Tax & Business Services |
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Payroll Taxes Payroll taxes have long been a cause of frustration for small business owners. However, the government is very strict about the rules in collecting these funds. So make sure you collect and pay these federal income taxes correctly. It might be a good idea to out-source your small business payroll accounting to a third-party, especially if it changes from week to week. You'll find that utilizing a payroll service that can track and maintain these records frees you to concentrate on other aspects of the business. What are payroll taxes? Payroll taxes are the employment taxes that a business must pay on behalf of its employees (as opposed to the income tax and the employee's share of social security and Medicare taxes, all of which are withheld from the employee's wages). Payroll taxes include:
Where to Start Employers of individual workers are responsible for the accurate and timely withholding of several types of taxes. Prior to hiring a worker, a domestic employer must accomplish two tasks - obtain an Employer Identification Number (EIN), and verify that the individual is eligible to work in the United States. An employer can obtain an EIN by mail, telephone, facsimile, and online. Employers should verify that a worker is eligible to work in the U.S. by reviewing the employee's government-issued identification, and if necessary, requiring the employee to complete Form I-9. The employer must keep the Form I-9 on record either for three years after the date of hire or for one year after employment is terminated, whichever is later. The form must be available for inspection by the authorized U.S. Government officials. After the worker is hired, the employer must determine the status of the worker. If the worker is an independent contractor, the employer simply pays the agreed-upon fees for services to the worker and does not withhold taxes. The worker is responsible for calculating and paying unemployment taxes to the government. However, if the worker is an employee, the employer must obtain a completed Form W-4 from the employee, withhold funds for income, Social Security and Medicare taxes, and pay FUTA and SUTA (State Unemployment Tax) taxes, as well as the employer's share of Social Security and Medicare taxes. Paying Payroll Taxes In general, the employer must file Form 941 four times a year and pay his or her share of Social Security and Medicare taxes, plus the federal income tax, Social Security tax, and Medicare tax required to be withheld from employees' wages. However, if the expected total of these taxes is $1,000 or less for the year, the employer can file just once per year using the new federal income tax form, Form 944. Generally, employers must deposit withheld taxes by submitting them to an authorized Treasury Tax and Loan depository organization, or deposit them electronically with the Electronic Federal Tax Payment System (EFTPS). Employers with quarterly tax liabilities of less than $2,500 can pay with Form 941; those who are eligible to file Form 944 may pay with that federal income tax form. The Earned Income Tax Credit (EITC) Employees who are eligible for EITC may choose to receive more than half of the credit during the year, rather than waiting to receive it in full when filing the following year's federal tax return. Employers must notify employees who have no income tax withheld that they might be eligible for the credit, so that eligible employees will file returns and claim the credit. Special Employment Relationships Household employees: If the worker is a household employee (the taxpayer's employee who performs non-business services in the taxpayer's home), the employer may be responsible for withholding income, Social Security, Medicare taxes, as well as paying FUTA and SUTA. Whether the employer is required to withhold and pay state and federal income taxes depends upon the age and relationship of the employee, as well as the amount the employee is paid. Farm employees: Farm employees are subject to FICA (Social Security and Medicare) withholding if the employer has at least one employee who was paid more than $150 cash wages during the year, or the employer paid at least $2,500 to all farm employees during the year. Statutory employees: Statutory employees are workers who are employed in specialized types of work, and are subject to FICA withholding, but not income tax withholding. Employees who receive tip income: Employees who receive more than $20 in tips during any month from work performed under a single employer are required to report the tip amount to the employer, who must withhold income and FICA taxes, as well as pay FUTA and SUTA taxes on the amounts reported. Business owners who employ relatives: Many sole proprietors employ family members in their small businesses. Here's a brief list of the payroll tax requirements that employers of relatives face:
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