Do You Understand Payroll Taxes for Your Small Business

A small business owner only has so much time to do tasks for your business. Once your business hits a certain point of growth, you will have to add more employees and add them onto your payroll. More employees should result in further growth for your business since more hands on deck means more work can be done. However, having employees can complicate your small business taxes further- especially payroll taxes. Outsourced payroll services can save small business owners hours of time by handling all things payroll.

What Are Payroll Taxes?

Employee payroll taxes are usually made of these four taxes:

  • Federal Income Tax
  • State Income Tax
  • Social Security
  • Medicare

Payroll taxes are the state and federal taxes that you, as an employer, are required to withhold and/or to pay on behalf of your employees. You are required to withhold state and federal income taxes as well as social security and Medicare taxes from your employees’ wages.

You are also required to pay a matching amount of social security and Medicare taxes for your employees and to pay state and federal unemployment tax. The responsibility of depositing the withheld amount resides with the employer. This process can be confusing which is why many small business owners turn to outsourced payroll services for assistance.

Federal and state income tax is a bit more difficult to calculate. Federal income tax is determined by the Form W-4 that an employee submits, showing their filing Status as well as their number of exemptions. For state income tax withholding, there is a similar table produced annually by each state that determines how much state income tax to withhold from each employee’s paycheck

Social Security is calculated at 6.2% of the gross pay and it’s capped once you hit $132,900 in earnings. This means the maximum amount of Social Security tax you will pay in one year is $8,239.80.

Medicare has no cap and is calculated at 1.45% of an employee’s gross pay. If an employee earns more than $200,000 in a single year, you will need to withhold an additional 0.9% for medicare wages for anything greater than $200,000. This 0.9% is only paid by the employee and not the employer.

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When Are These Taxes Deposited?

Until the withheld taxes are actually paid to the IRS, they remain with you, the employer, as trust fund taxes. Trust fund taxes include income tax, social security taxes, Medicare taxes, railroad retirement tax or collected excise taxes, and other employment taxes.

When it comes to depositing the trust fund taxes, an employer can choose either a monthly schedule or a semi-weekly schedule. It’s important to note that you can’t switch schedules for a year. So, you’ll need to choose one before the start of each calendar year.

Managing Payroll Taxes

There are several ways you can manage employee payroll taxes and ensure that your business is compliant with the IRS: 

• Do them yourself: You can complete the payroll taxes for each employee in your company. This process involves analyzing each employee’s W-4 tax form, calculating allowances, referring to income tables and doing basic arithmetic to withhold the right amount of money. Keep in mind that you’d have to calculate for state and federal payroll tax withholding.

Outsourced Payroll services: Payroll services are third-party payroll processing companies that manage employee payroll. These services come fully baked with tax compliance, payroll processing, and various other features. These companies make money off a monthly fee or on the interest of the money it collects for payroll taxes. Payroll services pricing typically includes both a flat monthly fee and per employee fee. The base monthly costs generally range anywhere from $20 to $100 per month, with the per-employee fees ranging from $1 to $15.

• Professional Tax Accountant: Besides working with an outsourced payroll service, you can also work with a tax professional. A tax accountant can work with small businesses to solve payroll problems. You can also talk with an accountant about completing payroll taxes, although they may refer you to a payroll service.

What Happens If You Don’t Pay Payroll Taxes?

If you don’t pay the correct payroll taxes or send in payments later than they are scheduled, you will likely be paid a visit by the IRS. The Journal of Accountancy reported that business owners may be required to repay the federal taxes that they had failed to submit as part of their penalty. Furthermore, the fees cannot be discharged in a bankruptcy situation.

IRS can get aggressive when it comes to missed payroll taxes. The structure of payroll taxes means that when a company doesn’t withhold the right amount of money, the government can miss out on a lot of funding. That means IRS officials will be up-to-date on whether you’re paying your share of taxes.

If it is established that the business owner evaded paying payroll taxes on purpose and with intent, he or she could face felony criminal charges. This may involve at least five years of prison time and up to $10,000 in fines. Hiring outsourced payroll services can ensure your small business pays what it owes and steers clear of the IRS.

Final Thoughts

Payroll taxes are an important part of your business. While it may be easy to focus on your day-to-day operations and forget about high-level organizational aspects, payroll taxes are something your business must contribute. You should consider either partnering with a payroll service or working with a tax professional to protect your business from the IRS.

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Small business owners spend an average of eight hours a month performing payroll functions. That’s 12 full days a year that could be spent generating sales, prospecting new business opportunities, improving products or services, or servicing customers. We help you stay compliant while significantly reducing in-house staffing needs and costs. Contact us today to get started!Schedule a Free Financial Analysis Today