One of the biggest expenses for your business is payroll and doing it correctly is essential. Along with paying your employees, comes paying taxes. Payroll taxes can be one of your biggest headaches. If not done correctly, you could face major penalties. It’s vital you properly calculate, withhold, report and deposit tax monies from employees’ paychecks. Here are just some of the taxes employers must account for:
- Federal income tax
- Social security
- Federal and state unemployment tax
- State income tax (if applicable in your state)
- Multi-state employment regulations (if applicable)
- Disability insurance tax (if applicable in your state)
How much federal income tax an employee pays depends on how many exemptions each claims on his or her W-4 form. Your employees can also be responsible for other taxes including state, school district, and county or municipal taxes. It’s your job to know which taxes need to be taken from which employee and collect them appropriately. The more employees you have, the harder it is to keep this type of bookkeeping straight. Let’s take a look at the top four payroll tax mistakes small business owners make and hopefully learn from the mistakes of others.
- Not Making Deposits on Time
The IRS has two schedules, monthly or semi-weekly, for depositing various types of payroll taxes. You need to check the IRS guidelines to see which schedule to follow before the end of every calendar year (tip: it has nothing to do with how often you pay employees and is based on the total tax liability you reported on Form 941 during a look back period). If you miss a deadline, payroll tax penalties can add up quickly and generate substantial tax debt. These penalties can also apply to various state income tax deposits. Whether your business structure is a sole proprietorship, corporation, or LLC, tax debt and penalties can put your entire business at risk.
- Incorrectly Paying Federal and State Unemployment Tax
Employers report and pay federal and state unemployment tax (known as FUTA and SUTA) separately from federal income tax, social security and Medicare taxes. You pay FUTA tax only from your own funds. Many employers don’t realize there is a cap on how much of this tax you must pay every year and if you go over that cap and pay more than you’re legally required to, you don’t get that extra money back. SUTA taxes are not as standardized as FUTA taxes because each state has its own limit on taxable wages. Likewise, every state has varying tax rates and rules for different types of companies. Each state also has specialized forms or required paperwork.
- Incorrectly Classifying Employees
Classifying employees correctly is important because you are only responsible for payroll taxes for employees, but not independent contractors. Penalties for classifying employees incorrectly include:
- Liability for employer taxes not paid (for example, FICA or unemployment insurance)
- Potential liability for employee withholding not remitted
- Interest, fines, and criminal punishment for noncompliance with tax and immigration statutes
- Confusing Reporting with Depositing
In addition to withholding money from your employees' wages, and depositing that money on their behalf, you could also be required to pay a matching amount for some of those taxes. Don’t confuse reporting with depositing as there are different deadlines and schedules for each.
- Reporting tells the government how much you owe.
- Depositing is sending the correct amount of money in a timely manner.
Keep in mind, regulations change all the time and keeping up with new laws is key to remaining complaint. If it sounds overwhelming, we can help. FrankCrum handles all your payroll tax deductions as just one of many benefits of partnering with us. Contact us today to learn more.