Payroll Taxes: A Complete Guide
- November 24, 2019
- Posted by: BenG-Admin
- Category: Blog, Business, Taxes, Wage
Every business in existence has to pay payroll taxes after hiring employees. Payroll taxes include your federal income, Social Security, and Medicare. Though it depends on the geographical location of your business, state and city taxes are often different when it comes to payroll taxes.
Typically, the business owner should get a federal Employer Identification Number (EIN) to file and pay payroll taxes with official government authorities. Furthermore, employers have to withhold the federal income tax of the employees.
Employees, on the other hand, also need to withhold their Social Security and Medicare tax in half from the paycheck. Dive in and learn more about how to prepare, gather, calculate, record, file, and pay your payroll taxes before deadlines:
Penalties for Not Paying Payroll Taxes
Yes, the failure to file and pay payroll taxes results in penalties. Some businesses often have to pay additional fees. Today, small and large companies alike get a penalty between 2-10% for not paying payroll taxes on time. Also, there’s a good chance your state and city have the same penalties.
Moreover, if you monthly or quarterly fail to file payroll tax returns, your business will have to pay more penalties. Similarly, failure to submit a W-2 form for every new worker can add up to $50. In fact, the IRS has separate penalties for companies that don’t care to submit the withhold social security tax payments as per law.
What about the Manual Calculation of Payroll Taxes?
If you operate as a small business owner, you can outsource the calculation and evaluation of payroll to save your precious time. That said, you should have a basic understanding of how experts calculate payroll taxes. Maybe one of these you might have to calculate by yourself.
Here’s a formula to calculate the total pay of a worker:
Full Pay = Employee Gross Pay – (Federal Withholding Tax + Share of Social Security + Medicare + Additional Deductions)
Hire Employees and Choose Payment Intervals
It is vital to determine how frequently you will pay workers before the hiring process begins. You can, for instance, use weekly, bi-weekly, semi-monthly, or monthly criteria. Also, you can get an increase in the number of pay intervals. It means you can pay hourly wages to workers for a week or month. And apply the same rule to salaried workers, but as a bi-weekly payment.
Employees’ Benefits and Insurance Policy
Employee benefits are a significant factor when it comes to payroll taxes. If you, for instance, provide a 401(k) plan or any health insurance, you’ll have to figure out the total contribution towards a worker in the foreseeable future.
Also, you should offer an employee compensation plan that should cover injuries or sickness on the work. Apart from Texas, employees’ compensation is regulated by every state in the U.S. Remember, it’s never too late to find out about your state requirements.
Assemble Necessary Paperwork
Once you’ve hired your workers, it’s time to create a payroll system for them. However, the decision to use excel-sheets or a payroll application is entirely yours. For every worker, you will generally require an I-9 form and W-4 form. On top of that, you’ll also need a direct deposit authorization form.
- The Function of I-9 Form
I-9 form states that every employer in the United States should confirm before hiring that the individual resides and can work in the U.S. You can fill out the details in the I-9. It is recommended to make multiple copies of the form along with employees’ documents like driver’s license, visa card, Social Security, or birth certificate.
- The Function of W-4 Form
W-4 form lists employees’ information about marital status and allowances desired. You can use the same information and calculate income tax from your employees’ paycheck. However, if you can’t seem to get signatures of your employees to get for direct deposit, you’ll have to print their payroll checks. You can, of course, print payroll paychecks via software. All you have to do is purchase payroll check stock.
That said, you should get the permission of your employees before making a direct despot to their bank accounts. Your employees need to fill out a direct deposit authorization form. Simultaneously, you can ask the respective employee(s) to submit a voided check. The purpose is to confirm the bank account number of employees.
Calculate and Record Paychecks
Sure, you can manually calculate paychecks regularly. It is, however, not advisable. Why? You’re bound to make mistakes like underpayment or miscalculated payroll taxes. It’s not just fair to employees, but you will face inevitable penalties from the federal government.
Therefore, utilize a payroll application that will calculate payroll paychecks automatically. Furthermore, you can check payable payroll taxes and make alerts to submit payroll tax payments. The manual processing of paychecks isn’t just time-consuming; it creates hurdles for your business. Instead, implement an HR-oriented and payroll software that could make hourly and time-off changes in the blink of an eye.
When you record your payroll taxes, ensure that amounts are correct in the payroll system. Don’t directly record your payroll taxes, but create payroll accounts of your employees as a list. The collective list of accounts will help you divide and identify the financial transactions of your business.
Different Employee Accounts
You will need to create an expense or liability account to keep an eye on the payroll. Employees’ compensation, for instance, is a liability account because the money here is payable to insurance service.
Employees’ health insurance, on the other hand, is an expensive account because it offers health insurance assistance for your business.
Gross wages, 401(k), federal withholding, SUTA, FUTA, FICA, employees’ compensation, and state disability payable are some of the standard employee accounts.
File and Pay Your Payroll Taxes
Currently, there are several payroll methods to report and document your details to local, state, and federal authorities. However, your focus of interest should solely be on the requirements of the federal government.
Ultimately, you will have to find some online guidance or professional expertise to research and analyze the requirements that match your state or geographical location. Mostly, tax forms comprise Form 941, Form W-2, Form W-3, and Form 941 to report your payroll tax data.
Final Thoughts: Piece of Advice
Small business owners often get overwhelmed when it comes to complex requirements of the payroll taxes. And that’s normal. It’s about making the right decision to seek the counsel of a tax specialist when you desperately need one. And don’t rely on your limited skills to take care of your payroll taxes to save a few dollars. It is better to get advice from a tax expert than face hefty penalties that could cripple the foundation of your business.