Paying payroll taxes is one of the least fun activities of any business with employees. But taxes are a fact of life today, so it's best to just pay the taxes. But what payroll taxes must be paid, and when?
In this article, I'll review some of your major responsibilities for payroll taxes, including withholding federal income taxes and Social Security/Medicare taxes, sending these taxes to the IRS, and paying other employment taxes like unemployment tax.
What are Payroll Taxes?
Payroll taxes (are those taxes you have to consider when you pay employees, so they depend on your payroll. Some of these taxes are withheld from employee pay, and others are your responsibility as an employer. The term "withholding" means that you are deducting these payments from employee paychecks, based on laws and regulations that require these payments to be made.
These taxes include:
- Withholding federal, state, and local income taxes from employee paychecks
- Withholding FICA taxes from employee paychecks and paying an equal amount as an employer.
- Paying unemployment taxes based on employee pay.
- Paying amounts to state and federal worker's compensation funds, based on employee pay.
In case you wondered, the terms "payroll taxes" and "employment taxes" are basically the same. The IRS uses the term "employment taxes."
Your Business Responsibilities for Payroll Taxes
As a business with employees, you have certain important responsibilities relating to payroll taxes.
Your responsibility for withholding, reporting, and paying these payroll taxes is set by law. Not paying these taxes can result in extreme fines and penalties.
Having an understanding of these responsibilities will help you in making certain that you comply with the law. All employers must:
- Collect information from employees on a W-4 form when the employee is hired, so you can withhold federal income taxes as the employee directs. It's not your responsibility as an employer to make sure the employee is having the "correct" amount withheld.
- Withhold (take out) appropriate taxes from employees. These taxes include the federal, state, and local income taxes the employees must pay, FICA taxes withheld from employees and also paid by you as the employer. You as the employer must withhold the income taxes as the employee has designated in a W-4 form; FICA taxes are deducted as a percentage of gross pay.
- Set aside funds for these payroll taxes, including both employer and employee portions of Social Security/Medicare, and employer liabilities for unemployment taxes and worker's compensation. These funds are called trust fund taxes, which means they are held in trust until they are required to be paid.
- Pay the taxes to the appropriate agency. This includes both employee taxes and employer taxes. For example, you will pay both the federal income tax withholding and Social Security/Medicare amounts to the IRS. You must also pay the FICA taxes you collected from employees, along with your own portion of the FICA taxes as an employer.
- Report tax owed to appropriate agencies and to employees, as specified by law. These reports include Form 941 - Employer's Quarterly Wage and Tax Report, and Form 940 - Unemployment Tax Report.
- Provide other reports to federal, state, and local agencies as required. For example, you must report the employment status of all new employees.
Personal Responsibility for Payroll Taxes
Having a business, even a corporation, does not relieve company employees, executives, or owners from personal responsibility if payroll taxes are not paid. For example, if you are a single-member LLC, you are the sole owner of the business and you have personal responsibility for these taxes. You as the owner are still responsible.
If your business is a corporation, the personal responsibility is usually given to a top executive, who has the job of making sure payments and reports are sent on time.
Penalties for Non-payment of Payroll Taxes
Employers who do not comply with the employment tax laws may be subject to criminal and civil sanctions for willfully failing to pay employment [payroll] taxes.
Fines and penalties for failure to report and file are steep, even if the failure is not determined to be willful.
How to Make Sure You Meet Your Payroll Tax Responsibilities
The best way to make sure that payroll taxes are withheld, accounted for, reported, and paid is to set up a system that works automatically.
First, set up a separate payroll bank account, so you can keep payroll-related payments and income separate from your general business accounting.
Then find someone to do your payroll:
- Use payroll accounting software. Most business accounting systems have an add-on payroll accounting system. Find one that works for your business.
- Outsource payroll to a service. Your accountant may be able to provide this service, or you can find a person or company that will personally handle your company's payroll, creating paychecks, putting money into a dedicated. Some
- Use an online stand-alone payroll accounting application, like Gusto or Paychex.
Even a very small business with a few employees can benefit from having someone else take care of payroll tax responsibilities. Just remember that whoever does payroll and deals with payroll taxes, the responsibility is ultimately yours as the business owner.