Payroll can be a very daunting task unless it is appropriately handled. When that is not the case, businesses run the risk of upsetting employees, plus they could be hit with penalties and interest for not reporting payroll taxes by government regulations. Every company with employees is responsible for running payroll or finding someone to do it for them. To help employers complete those tasks, here are the top 10 tips to know about payroll.
Top Tips to Know About Payroll
1. What constitutes payroll?
Payroll typically consists of paying wages and salaries to employees for services rendered. Wages also include bonuses, tips, and commissions. In some cases, wages may include fringe benefits like automobiles and cell phones.
2. How are employees classified?
The proper classification of employees is a vital payroll function. When done improperly, it can result in substantial financial consequences. For instance, some businesses classify part-time, occasional, temporary, and seasonal workers as independent contractors to avoid paying benefits or payroll taxes. However, the IRS and state governments have specific rules regarding employee classification. Failure to follow those rules can result in penalties, fines, and interest.
3. Where do employees live?
The location of an employee’s permanent residence determines what state taxes the employer must withhold. This can become very tricky if the employee resides in a state different from where the employer is. This is because some states impose a state income tax while others do not. When an employee works in a state that imposes a state income tax, the employer must typically withhold state taxes regardless of where the employee lives. However, an employer may be required to hold additional state taxes for a nonresident employee residing in a neighboring state that imposes a state income tax.
4. What taxes must be withheld?
Employers must withhold federal, state, county, and local income taxes. They are also required to withhold Social Security and Medicare taxes. In some cases, they must withhold additional taxes required by individual states, such as the four payroll taxes required by California.
5. What taxes must be paid?
An employer must pay all taxes it withholds to the proper governmental agencies. In most cases, this will be the IRS or a state agency. Employers are also responsible for matching the FICA taxes they withhold from an employee’s paycheck. Additionally, employers must pay any required federal and state unemployment insurance.
6. What tax rates apply?
For federal income taxes, withholding rates are determined by the payroll deductions an employee claims on their W-4 form. Some states also rely on the W-4 form, while others use their own. However, the base Social Security tax rate for 2019 is fixed at 6.2 percent, and the base Medicare tax is fixed at 1.45 percent. However, additional taxes may be due on wages over the base amount, depending on whether taxpayers file jointly or separately. Each of those governmental entities determines state and local tax rates.
7. When must taxes be paid?
The employer’s tax liability determines the payment schedule. Around the end of the year, the IRS notifies employers by mail of the schedule required for depositing taxes for the following year. In most cases, taxes will need to be paid monthly or semi-weekly. State and local taxes differ by location, and employers must refer to the different state tax laws to determine the correct deposit schedule.
Calculating payroll taxes and determining deposit schedules overwhelm many business owners. When that is the case, employers may want to enlist the services of a professional accountant with experience in payroll processing and income tax withholding.
8. What method is used to pay taxes?
Federal withholding taxes, along with unemployment taxes, must be deposited using the federal government’s electronic payment system, EFTPS. States and local jurisdictions may also require electronic payments. Employers must have a current account in every state where they are required to withhold and remit taxes. Failure to make tax withholding deposits on time could result in penalties.
9. Which employees are exempt from payroll taxes?
Certain employees are exempt from federal payroll taxes. These include husbands and wives who their spouse employs in a business structure known as a sole proprietorship. Although children may have to pay income tax, they are exempt from FICA taxes if they are under 18 and work for their parents in a sole proprietorship. They also may not be required to pay federal unemployment taxes as long as they are under 21. State payroll taxes are more complicated because they vary by location.
10. How do business owners pay themselves?
When it comes to processing payroll, one of the most important questions to address is how business owners pay themselves. There are three basic ways to do that: a salary, a distribution, or a dividend. For a sole proprietorship, partnership, or LLC, the standard way is a distribution. The standard for an S or C corporation is a salary or distribution.
Summary
Processing payroll in accordance with all federal and state laws is not easy. Businesses that are unable to do so risk substantial penalties and interest. When a business owner is overwhelmed by calculating payroll taxes and determining deposit schedules, it may be best to hire a professional accountant with experience in payroll processing, income tax withholding, and unemployment insurance.