Ensuring your employees are paid on-time and accurately is one important key to keeping them motivated. To make this happen, you need to ensure that all your i's are dotted and t's are crossed when running payroll each pay period.
A key component to figuring out exactly how much your employees should receive in their paychecks each pay period is correctly determining how much money should be withheld for such things as state and federal income tax, benefits and payroll taxes.
As a business owner, it is critical to have a complete understanding of each component of your employee's withholdings. While you know what benefit withholdings are for, you might not be as clear on the purpose of payroll taxes. Understanding what payroll taxes are, how they work and the consequences of not paying them can help you take the proper steps to better manage your business.
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"Payroll taxes are assessments on employee compensation the government collects from the employer," said Michael Law, a certified public accountant with Canopy.
Payroll taxes were established in the early 1940s as a way for the government to fund certain social programs. Instead of directly taxing employees, who may or may not pay their taxes on time, the government decided to have employers withhold certain amounts from employee paychecks.
"The rationale is that employers are easier targets to collect from because of deeper resources than millions of non-compliant tax payers," said Anthony Parent, owner of tax law and business tax services firm Parent & Parent LLP.
This means small business owners are responsible for withholding the appropriate taxes from their employees' paychecks. Business owners can handle this process on their own, get the help of a tax professional or employ a payroll service to handle all of their payroll and payroll tax responsibilities.
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What are payroll taxes?
Payroll taxes are comprised of two main parts. There is the portion of an employee's paycheck that's withheld by the employer, as well as contributions that the employer must make.
Law said these payments are used to pay for several programs, including Social Security and Medicare. Payroll taxes also include income taxes.
"States and some localities also have payroll taxes and often include such things as State Disability Insurance," Law said. "If any of your employees earn over $200,000, there is an additional Medicare Surtax withholding on them."
In addition to withholding taxes from an employee's paycheck, employers must match contributions to Social Security and Medicare, and issue other payments like state and federal unemployment taxes.
Sonya Muenchen, founder of The Payroll Gal, has been a small businesses payroll tax consultant for more than 20 years. She said it's important for business owners to understand exactly what they're responsible for.
"As an employer, you are responsible for … keeping track of time, calculating payroll based on employee's tax certificates, and depositing a payroll check on a weekly, bi-weekly, semi-monthly or monthly basis," she said.
As businesses head in to 2019, there are a couple of new payroll tax issues they should be aware of. When it comes to Social Security taxes, high income earners will see a larger portion of their paycheck withheld for Social Security. The Social Security tax previously had only been applied to the first $128,400 of an employee's salary. In 2019, that amount is being increased to $132,900.
According to the Society of for Human Resource Management, the taxable wage cap for Social Security is typically raised each year based on increases in the national average wage.
Paying payroll taxes
Law said how often you make payroll tax payments typically depends on the size of your business, how often you run payroll and the type of employer you are.
"Household employers with small payrolls have the most lenient deposit requirements with annual deposits," Law said. "Those with larger payrolls need to make deposits either as monthly or semi-weekly."
Law said businesses that are unlucky enough to be caught in a federally declared disaster area may have their required payments relaxed for a short period of time.
While completing payroll taxes on your own is possible, it can be complicated – especially when it comes to keeping track of making payments and withholding the right amount of money.
"The most solid yet basic advice I give business owners is to get a payroll company and get in the habit of depositing everything they tell you to deposit," Parent said.
How to manage 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.
- 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.
- Work with a tax professional: Besides working with a payroll service, you can also work with a tax professional. Muenchen, for example, works with business to solve payroll problems. You can also talk with an accountant about completing payroll taxes, although they may refer you to a payroll service.
If you invest in a service or work with a tax professional, rather than taking care of payroll taxes yourself, you can spend less time working on business operations and more time handling important projects and issues within your business.
What happens if you don't pay?
Making sure your payroll taxes are paid to the right agencies and on time isn't a task small business owners should take lightly. If you don't make your payments on time, you could face huge fines, see your business shut down and possibly be forced to spend time behind bars.
Law said any money that you withhold from your employee's paychecks for payroll taxes technically belongs to the government.
"You have a fiduciary duty to turn over those funds to the applicable government agency'" Law said. "You are not compensated for the fiduciary relationship, but you are penalized if you fail to pay over the amount due at 100 percent of the amount that should have been paid."
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.
"Should you get behind in paying the payroll taxes, you will get IRS notices and eventually a personal visit from the IRS," Law said. "Continual failure to pay the payroll taxes will result in the IRS shutting down your business and possible jail time."
Parent said the 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.
"A Revenue Officer will likely get assigned and make an up close and personal inspection of your affairs," Parent said. "Many people, including myself, think that skipping payroll deposits to make ends meet is truly a deal with the devil."
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.
Additional reporting by Matt D'Angelo. Some source interviews were conducted for a previous version of this article.