What payroll taxes do small business owners need to manage?

Small business owners must manage employee income tax withholding, employer and employee contributions for social programs, unemployment insurance obligations, and any state or local payroll taxes applicable to wages.

How can employers avoid payroll tax penalties?

Employers can avoid penalties by correctly classifying workers, withholding accurate amounts, making timely tax deposits, filing required reports on schedule, keeping thorough records, and monitoring regulatory changes.

Small business owner's guide to the payroll tax

A realistic guide to employer payroll taxes & compliance pros and cons opener A neutral view of taxes: good or bad?

For small business owners, processing payroll is one of the most important administrative duties there is. In addition to paying workers on time, this includes withholding the right amount of payroll taxes and making timely deposits and filing necessary reports. Failure to adhere can result in penalties, interest — and headache. This guide demystifies the basics so you can establish a reliable payroll regimen.

Knowing the fundamental kinds of payroll taxes

Before you run payroll, learn the primary types of payroll taxes and who’s on hook for them:

Employee withholding: Employers withhold income tax from the wages of employees based upon the information on a withholding form and the applicable tax table.
Employment taxes for social programs: In many countries, payroll contributions are levied to finance social insurance programs. A chunk of it is usually deducted from their employees’ paychecks and another chunk is paid directly by the employer.
Unemployment insurance: Employers generally pay unemployment insurance taxes or premiums to fund temporary benefits for workers who lose their jobs.
Local and state taxes: In addition to federal obligations, employers should be aware of local and income taxes as well as local payroll taxes or city-level levies that apply to wages.

Classifying the people you pay

Proper classification of workers determines which taxes are applicable.

Employees: WEA-CT sees people under your management who receive regular wages (or salary) as employees. Employers typically withhold income taxes and pay the employer portion of payroll taxes on behalf of employees.
Independent contractors: Contractors are generally on the hook for their own tax payments, and they are often paid without income tax being taken out. Penalties for Misclassification exposure to retroactive payroll tax liabilities.

Withholding: Here’s how to calculate and get more money back as a tax refund

Accurate withholdings start with good documentation of the employee and current withholding instructions. Withhold from each employee's wages the amount stated on his or her withholding allowance certificates (or any acceptable substitute). Next, find the compulsory withholdings for social contributions. Add these together to find out the net pay.

Tips:

Do a payroll check in each pay period to make sure withholding conforms to the latest instructions.
Kept lines of communication open to allow employees to adjust their withholding when life changes.

Deposit schedules and timing

Payroll tax is generally due monthly or semi-weekly (depending on the total amount of payroll tax) and employers must deposit their payroll taxes at an authorized financial institution pursuant to Treasury Regulation Section 31.6302-1. It’s a very common penalty to be assessed helping missing deadlines for deposits.

Practical steps:

Figure out your deposit schedule in advance and set up recurring calendar reminders for each due date.
Keep a payroll account or ledger so any money withheld for taxes does not mix with operating cash.

Filing returns and reports

Other than deposits, there are often periodic reports required that detail the wages paid, the tax withheld and employer contributions. Filings may be quarterly or annual filings and can involve reconciliation of withheld amounts.

Action items:

Monitor deadlines for each necessary filing and compile reports early.
Keep all reports and acknowledgments filed as these could be useful in clarifying any questionable information during future audits.

Recordkeeping best practices

Keeping good records protects your business and it also makes compliance much easier. Keep payroll records for a number of year -- to include payroll journals, copies of employee withholding statements, timecards as well as deposit confirmations and filed reports.

Recommended practices:

Keep records safe and duplicate them digitally.
Retain records of hiring and classification decisions, to be used in worker status determinations.

Mistakes to avoid (and how you can prevent them)

Misclassifying workers: When contractors are improperly categorized as employees or vice versa without records, the potential for payroll tax liability expands. Examine the work, supervisory and payment arrangement to confirm classifications.
Late deposits and filings: Establish internal deadlines that are earlier than official deadlines and use automated reminders.
Inaccurate or scattered information: Create a consistent payroll file for each employee and keep all documents in one place.

Dealing with payroll tax changes

Rules, rates and reporting requirements for payroll taxes evolve. Keep up to date with official guidance and develop a rhythm of re-assessment at least once every three months. As soon as a new law which affects rates or withholding rules becomes law, reflect the new computation in payroll processing and let affected employees know about it.

Managing audits and liabilities

If there are any problems that the authorities have identified, deal with them promptly. Collection of records, show cause why corrective action cannot be shown and if applicable negotiate payment arrangements for a tax liability. You can mitigate penalties in many cases by quickly taking voluntary corrective action.

Creating a basic payroll compliance checklist.

Check the classification of each person you pay as a worker.
Require proper withholding documentation from all employees.
Compute gross wages, deductions and employer contributions for each pay period.
Verify mine deposit calendar, and deposits tax on time.
Is File also required to periodically report and reconcile amounts held to deposits?
Retain payroll transactions, deposits and filings for the typical retention period.
Track developments in regulations and update your payroll practices accordingly.

Helpful hints for a smoother month-end payroll process

Establish a predictable pay schedule that corresponds to your cash flow and reporting requirements.
Reconcile Payroll liabilities after every pay run to pick up mistakes early.
Utilize transparent internal checklists to ensure multiple individuals can perform the same payroll process.
Keep a slush fund to cover payroll tax deposits in the event that cash starts to dry up.

When to seek professional help

While a lot of small businesses can manage payroll in-house, seek advice from a professional if you have questions about complicated classifications, cross-border payrolls, or lots of tax notices. Expert advice saves you time, money and gives peace of mind in the long run.

Final thoughts

Complying with Payroll Tax is It’s Own Beast That Makes You Worry We all know that payroll tax compliance is a crucial requirement. Small business owners can minimize risk and focus on growth by knowing the basic types of payroll taxes, classifying workers correctly, maintaining scrupulous records and going through an easy-to-follow compliance checklist. To get there, take the time to record your current payroll procedures and compare them against the checklist above to see where you don’t measure up—and then work towards fixing this in your next payroll cycle.