What You Should Know About Payroll Taxes

Overview

Happy employees are key for business growth and development. It is essential that your workforce is paid accurately and on time. Payroll is not just exclusively paying employees on a month-to-month basis (or however often your business does it). Every business should also maintain thorough records and pay taxes on behalf of the employee’s wages. It is very important to calculate the right deductions and add the right allowances. In other words, you need to keep not only your employees happy, but also keep the government happy. Typically, payroll is handled by an accounting department or human resources department in a business. If the business is smaller, a bookkeeper or the owner directly manages payroll, including payroll taxes.As a business owner, understanding how to navigate taxes can be extremely overwhelming. You need to know what forms to fill out, how to fill them out, and remember to submit them (and pay) on time. Incorrectly calculating your taxes or missing deadlines can cost you thousands of dollars. In addition, you need to have an accurate record of payroll taxes you paid and still owe. The topic of payroll taxes also interests many employees as well. After all, they also want to know where the money they earned goes and why it is not being paid to them. It does not matter if you have one employee, ten employees, or one hundred, knowing your obligations in regards to the payroll taxes and paying a correct amount on time is key. It is payroll tax because it takes money out of employee’s paychecks every pay cycle. Payroll taxes generally fall into a couple of categories. Employees typically pay the federal and state income taxes, while employers pay the unemployment taxes on the federal and state levels. Social Security and Medicare are paid by both.

A step by step guide

If you do not know where to start with payroll taxes, here is a quick guide for you.

1. When hiring a new worker and before that person actually starts working, you should request the individual to fill out an I-9 form and W-4 form. Using the last form employees to choose their number of withholdings and provide other information that determines the amount of income tax would be paid right from their paycheck. Although it is not required that you send a W-9 before you hire a contractor, it is best if you do.
2. Once it is time to write a paycheck, you will need to withhold a portion of the employee’s gross wage to pay taxes on their behalf. This will be a federal income and 7.65% of their salary will go towards the FICA tax. Even if the employee does not owe income taxes, they still have to pay this tax. Keep in mind that this is your employee’s money and if it does not get to the IRS, then simply put you can get in trouble for stealing money. Thus, make a rule for yourself not to borrow that money, no matter how tempting it can be when you really need more cash flow in your business.
3. As an employer, you must file quarterly employer tax forms. You owe your portion of the FICA tax, federal and state unemployment taxes. The federal tax of 6% is paid only on the first seven thousand dollars of wages the business pays each and every employee, while the Form W-4 is used to compute the state one. You should ensure that you pay all these taxes before the quarterly due dates if you want to avoid also paying the fines.
4. Every year, you need to prepare a Form W-2 for your employees. For contractors, you will file Form 1099 Miscellaneous. You will also have to file an annual payroll form to reconcile the payroll quarters using Form 944.

Since payroll is impacted by so many variables, typically, companies hire another company that streamlines the process. These companies usually perform day-to-day accounting activities as well as payroll. However, you might also request only payroll services and do the rest yourself. Luckily, nowadays, there is also an accounting software that can take the hard work out of calculating the payroll taxes. Usually, it just needs your employee’s information to be entered into the system, and it will compute the taxes and withhold them automatically. If you are not sure how to go about payroll taxes, then we recommend contacting tax or accounting specialists to help you set up the system and ensure that you are doing everything correctly to avoid any fines.