5 Tips for Payroll Tax Reporting

Payroll taxes are one of the most labor-intensive employment taxes that business owners handle. Also known as “FICA taxes,” payroll tax is comprised of Social Security and Medicare taxes. These taxes are withheld from employees’ paychecks as well as paid by the employers, which means that business owners must manage both sides of the equation.

​The topic of payroll taxes is a big one for small business owners, with more than half of them  indicating that these federal taxes have either “moderate impact” or “significant impact” on their day-to-day operations. These impacts typically include lost productivity and increased mental strain for already over-burdened business owners.

With all the constantly changing regulations and nuances in tax filings, small business owners often feel like they are trying to stay afloat in a sea of confusing legal regulations. Learning more about this area of business taxation provides the knowledge and reassurance needed to for business owners to file payroll taxes in compliance with federal laws.

(1)  Understand Withholdings

Payroll taxes are either withheld from employee earnings or paid directly by employers. Taxes that are withheld before earnings are paid out to employees include:

• Federal income taxes
• State income taxes
• FICA taxes
• Medicare taxes

These withholdings must be placed on deposit regularly (either quarterly, monthly, semi-weekly, or daily depending on the business type and location). Additionally, a Form 941 needs to be filed quarterly via mail or email with the IRS to report these withholdings.

Additionally, taxes that are paid to governing entities by employers include:

• Matching FICA taxes
• Federal unemployment taxes
• State unemployment taxes
• Worker’s compensation fees

Requiring that employers pay a portion of state and federal taxes in addition to depositing employee withholdings ensures that the tax burden will be shared between workers and businesses.

(2)  Withhold the Correct Amounts

Employers must withhold earnings from all employees’ paychecks, including full-time, part-time, and seasonal employees. Independent contractors and self-employed individuals, however, are not subject to withholdings. While independent contractors do not fall under an employer’s withholding obligations, they must be documented using W-9 forms and payments to them must be reported using 1099 forms.

Current withholding values from an employee’s pay include:

• 6.2% for Social Security taxes
• 1.45% for Medicare taxes
• Federal and state income tax values based on individual employees’ W-4 forms

Employers then pay:

• 6.2% for Social Security taxes
• 1.45% for Medicare taxes
• 6% federal unemployment taxes (before credits) on the first $7,000 earned by each employee
• State unemployment taxes (which vary by state and other factors like company type, experience, and history of unemployment claims)

(3)  Include All Applicable Forms

Employers are required to report wages, tips, and other employee compensation using a Form 940 for each quarter where taxes owed are greater than $500. Additionally, forms 941 and 944 are required to report on deposited taxes. These can be e-filed or physically mailed to the IRS.

For a full list of forms, requirements, and other considerations, visit the IRS depositing and reporting resource list. Consulting with a tax professional can help determine which of these forms are necessary for your specific business organization.

(4)  File on Time

Reporting and filing dates change from year-to-year, but the IRS notifies businesses of filing deadlines for the coming year in December. While some deadlines are universal, others depend on a business’s previous filing pattern (for instance, entities that submitted timely tax deposits previously are given 10 extra days to file a Form 941). Other deadlines depend on the schedule a business uses to make deposits.

Filing on time is as crucial as reporting and depositing the correct amounts. Failing to file in a timely manner without the issuance of an extension can increase your chances of being audited and result in fines and penalties.

Current employment tax reporting dates can be found on the IRS website.

(5)  Use a Payroll Service

Many small businesses choose to do payroll in-house to reduce costs. However, this is not a wise use of resources because payroll administration takes valuable time away from revenue-generating activities. In fact, a third of small businesses spend  more than 40-hours annually on federal taxes alone. Understanding tax code obligations and filing all the applicable forms on time is an efficiency-killer for small businesses nationwide. Additionally, 63% of small businesses spend over $1,000 per year solely on the administration of federal taxes.

When combined with state tax administration and other employment tax requirements, this number can rapidly increase. Comparatively, the average small business only spends $101-500 monthly on comprehensive payroll services. Therefore, investing in professional payroll services is a shrewd business decision for most small business owners because it reduces both time-waste and management costs.

Furthermore, using a payroll service ensures tax filing accuracy to reduce the risk of getting audited. The result is a decreased likelihood of tax penalties and fines as well as more efficient filing. While most business owners choose to use this kind of professional service to safeguard against underpaying payroll taxes, savvy owners also recognize the value in avoiding overpayments. Withholding too much money from employees’ wages or overestimating tax obligations can result in serious business issues such as restricted cash flow.

Payroll can get complicated and keeping up with payroll tax requirements difficult. If you need help with your payroll and reporting, please contact us here.

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