Payroll and Sales Tax

As an employer, there are things you love doing and things you absolutely despise. Somewhere in the latter category is probably the duty of filing and paying payroll taxes. While it is certainly confusing, time consuming, and stress inducing, payroll taxes aren’t impossible. With a little determination and understanding of the requirements, you can push through and get to the things you truly enjoy.

The Issue with Payroll Taxes

Payroll taxes in and of themselves are not very difficult to calculate and file. It’s the various payroll deductions that prohibit most business owners and accountants from getting to an accurate net pay that holds them back. The basic formula is as follows: (Employee Gross Pay) minus (Statutory Payroll Tax Deductions) minus (Voluntary Payroll Deductions) = Net Pay.

If you’re looking at that equation and asking yourself exactly what these payroll tax deductions are, don’t worry. Plenty of employers stumble over these areas and need assistance. The key is to take it one step at a time and keep each category separate from the other.

 Statutory Payroll Tax Deductions

Those payroll tax deductions you are required by law to withhold from your employees’ paychecks are known as statutory payroll tax deductions. These include the following:

• Social security tax withholding (which is anywhere from 6.2{bf3da7fb6a4d0e0e3790d09a79b980fc065e33e2f3a2d49280f7e95b82f4982b} up to the maximum annual limit).
• Federal income tax withholdings.
• Medicare tax withholding and any additional Medicare tax for employees earning in excess of $200,000.
• State income tax withholding.
• Local tax withholdings, such as county, city, school district, unemployment insurance, and state disability).

 Voluntary Payroll Deductions

If your accountant has done a good job of keeping the books throughout the year, statutory payroll tax deductions are simple to calculate. It’s the voluntary payroll deductions that can cause a little more trouble. Because these deductions are only withheld if requested by the employee – as opposed to being automatically deducted – it’s crucial they are accurately and precisely recorded. Examples of voluntary payroll deductions include:

• Life insurance premiums.
• Health – medical, eye care, dental – insurance premiums.
• Employee purchased stock plans.
• Retirement contributions to a 401(k) plan.
• Job-related expenses involving food, uniforms, union dues, equipment, etc.

Because these deductions can be paid with either pre- or after-tax dollars, certain wages are subject to federal income tax, while others are instead subject to Medicare and Social Security taxes. These determinations can be made by reviewing the IRSs Publications 15 and 15-B.

 How to Deal With Tips in Service Industries

For employers in service industries where a considerable amount of income is earned from tips, it’s important to understand the basics of reporting these earnings. Here are some things to keep in mind:

• 100{bf3da7fb6a4d0e0e3790d09a79b980fc065e33e2f3a2d49280f7e95b82f4982b} of tips are taxable. If your employees receive more than $20 of tips in a month, everything they earn must be reported. This number includes cash and credit tips.

• The IRS is very serious about taxing tips and asks employers to gather employee tip reports for any employee earning more than $20 in tips over a one month period.

• Using these tip reports, you are required to report your employees’ tips and withhold payroll taxes.

• For certain employers, it’s necessary to file an 8027 Form with the IRS each February. Known as the Employer’s Annual Information Return of Tip Income and Allocated tips, this form is for businesses that meet the following criteria: (a) serve food and drink, (b) tipping is customary, and (c) employ more than 10 employees (or 80 hours of labor) on a given day.

When it comes to reporting payroll taxes, tips can seriously complicate the issue. The best thing an employer can do is make an effort to educate employees on the importance of payroll taxes and staying complaint with IRS regulations. If no efforts are made to educate employees, tips will go unreported and issues will arise.

 Your Payroll Tax Responsibilities

As an employer, you have a number of payroll tax responsibilities that come with the territory. After calculating the net pay by subtracting deductions, you are required to report your payroll tax obligations and make a timely payment. Your reporting responsibilities include making federal tax deposits, filing an employer’s quarterly payroll tax return four times each fiscal year, filing an annual federal unemployment tax return, reporting withheld federal income tax each year, and keeping up with W-2 Wage and Tax Statements.

Hiring a Tax Professional

While it can seem intimidating, payroll taxes don’t have to be a dreaded task each year. By ensuring total accuracy and staying on top of deadlines, you’ll find the process relatively easy. For assistance, consider hiring a tax professional to review payroll taxes.

If you are a business owner or individual responsible for collecting payroll taxes, you are almost assuredly aware of the requirement to submit withheld funds to the IRS. While the responsibility to pay is obvious, do you have a clear understanding of the consequences of failing to comply?

 The Trust Fund Recovery Penalty

Payroll taxes; two dreaded words for small businesses everywhere. While it would be nice to close your eyes, clap twice, and have them disappear, tax authorities won’t allow it. As a business owner, you are required to submit payroll taxes – which usually means withholding funds from your employees’ paychecks. To keep you in line, the IRS has instituted the Trust Fund Recovery Penalty (TFRP).

The IRS can assess a penalty for companies that don’t follow the rules. Specifically, the TFRP can be assessed against any individual who “is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes” and “willfully fails to collect or pay them.”

In laymen’s terms, any individual that’s responsible for collecting trust fund/payroll taxes and does not collect or pay them is susceptible to penalization. This individual could wear any number of hats, including officer or employee of a corporation, director, shareholder, member of the board of trustees, third party payer, payroll service provider, professional employer organization, or any other party responsible for payment.

In addition to being responsible for collecting and paying payroll taxes, it must be proven that the party willfully failed to collect and pay. This requires that there was a clear understanding of outstanding taxes and the responsibility to pay was intentionally disregarded. The IRS points out that “no evil intent or bad motive is required” under this condition.

The TFRP Penalty Amount

The TFRP penalty amount is determined based upon the unpaid balance of the trust fund tax – which includes unpaid income taxes withheld plus the employee’s portion of withheld FICA taxes.

Once the IRS determines responsibility and sends a letter stating its intention to assess the TFRP penalty, the responsible party has 60 days to respond with an appeal. If no appeal is submitted, the IRS will assess the penalty via a Notice and Demand for Payment. At this point, the IRS can launch a total collection action against personal assets (federal tax lien, levy, seizure claim, etc.).

How to Avoid the TFRP

Sounds pretty scary, doesn’t it? If you want to avoid the trust fund recovery penalty and remain in business, you must stay proactive. The IRS takes payroll taxes very seriously and your refusal to pay will have them beating down your door in no time. Here are a few tips for avoiding the frightening TFRP:

• Stay current. Most importantly, you need to stay on top of your payroll accounting. Get current with all employment tax returns and 941’s, even if paying them in full is impossible. By filing your 941’s, you can at least show the IRS you are attempting to remain compliant. They deal much more kindly with business owners that make an effort, as opposed to ones that pay total disregard to their rules and regulations.

• Start fresh. As a business owner, you certainly understand the importance of leaving the past in the past and focusing on the present. That skill will come in handy if you are confronted with the possibility of a TFRP. Regardless of how much past payroll tax you owe, start with the current month’s deposits and work from there. Again, the IRS takes notice of these small details.

• Statute of limitations. According to the Trust Fund Recovery Penalty Statute of Limitations, the IRS has exactly three years to notify you of delinquent trust fund taxes. After this point, you are off the hook. While these situations rarely slip by the watchful eyes of the IRS, it’s at least worth knowing.

• Negotiate. When you know you’ve messed up, it never hurts to negotiate. As a rule of thumb, “always under-promise and over deliver when you make a commitment” to the IRS. If you cooperate, it’s entirely possible they will work with you instead of imposing the TFRP.

• Be honest. Above all else, it’s incredibly important to be honest and transparent. The IRS is willing to work with you if they feel like you’re sincere. Never lie to the IRS and always provide information when you have it.

For help understanding the trust fund recovery penalty or negotiating with the internal revenue system, seek the assistance of an IRS tax professional. Their expertise and knowledge can improve your chances of remaining in the good graces of the IRS.

As a small business owner, there is so much to remember. Keeping inventory in stock, hiring employees, managing the books, and establishing relationships with clients all demand your attention. While payroll taxes may not be something you spend a large amount of your time focusing on, you shouldn’t ignore them. The IRS takes payroll taxes very seriously, so be sure you understand these seven important things:

7 Tips for Small Business Owners about Payroll Taxes

• Crossing State Lines.

   If you own a business with employees in more than one state, payroll taxes become much more complex. That’s because different states have individual rules and regulations regarding how payroll taxes are calculated, handled, and distributed. While it may be advantageous to hire employees in other states, make sure you understand the tax liabilities involved before proceeding. The additional taxes you will be subjected to may or may not outweigh the benefits.

• Tax Compliance Enforcement.

  While you may run an honest business, slipups can carry stiff penalties. That’s because the IRS has chosen to focus its tax compliance enforcement on small businesses. They crack down on small businesses because they have been identified as the single largest source of uncollected taxes in the country. This is likely a case of a few bad seeds ruining the reputation for everyone else, but still warrants careful treading. Keep this in mind when you want to discount the importance of careful bookkeeping and payroll taxes.

• Keep Your Hands Off.

  The biggest “no-no” in regards to payroll taxes involves interfering with the funds. Above all else, you must remember to keep your hands off and leave funds alone. It is completely against the law to borrow or use payroll taxes for any purpose. That’s because they don’t technically belong to you. They are a portion of your employees’ paychecks and do not belong to the employer.

• Constantly Monitor.

  You can’t set up a payroll program or system and expect it to run itself. It’s important to constantly monitor things on a rolling basis and the need for continual evaluation is huge. Tax laws and requirements change frequently, so don’t fall behind on the times.

• Bonus Checks and Overtime.

  Did you know the timing of bonus checks and overtime payments can have major tax implications? The timing of these payments needs to be correctly aligned with payroll tax due dates. Improper alignment could mean penalties and fines.

• Stiff Penalties.

  Improper payroll tax deductions can lead to stiff and severe penalties. In fact, not paying payroll taxes can be a federal crime. If your situation is severe enough, you may be referred to the Criminal Investigation Division or Department of Justice.

• Delinquent Payroll Taxes.

  If you have delinquent payroll taxes, it’s best to deal with the situation swiftly. The best piece of advice is to stay current on all of your present and future payroll tax withholdings. The second piece of advice is to seek professional tax relief help and develop a plan for paying off your debt. Delinquent payroll taxes add up quickly and can be considered a federal crime. To avoid unnecessary penalties, it’s best to cooperate.

Payroll Tax FAQs :

While these seven things are pretty important, you have to start with the basics. Do you have questions regarding basic employer payroll taxes? Here are answers to commonly asked questions:

• How can I ensure compliance?

  There are hundreds of rules, codes, and regulations regarding payroll and payroll tax withholdings. These often lead to major confusion over rules and compliance. To avoid mistakes, it’s important to educate yourself on common errors, learn about simple ways to follow the rules, and get professional help when necessary.

• I’m overwhelmed… where can I get help?

  The good news for those overwhelmed by payroll taxes is that there is help waiting around the corner. There are plenty of services, software, and tools to help alleviate the pressure and ensure compliance. While these are helpful, it’s important to keep an eye on these tools from time to time to make sure they are working properly.

• I have delinquent payroll taxes, am I in trouble?

  The short answer is “not necessarily.” As soon as you find out about delinquent payroll taxes, it’s important to contact professional help. You will want to deal with the IRS honestly and reasonably.

Payroll tax deductions are an important part of running a small business. To remain in the good graces of the IRS, you must make sure you follow all laws and regulations pertaining to your business. The IRS is always looking to crack down on small businesses that disobey their rules; don’t let yours be one of them.

The larger your business, the more revenue you probably earn. As your revenue increases, so do your tax responsibilities. While business owners have much on their plates, it’s important to remember state sales tax. Adherence to the rules and requirements means everything runs smoothly, but slip up and you may find yourself in trouble if you fail to learn how to solve sales tax problems. Here are 8 common sales tax problems you should avoid at all costs:

8 Common Sales Tax Problems:

• Failing to Collect Sales Tax.

  For some odd reason, businesses sometimes overlook the need to collect sales tax. There’s really no excuse for this. If you sell a tangible product, you need to collect sales tax. A failure to do so means you lose money on your end, granted you are still paying sales tax to your state’s tax authority.

• Inadvertent Misuse of Sales Tax Money.

  There is absolutely no excuse for misusing sales tax money, yet it still happens on a regular basis. Because small businesses don’t always manage bank accounts accurately and well, funds often become co-mingled. That means business revenue, personal money, and taxes are all sloshing around in one big bucket. When this is the case, it’s very likely tax money will be spent to pay for bills – personal or business in nature. Your state’s authority does not look fondly on this and will enact harsh penalties. To avoid this situation from the start, it’s best to keep separate accounts for all funds.

• Intentional Misuse of Sales Tax Money.

  The only thing worse than misusing sales tax money is intentionally misusing sales tax money This happens when a business owner finds himself in trouble and “borrows” sales tax money to pay off some other expense. In most cases, the owner never recovers the money and cash flow problems only become worse. No excuse will appease your state’s tax authority in this situation.

• Doing Nothing.

  While your state’s does not appreciate inadvertent misuse of sales tax money, they are not the cold-hearted individuals people often make them out to be. It’s always best to pay part of what is owed, rather than avoiding the sum altogether. Many times, business owners think they should avoid the situation if they don’t have enough to cover what they owe. Instead, they should pay what they have and make a case for the remaining balance. Often, your state’s tax authority will develop a repayment plan.

• Miscalculations.

  While all business owners should have a basic understanding of finance and accounting, it isn’t always the owner’s expertise. This means errors are easy to come by when dealing with sales tax. One solution is to run numbers twice through two different tools.

• Failing to File on Time.

  Something as straightforward as filing tax forms on time may seem easy, but to a business owner with numerous things to do, it’s easy to forget. Late tax forms can be costly, so business owners should keep a calendar to remind them of all deadlines.

• Nonprofit Exemptions.

  One common misconception is that all nonprofits are exempt from paying sales tax. While this may be true, it is not necessarily a given. Nonprofit status does exempt federal income taxes, but some states still require sales tax. Business owners should check state laws and regulations to ensure they are following the rules.

• Online Businesses.

  Online businesses are often subjected to different rules and regulations, which can leave owners confused and misguided. One common mistake is believing sales tax is not required for an online business. In the state where the business has a physical presence, it is required that the business charges sales tax. It’s best to check specific rules and regulations regarding this law, as they do change from time to time.

Sales Tax Word Problems

It turns out elementary school word problems are actually useful in real life. If you are looking for answers on how to solve sales tax problems, it may be best to simply practice. Here are some sales tax word problems to get your mind going:

Your local dealership is selling a pickup truck for $18,995. The sales tax is 7{bf3da7fb6a4d0e0e3790d09a79b980fc065e33e2f3a2d49280f7e95b82f4982b}. What is the total price and what portion of that is sales tax?
The total price is $20,324.65. The sales tax is $1,329.65.

John purchased two pairs of blue jeans for $29 dollars each and one shirt for $12. The sales tax is 6.5{bf3da7fb6a4d0e0e3790d09a79b980fc065e33e2f3a2d49280f7e95b82f4982b}. How much did John owe and what portion is the business required to set aside for sales tax?
The total price paid was $74.55. The business must set aside $4.55 in sales tax.

Maintain the integrity and reputation of your business with your state’s tax authority by using these 8 tips on how to solve sales tax problems.