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.
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