Anyone that has ever received a paycheck is probably very familiar with the reality of payroll taxes. “Where’s the rest of my paycheck?” you might have asked. Despite the fact that most people in the workforce have dealt with these taxes, many first-time entrepreneurs often forget to consider the impact of payroll taxes on their new business. There are logical and financial considerations that sometimes slip under the radar.
Admittedly, the processes required to properly manage your new company’s payroll taxes can seem daunting and somewhat complicated. But with a little understanding and conscious effort, this burden can be managed efficiently, effectively, and relatively painlessly.
What exactly are payroll taxes?
The term “payroll tax” is used to describe a combination of both federal and state-imposed taxes. Bundling these taxes into a payroll deduction helps ensure that the government is effectively receiving personal income taxes from your employees. Payroll taxes also reflect the collection of FICA taxes. These taxes fund programs designed to benefit society, such as Social Security, unemployment programs, disability programs, and Medicare. While these taxes will be paid directly by your business, a portion of the total burden will be withheld from your employees’ wages, while the remainder will be drawn from your company’s own funds.
How to manage your payroll tax burden
As with any tax burden, your business’s primary goal should be making sure that it is making each tax payment to the government in full, and on time. Failure to do so can lead to serious fines and penalties, or even losing your right to conduct business. While the tax codes and processes that determine payroll taxes are complex, following these five steps will help you properly manage this responsibility.
Please keep in mind that if you are ever in doubt regarding tax-related issues, it may be best to speak to a licensed accountant in order to avoid any costly mistakes.
- Identify your actual employees.
Your business is only liable for payroll taxes on wages paid to actual employees. This means that you are not responsible for any payroll taxes on wages paid to independent contractors. The distinction is often rather obvious, but can occasionally be difficult to discern. As a rule of thumb, if the individual in question will be reporting directly to your physical location for an undefined period of time, or works specific and regular hours, they are likely considered an employee for tax purposes.
- Determine each employees’ amount of taxable wages.
The taxable wages for each employee are not limited to just the employee’s take-home pay. There are a number of other related compensation factors which can lead to either added tax expenses or increased tax deductions. Some of the non-cash factors include benefits (health, retirement, etc.), tips, expense account activity, and illiquid bonuses. Be sure to accurately calculate the amounts of each of these payments.
- Understand how payroll taxes are applied.
A significant part of your payroll tax burden will be withheld directly from the paychecks of each of your employees. This portion of your company’s payroll taxes is designed to cover a percentage of your employee’s personal income tax, state income tax, and FICA taxes. You will need to pay the remainder of your business’s payroll taxes directly from your company’s own funds. This portion is used to match your employees’ contribution to FICA funded programs, as well as pay into unemployment and disability programs. IRS Publication 12 (the Employer’s Tax Guide) will help you break these obligations down.
- Familiarize yourself with the relevant IRS forms and the payment processes.
You may know that the IRS facilitates your paying personal income taxes by supplying a number of forms and schedules to help determine the amount you owe. The same resources exist to help you determine your company’s exact payroll tax burden. After calculating the data required to complete these forms (see step two above), you will need to follow the processes on these materials exactly as outlined. Also, please note that in many states, different types of payroll tax payments (FICA, those regarding employee income, etc.) are due on separate dates. Be sure to keep a close eye on these payment schedules in order avoid missing deadlines or sending unnecessary payments.
- Address your own personal payroll tax considerations.
Self-employed individuals are considered employees of their own businesses. This has particular implication for business owners. Even if you’re the sole employee, you’ll still need to address payroll taxes. However, in these circumstances, payroll taxes are more commonly referred to as self-employment taxes. If your business is incorporated, the procedures of assessing tax responsibilities will be very similar to a traditional business with more than one employee. If your company is a sole proprietorship, you will need to pay some special taxes (including an estimated income tax), as well as additional self-employment taxes (SECA), to cover your contributions to FICA funded programs.
As you can see, payroll taxes can be a little confusing, but if you follow the established procedures, you’ll remain compliant.