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List of Partners vendors. One of the issues small-business owners have to contend with is staying current with the many obligations for local, state, and federal taxes. While most business owners hire an accountant or a tax professional to deal with tax-related issues, understanding the tax system is important to those who bear the ultimate responsibility for fulfilling all tax obligations. This article will focus on the business owner's obligations with regard to payroll taxes. Any business with employees must withhold payroll taxes from employees' paychecks and pay applicable federal, state, and local taxes.
The taxes usually withheld from employee paychecks include FICA Medicare and Social Security taxes and federal, state, and local income taxes , if applicable. Failure to pay taxes or missing a payment may result in heavy fines and penalties, so it is important to calculate the amount of payroll taxes owed and to pay them on time. If the small-business owner does not have outside employees but is incorporated , the above rules apply for the owner's paychecks as well, because they are essentially the sole employee of the corporation.
If the business is not incorporated and there are no employees, the owner will need to pay estimated taxes on self-employment income each quarter. There are three steps to calculating payroll taxes:. Workers can be employees or independent contractors. Employees are treated as taxable workers subject to payroll taxes, while independent contractors are responsible for paying their own taxes.
Usually, workers are considered employees if you have the right to direct and control the way they do their work, rather than merely the results of the work. However, the lines between independent contractors and employees are not always clear-cut. In order to help business owners determine which workers are taxable employees, the Internal Revenue Service IRS has common law rules, which include behavioral, financial, and relationship tests :.
A worker is an employee when the employer has the right to direct and control the worker. The employer does not have to actually direct or control the worker but has the right to do so.
This test looks at the degree of control an employer has over the financial aspects of the job. In some professions, having significant control over supplies used for work supports a worker's status as an independent contractor. One definite way to distinguish an independent contractor from an employee is by the availability of services. An independent contractor is not tied to one company and can advertise services; an employee cannot advertise services unless they are working outside the company as an independent contractor.
This test refers to the way the employer and the worker perceive their relationship. If an employer-worker relationship is expected to last until the end of a specific project or for a specified period of time, then the worker is an independent contractor.
On the other hand, if the relationship has no or boundaries, the worker is a taxable employee. Taxable wages are compensation for services performed and may include salary, bonuses , or gifts. Some forms of compensation, such as business-expense reimbursements for travel or meals, do not qualify as taxable wages.
For the expenses to be nontaxable, employees must verify them through receipts or expense reports. They must also be necessary, reasonable, and business-related. After you've figured out which workers qualify as taxable employees and which wages are taxable wages, the next step is figuring out the amount you must withhold for federal, state, and local taxes, as well as FICA and FUTA.
Every paycheck must withhold federal income taxes for the applicable period. The IRS has two sets of tax tables that employers can use to calculate withholding amounts: the wage bracket tables and the percentage tables. The wage bracket tables are segregated for five different payroll periods daily, weekly, bi-weekly, semi-monthly, and monthly. To determine withholding amounts, employers pick the applicable pay period and wage bracket for employees, then read across the table to the column that shows the filing status.
The percentage tables are available for five payroll periods daily, weekly, bi-weekly, semi-monthly, and monthly and segregated by filing status. Employers start by reducing wages by the value of exemptions claimed. Next, they use the table corresponding to the employee's filing status and look for the withholding amount based on the wage bracket.
As a business owner, it is your responsibility to look at the two sets of tables and determine which one is appropriate for your business. The percentage tables are more inclusive, in terms of payroll periods, so if you are in a situation where different employees are paid at different payroll periods, then the percentage table should be the table of choice.
For example, if your employees are paid quarterly, the percentage tables will be more appropriate than the wage bracket tables. Wagefest Peace, Love and Payroll was an epic virtual event of learning, fun and community. Check out this highlight reel of what went down. Canadian Security Systems Ltd. Read about the positive impact it's had for them. Tips for bolstering confidence and capacity for small business owners from Tanya Geisler, imposter syndrome expert.
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Read this to learn why your constructive feedback isn't working. Did you hear that Wagepoint is hosting an event for small business owners, bookkeepers and accountants? Learn the top 5 reasons you should attend! Learn more. Get insights and statistics on how Canadian small businesses have faired one year into the COVID pandemic — including trends on headcount and adopting new technology.
Download a copy. Here's what she said. Accountants are no longer "just accountants. Here are a few stakeholder relationship-building tips.
It's Week 5 of Wagefest Summer Camp! Here's what he said. Michelle Mire. Why This Matters While having a bookkeeper or using online payroll companies serving small businesses, like Wagepoint , helps you simplify and automate your payroll process — every business owner needs to be aware of the deposit and reporting deadlines.
Federal Employment Taxes Starting at the top, the federal employment taxes that an employer is responsible for depositing and reporting include: Federal Income Tax — This is a pay-as-you-go tax. The Golden Rule for Depositing Federal Employment Taxes It is generally recommended that you make your federal income tax, social security and Medicare deposits, collectively known as trust fund taxes, on the same pay date or check date that you issue your payroll checks to your employees.
Other Deposit Schedules If you choose not to deposit your federal employment taxes the same day that you issue payroll, you may follow a monthly, semi-weekly, annual or next-day deposit schedule.
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