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Grow Your Business Finances

Everything You Need To Know About Small Business Payroll Taxes

Everything You Need To Know About Small Business Payroll Taxes
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Payroll taxes are a necessary evil for small business owners. While it can be easy to get caught up in the day-to-day operations of running a small business, taking the time to analyze how your business runs from an accounting and payroll standpoint can help you save money in the long run. 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.

Payroll taxes were put in place 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. Besides using a payroll service – a third-party company that provides a wide-range of services from issuing paychecks to tax compliance – small business owners can opt to complete payroll taxes on their own or with the help of a tax professional. [Looking for help on your payroll taxes? Check out our picks for the best payroll services.]

Payroll taxes are a portion of an employee's paycheck that’s withheld by the employer. In addition to keeping track of time and 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.

The money collected from payroll taxes largely goes to fund social programs or is contributed to both state and federal unemployment insurance. 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.

Editor's Note: Looking for information on payroll systems? Use the questionnaire below, and our vendor partners will contact you with the information you need:

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There are several ways you can manage employee payroll taxes and ensure that your business is compliant with the IRS:  

  1. 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.
  2. Payroll services: Payroll services are third-party 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.
  3. 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.

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.

Editor's Note: Looking for information on payroll systems? Use the questionnaire below, and our vendor partners will contact you with the information you need:

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Matt D'Angelo

Matt D'Angelo is a B2B Tech Staff Writer based in New York City. After graduating from James Madison University with a degree in Journalism, Matt gained experience as a copy editor and writer for newspapers and various online publications. Matt joined the Purch team in 2017 and covers technology for Business.com and Business News Daily. Follow him on Twitter or email him.