No business owner wants to wind up facing the ire of the IRS. The fees for late filing or under-reporting payroll taxes can be harsh. Late submission results in owing up to an additional 15% of the taxes that were due. Not filing results in 25% more, plus interest. Clearly, it is wise to stay on top of this important scheduled payment. Still, many entrepreneurs struggle with how to calculate and report their employees’ payroll taxes.
Calculating Payroll Deductions for Each Employee.
There are three parts to payroll taxes: Federal Income Tax, FICA, and Unemployment (Both Federal and State). For most situations, the following rules apply to payroll tax planning, but you should always check IRS documentation for exceptions.
To calculate how much Federal Income Tax should be withheld from an employee’s paycheck, they must first fill out a W-4 form. Using the information on that form, as well as charts in IRS Publication 15, Circular E, an employer can figure out how much of an employee’s salary should be withheld for income taxes each paycheck.
To calculate FICA (Social Security and Medicare) payments, check Publication 15, Circular E for the current years’ rates. For 2016, Social Security is 6.2% each for the employee and the employer. Medicare is 1.45% each. So, a total of 7.65% will be taken out of the employee’s paycheck for FICA, and then the employer must match that amount by paying another 7.65%.
FUTA (Federal Unemployment Tax) is not taken from an employee’s paycheck, but must be paid by the employer quarterly. The 2016 FUTA tax rate is 0.006% of the first $7,000 paid to each employee.
SUTA (State Unemployment Tax) is also paid by the employer and the rates vary by state.
Reporting and Depositing Employees’ Payroll Taxes.
While unemployment contributions are collected quarterly, Federal Income Tax and FICA may need to be filed monthly if they total more than $2,500, or semi-weekly if the previous years’ taxes totaled more than $50,000. Deposits must be made electronically via the Electronic Federal Tax Payment System (www.eftps.gov). The necessary quarterly and annual reporting forms (941, 944, 940, 940-EZ) can also be filed through this system.
Save Time and Trouble with Professional Services.
Because of the complexity and the importance of payroll taxes, most business owners will use some kind of professional service to help them. This may be payroll software, a payroll service, or a full-service accounting firm. The fees for any of these services are tax-deductible, and often are well worth avoiding the headache of figuring out payroll deductions on your own.
The most important thing to remember about payroll taxes is, they are unavoidable. When not paid, the IRS will hold an individual, not a business, responsible. Almost always, that individual will be the business owner. Payroll taxes cannot be discharged through bankruptcy; the person in charge will hold the debt over their head until it is paid off.
A professional bookkeeper or tax accountant will make sure that your company’s payroll taxes are filed correctly and on-time so you won’t have to worry about a worst-case scenario with the IRS.
Maxine Taylor and her team at The Balance Sheet provide payroll tax planning services in the Palm Beach, Florida area, as well as many other accounting and bookkeeping services. Visit their website at Tax Accounting Bookkeeping to find blog articles and expert advice for business owners.