When you’re trying to decide how often to pay employees, you’ll realize there are several options. Common pay frequencies include weekly, biweekly, semi-monthly, and monthly. But, you might be wondering if your employees can be paid quarterly.
Is a quarterly payment schedule legal?
Federal laws do not mandate how frequently you must pay employees. However, many states have laws about how often you must pay employees. For example, a state might require you to pay employees at least biweekly. Be sure to check state laws to find out if you must use a specific pay frequency.
A quarterly payroll is not legal if state laws require you to pay employees more frequently.
If state laws allow for a quarterly payroll, you might consider using this pay frequency for paying your employees.
Pros and cons of a quarterly payroll
A quarterly payroll means you only have to run payroll four times per year. This infrequent payroll run can save you time.
Quarterly payroll runs are good for shareholder-employees of S corporations. If you are a shareholder-employee, you might pay yourself quarterly so you can earn regular paychecks, but let the money remain longer in your business for use.
Employees might not be fond of being paid quarterly. Remember, employees have their own expenses to pay. It can be difficult for employees to make and keep personal budgets when they only get paid once every three months.
Because employees are infrequently paid, you might have a difficult time attracting and retaining employees. A more frequent pay frequency will attract more workers.
If you do use a quarterly pay period, you might have difficulties when it comes time to finally run payroll. You might not have sufficient records to accurately calculate employee wages, taxes, and other deductions. And you might not have enough money on hand to pay wages and taxes.
Quarterly payroll and S corporations
An S Corp shareholder who also works within a business must receive a reasonable wage. This normally applies to business owners of S Corps.
If you are a shareholder-employee, you might be able to run payroll quarterly for yourself, even if you must run payroll more frequently for other employees. Be sure to check state laws to learn more.
The shareholder-employee’s wages are subject to all employment taxes. This includes both employee and employer taxes. These must be taken out of the paycheck and remitted on a regular basis.
How to handle taxes when an employee is paid quarterly
If you run a quarterly payroll, you must still collect, remit, and file taxes.
For federal income taxes, use IRS Publication 15. You can use either the percentage method or wage bracket method to calculate federal income taxes for a quarterly payroll.
Withhold and remit state and local income taxes according to the local tax rates.
Calculate Social Security tax and Medicare tax using the usual method. Social Security tax is 6.2% of the wages. Medicare tax is 1.45% of the employee’s wages. You must also pay a matching employer portion.
For more frequent pay periods, you need to remit federal income, Social Security, and Medicare taxes on a monthly or semi-weekly basis. But when you run payroll quarterly, you will remit these taxes on a quarterly basis when you file your Form 941.
You must pay federal and state unemployment taxes on the wages. You must remit and file FUTA tax on a quarterly basis.
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This article is updated from its original publication date 6/11/2018.
This is not intended as legal advice; for more information, please click here.