs add up.
Many employers opt for a third party payroll service provider like Gusto. A payroll service provider is a company that handles most or all of your payroll tasks for you. They can:
- Set up automated processes, so your employees are paid at the end of every payroll period accurately and on time
- Withhold taxes from employee wages
- File payroll taxes for each employee
- Generate reports telling you how much employees have been paid, how many hours they’ve worked, and how much you remitted in taxes
- Provide employees with pay stubs, and allow them to make changes to their payment details
Payroll service providers also keep you compliant. When laws and regulations change at the federal or state level, your provider will make changes in order to comply with them—so you don’t always have to keep your eyes peeled for new laws.
Schedule a free consult call to learn more about how Heard manages payroll for therapists through our partnership with Gusto.
If your business is planning to hire employees, it’s best to use an accrual accounting system. Learn more about the differences between cash and accrual accounting.
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.