As if small business owners did not have enough to do, having employees adds even more to their plate. Making sure their payroll is done correctly and all information reported properly is of high priority, regardless of whether payroll is done in house or by a third party. As mentioned in our last blog post it’s the business owner’s responsibility to report information regarding an employee’s previous year income by the end of January. That is not where a business owner’s payroll reporting responsibility ends. Every business owner who has employees is required to at least withhold federal payroll taxes. Businesses in states that have an income tax are also required to withhold state payroll taxes.
Payroll taxes, whether federal or state, are calculated based on an employee’s gross pay (hourly rate x hours worked). Once calculated they are withheld from the employee’s paycheck. Any amount withheld then needs to be reported to the proper agency.
Payroll taxes that must be withheld include:
- Federal Income Tax Withholding
- Social Security Tax Withholding
- Medicare Care Tax Withholding
Additional payroll tax deductions can include:
- State income tax withholdings
- Local tax withholding, such as county, city or school district taxes, state disability or unemployment insurance.
Other deductions that can affect payroll taxes are health care premiums, 401 (k) deductions and job related expenses, such as union dues or uniforms. The type of benefit being paid for will determine if the deduction is paid with pre-tax or after-tax dollars.
An employee’s federal tax withholdings is determined by information they provide on their W-4 form. This form should be updated each January to ensure the correct amount of withholding allowances are claimed
As part of payroll tax reporting the following forms need to be completed by the business owner:
Annual Federal Unemployment Tax Return (Form 940)
Businesses are responsible under the Federal Unemployment Tax Act (FUTA) for paying taxes to the federal government to cover unemployment insurance. The amount paid not only covers federally mandated benefits but also serves to provide emergency funds that states can tap into when they need temporary assistance in paying state unemployment benefits. FUTA tax payments are deposited quarterly (quarter ending Mar 31 – April 30, quarter ending June 30 – July 31, quarter ending Sept 30 – Oct 31 and quarter ending Dec 31 – Jan 31). These deposits are made electronically through the EFTPS system. Form 940 must be filed by January 31 to report all unemployment taxes paid in the previous year.
Employer’s Quarterly Federal Tax Return (Form 941)
A business owner who pays wages that are subject to income tax withholding or social security and Medicare taxes must file Form 941. Each quarter the business owner must use that form to report the total number of employees they have, total amount of wages paid and the amount of taxes withheld. The form is submitted quarterly (quarter ending Mar 31 – April 30, quarter ending June 30 – July 31, quarter ending Sept 30 – Oct 31 and quarter ending Dec 31 – Jan 31). If a business owner closes their business they must submit a final return for the last quarter in which wages were paid.
Disclaimer: The payroll tax and withholding information mentioned above are provided for informational guidance for business owners but in no way should be construed as tax, legal, or accounting advice. Business owners should always seek the advice of a tax adviser to learn what is best for their specific business and to avoid the potential of receiving any tax penalties.
For additional information regarding payroll tax and withholding check out the IRS website
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