Keeping up with the numerous commitments for federal, state, and local taxes is one of the many challenges that small-business owners must deal with. While most company owners hire a CPA or a tax specialist to deal with tax-related matters, it is crucial for those who are ultimately responsible for all tax responsibilities (the business owner) to fully comprehend the tax system. Because at the end of the day, it is the owner who will be held civilly (and potentially criminally) liable if the business fails to comply with tax obligations or if there is any wrongdoing. Therefore, it behooves you as a small business owner to know as much as possible about your tax obligations, even if you use the services of other tax professionals.
This article will concentrate on the business owner’s responsibilities in terms of payroll taxes and tax-related obligations that you must never ignore as a small business owner.
Most states employ tables that are identical to federal tax tables, which you may find by visiting your state’s website’s tax section or calling the Small Business Administration. In states where there are no state income taxes, such as Alaska, Texas, Wyoming, Florida, and Washington, you do not need to deduct state taxes. Other instances include states like Arizona, where personal income taxes are a fixed percentage of federal taxes, and Pennsylvania, where state taxes are a fixed percentage of gross wages.
The Federal Insurance Contributions Act (FICA) is federal legislation that mandates that companies deduct Social Security and Medicare taxes from employee pay. It also mandates that both the employer and the employee pay half of the FICA tax.
Employees pay a flat rate of 6.2 percent for social security and 1.45 percent for Medicare, while employers pay a single flat rate of 6.2 percent and 1.45 percent, respectively, for a total FICA tax rate of 15.3 percent (12.4 percent for Social Security and 2.9 percent for Medicare). Individuals who work for themselves are liable for paying the entire 15.3 percent tax.
FICA taxes are unchanged by the number of withholding exemptions filed by the employee, unlike state and federal taxes. Therefore, to establish how much you must withhold and pay as an employer, just multiply an employee’s gross wage payment by the applicable tax rate.
The Social Security tax, often known as the Social Security wage base, will only apply to the first $142,800 of income in 2021.
Every year, the wage base is updated for inflation. There is no income cap for the Medicare tax.
Unemployment taxes, often known as FUTA, are a type of tax that the employer primarily pays. If any of the following apply to you, you must pay unemployment taxes:
a) You pay at least $1,500 in salaries per quarter.
b) For at least 20 weeks in a calendar year, you have at least one employee on any given day, regardless of whether the weeks are consecutive.
For 2020, the FUTA tax rate is 6.0 percent, and it is applied to each employee’s first $7,000 in salary. You can, however, claim credits against your total FUTA tax to account for state unemployment taxes paid. For example, if you pay your state unemployment taxes on time, you are eligible for a 5.4 percent credit, thus lowering your FUTA tax rate to 0.6 percent.
Payroll taxes can be complicated to calculate, and it’s critical to deliver payments on time to avoid penalties and late fees. Payments for federal taxes can be done online through the Electronic Federal Tax Payment System (EFTPS) or at banks that are authorized to take federal payments. If you choose the latter approach, each transaction should be documented by Form 8109, which you may get from the IRS by calling 1-800-829-4933 or visiting their website.
Income and FICA taxes are normally deposited semi-weekly or monthly, and FUTA taxes are usually paid quarterly. At the conclusion of each year, the IRS normally sends a notification to business owners outlining which method to employ for the following year.
The day on which a deposit is made determines its timeliness. A mailed deposit received after the due date will, however, be deemed timely if you can prove it was mailed at least two days prior to the due date. Visit http://www.irs.gov/ or call the IRS live helpline for businesses at 1-800-829-4933 to learn more about small-business payroll responsibilities.