Bookkeeping and payroll tax management are important and indispensable responsibilities of running a business. While many small businesses often perform such tasks in-house to save money and cut costs, it is advisable to rely on the services of an experienced tax law firm such as the Law Offices of Nick Nemeth, as any mistakes in payroll taxes or bookkeeping can cost dearly. If you aren’t familiar with payroll tax payments or are in need of a clarification for commonly encountered doubts, this compilation of answers to a few commonly asked questions is for you. Read on.
What is payroll tax and how to it to the IRS?
The law requires any business which employs workers to withhold payroll taxes from its employees’ paychecks for paying several federal, state and local taxes. Federal taxes include FICA (Federal Insurance Contributions ACT), FUCA (Federal Unemployment Tax Act) and Federal Income Tax. For FICA, one half is paid by the employer and the employee pays the other half. FUTA must be paid by the employer and the employee must pay Federal income tax. On the state level, we have State Unemployment taxes that must be typically handled by the employer only. It is advisable to check with your local state regulations about any other payroll taxes specific to the municipality or township where you operate your business. The IRS requires businesses to pay the payroll tax deposits electronically using the EFTPS online system.
What all taxes are withheld?
The law requires employers to deposit and report employment taxes such as the income tax, Social Security and Medicare. As Medicare and Social Security are FICA taxes, the employer and employee share either half of the tax payment.
- The federal income tax rate depends on the income level of your employees. There are seven brackets ranging from 10 to 39.6 percent.
- For Social Security, the tax rate is 6.2% for an employee and an employer as well.
- Medicare tax rates stand at 1.45% for both the employee and the employer.
- In the case of FUTA, if your employee makes at least $1500 per quarter or if you have an employee active for at least 20 weeks in a calendar year, this tax must be withheld from their salary.
- On top of these regular tax withholdings, employers must also prepare and file the Form W-2 at the end of each year.
You may also have employee driven deductions depending on factors like contribution to retirement plans, having a health flexible spending account (FSA) or a health savings account (HSA).
How do I classify my employees?
First, determine the number of employees making taxable income. Your employees can be primarily classified as employees or independent contractors. In most cases, for any given work, both employees and independent contractors may be paid in the same range. The major distinction comes in the case of withholding taxes. Income tax, Social Security and Medicare taxes are withheld from employees before paying them. No such tax withholding is necessary with an independent contractor.
Should I hire salaried or hourly paid employees?
It is necessary to establish whether a business will pay out in the form of a monthly salary or pay its employees on an hourly basis. Generally, it is much easier to manage and pay salaries rather than hourly rates.
How should I decide my company’s pay period?
It’s purely your choice and there isn’t a ‘one size fits all’ answer. You have many options such as a bi-weekly, weekly or monthly pay periods. It is however advisable to stick to a firm schedule as it will help your business stay organised, efficient and employee-friendly.
How long am I required to hold on to the records?
Businesses are required to hold on to W-4s and W2s. With W-4s, an employer is required to hold on to the records of all the active employees and the ones terminated within the last three years. Businesses must also store copies of the tax forms that are filed alongside the dates and amounts of all the tax deposits for at least a period of four years.
According to a recent survey, 26% of the small businesses were found to be spending nearly three to five hours a month on payroll and bookkeeping tasks. Over the course of a year, the time spent on these tasks adds up significantly. Should you need help resolving unfiled Payroll taxes, rely on an experienced IRS tax lawyer from the Law Offices of Nick Nemeth. For a confidential, no-obligation consultation with one of our tax attorneys, fill out our contact form or simply call +1 (972) 627-4784.