Payroll Without Surprises

The real cost of payroll isn't just the wage

Paying an employee $18 an hour doesn't mean your cost stops at $18. On top of it sit employer payroll taxes (Social Security, Medicare, federal and state unemployment) — roughly another 8–10% — and once you add workers' comp and paid time off, your true cost runs 1.15–1.3x the wage. Miss this gap and the bank account drains faster than you expected every pay run.

An $18 wage never costs $18. The real cost stacks on top.

Three things to set aside every run

Each time you run payroll, pull money out of the operating account and park it separately:

1. Taxes withheld from employees — this is not your money. You're just holding it.
2. Employer payroll taxes — owed to the IRS and the state every quarter.
3. Workers' comp and insurance reserves — bank a little monthly so the annual true-up doesn't bite.

Open a dedicated "tax account" and auto-transfer into it on every run, and the due dates stop being a scramble.

Overtime is where most owners slip

• In most states, over 40 hours in a week is 1.5x. Some states (like California) also apply it to over 8 hours in a day — check your state's rules.
• Track time to the minute. "Rounding to be nice" plants the seed for a labor dispute later.
• Classify exempt vs. non-exempt employees by their actual duties and pay basis — not by their job title.

If your business runs on tips

For restaurants and cafes, tip handling is the heart of payroll:

• Tips an employee receives must be reported as income and are subject to withholding.
• Make sure credit-card tips flow accurately into payroll.
• Put your tip-pooling rules in writing and share them with everyone.

Don't confuse 1099 and W-2

One of the most expensive mistakes is misclassifying an employee as an independent contractor (1099). If you control when and how the work gets done, that person is almost certainly a W-2 employee. Get it wrong and you're looking at back taxes plus penalties.

How to make payroll a routine

• Set a pay schedule (weekly or biweekly) and never break it. Your team's trust is built here.
• Run the same sequence every time: collect time → review → approve → pay.
• Mark quarterly tax due dates on the calendar in advance.

Payroll feels scary not because it's complicated, but because it's unpredictable. Set money aside, track accurately, and keep the schedule — and payroll becomes a quiet routine that simply comes around each week.