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Payroll Tax Tips for Employers
Opening your own business can be confusing and overwhelming, especially in terms of your responsibility for collecting and paying payroll taxes. Unfortunately, this is one area that is most frequently overlooked by new business owners. In fact, many employers forget to budget all together for their responsibility toward payroll taxes. As a result, they find themselves falling short and unable to pay those taxes; which can lead to serious trouble with the IRS. Taking the time to understand your responsibility for payroll taxes can help to ensure a long and successful business operation.
First, it is important to understand that it is your responsibility for making sure that certain taxes are withheld from your employee’s payroll checks. This includes Social Security taxes, federal taxes, Medicare taxes and even state and city taxes if they apply. Medicare and Social Security taxes are usually referred to as FICA as a result of the Act that authorized the collection of them in 1939. As an employer, you are responsible for sending these taxes to the IRS as well as local and state taxing agencies. This is done on either a quarterly, monthly or weekly basis. The total amount of taxes withheld determines the schedule by which they must be paid.
In addition, it is important to understand that it is not only the employee paying taxes-you must also match and pay tax amounts to the IRS. For example, for every dollar of Medicare and Social Security tax that is withheld from your employee’s payroll, you must make a matching payment to the IRS.
You are also responsible for unemployment taxes. FUTA, or Federal Unemployment Tax Act, imposes taxes on the first $7,000 of wages that are employed to each employee. While this is commonly misunderstood by many people, it is the employer that pays this amount, not the employee. The tax is paid to the IRS either quarterly or in a lump sum at the end of the year if the total tax owed for all employees is less than $500.
There is also the matter of state unemployment taxes. These tax rates vary from state to state. Some states have a low tax rate of just 0.5% while others range up to 10%. Generally, these taxes are paid quarterly. Keep in mind these taxes are paid by the employer and not the employee. These taxes must be budgeted for by the employer or there could be cash flow issues.
To make sure they avoid these potential problems many employers opt to add an additional 10% to the cost of their employee’s payroll to make sure they have all taxes covered. So, for example, if you have an employee that is paid $10 per hour, to make sure you have everything covered, you need to make sure you are actually budgeting for $11 per hour. That one dollar might not sound like much but over the course of a 40-hour work week it adds up to $40. Over a year, you’re looking at more than $2000-just for one employee. The implications of budgeting become obvious when you begin to multiply that by several employees.
Understanding the responsibility of payroll taxes and taking the time to properly plan and budget is an important part of operating a financially sound and successful business.
The purpose of this article is to provide general information on tax matters to business owners. It suggests general tax tips that may be appropriate in certain situations. The information and opinions are generalizations and may not apply to all taxpayers. It is important that you seek appropriate professional advice before implementing any of the tax ideas suggested.