Payroll taxes are a fact of life, but that doesn’t mean you know all the facts.
Any time the federal government, a state government and a small business intersects, there are bound to be nuances. And when it comes to payroll taxes, those details matter; tax authorities take very seriously the withholding and remitting of funds from employees’ paychecks.
Here, then, are seven things you may not know about payroll taxes and certainly should.
1. Tax liability in other states.
If a business has employees in multiple states, payroll taxes may get more complex. Different states have their own rules regarding how payroll taxes are handled, as well as different rates in certain areas. “Hiring people to work for you in other states potentially creates unemployment tax liability in those states,” says NFIB member Sam Kerch, resident CPA and director of finance at Symmetry Software in Scottsdale, Arizona. “Check with the states you are dealing with to determine what other taxes you may be subject to.”
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2. Timing of bonus checks.
Eager as you may be to hand out bonuses to star employees—wait. The timing of those bonuses could have tax implications. “If a small business owner pays bonuses to his or her employees, the timing of the bonus payments must be lined up with the due date for the payment of the payroll taxes. If these two payments are not lined up, a penalty could inadvertently be triggered,” says NFIB member Chris Roush, CPA, principal at Rea & Associates in New Philadelphia, Ohio.
3. Timing of overtime.
Just as the timing of bonuses can trigger tax havoc, other elements of payroll must be tackled with timing in mind. This includes overtime, says Shauna A. Wekherlien, CPA, owner of Tax Goddess Business Services in Scottsdale. Not every employer issues paychecks weekly. That’s fine, but for payroll-tax purposes, overtime still must be broken down into weekly increments.
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4. Paying up withholding on time.
Remitting funds to the IRS on deadline should be obvious. But in this case, it’s not even your money: It’s employee money that you have held back. That makes timeliness doubly serious. “Once monies are withheld from employees’ paychecks and not turned over to the IRS, penalties are severe. It is the most critical mistake many small business owners make. They often fall behind one quarter and attempt to ‘catch-up’ the next quarter. It generally does not work,” says Alan Drucker, a former IRS Special Agent and now principal in Secure Investigations, located in Little Falls, New Jersey.
5. Vetting vendors.
Don’t just assume a vendor is ready for the job. “If you deal with a third-party payroll-processing company, make sure the payroll-processing company is properly bonded for fidelity purposes and that all tax funds advanced to the third-party payroll-processing company are held in a separate trust fund,” says Neal Graham, a CPA with Harris Shelton Hanover Walsh in Memphis, Tennessee. In other words: Make sure that money stays safely out of bounds. “There have been cases where the third-party payroll company commingled the funds received from various small business owner clients and ultimately failed to transfer the small business owners’ payroll taxes to the U.S. Treasury. In those cases, the small business owners still owed the taxes and penalties to the U.S. Treasury and had to seek damages from the third-party payroll-processing company, which may or may not be solvent.”
6. Leaving funds alone.
Just as outside payroll companies must leave these funds inviolate, so must business owners keep their hands off. “It is against the law for employers to borrow from payroll taxes to pay operating expenses. Money collected from employees’ paychecks for payroll taxes does not belong to a business. All monies collected from employees’ paychecks needs to be deposited to the appropriate tax jurisdictions,” says Jason Maxwell, president of MassPay Payroll Services in Beverly, Massachusetts.
7. Always evaluating.
Payroll tax is a moving target; treat it that way. “Setting up a payroll program isn't just a one-time event,” Roush says. “It's important for small business owners to continually evaluate and update as needed their payroll programs to ensure that payroll taxes are being withheld accordingly. Tax requirements can change in various states or municipalities at any time, so it's important to stay up-to-date on these changes.”
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