The main problem that most small business owners face these days is that they have to keep themselves updated with recent federal, local, and state laws. It is entirely up to the owners that whether they want to hire a professional who can handle their tax issues or not. It is also possible that the owners themselves handle their tax problems but for this, they should have a thorough knowledge of the tax system. In this article, we will discuss the responsibilities of the business owners about taxes.

Payroll Tax Obligations

A business owner needs to deduct the payroll taxes from the salary of employees and clear the local, federal, and state taxes. The specific taxes that are deducted from the salary of employees are medical and security taxes, state, federal and income tax. In case if the business does not include employees, and the business is incorporated, then the tax will be deducted from the salary of the owner as he is the only employee of the business. In case of no employees in business and it is not incorporated, the business owner will have to pay self-employment tax four times each year.

You can estimate your payroll taxes by calculating the following

• Know about taxable workers
• Know about taxable wages
• Determine deducting amount

Who are Taxable Workers?

The workers can either be independent contractors or employees. An independent contractor is not taxable but he has the responsibility to pay his taxes. Employees are bound to pay payroll taxes. Workers as employees are under the control of the employer and he can direct them and their work.

Behavioral Test

If the employer has the charge of the worker, then the worker is said to be an employee. He does not necessarily have to control the worker but he is capable to do so.

Financial Test

The financial test is to assess the financial control of the employer on the job. In some jobs, if the employee has control over the work supplies, it makes the employee an independent contractor.

The difference between an employee and an independent contractor is the availability and control of services. If a worker is an independent contractor, he can also work in another company and is not bound to one company. A worker who is not an independent contractor can publicize services.

Relationship Test

This test is to show how the relationship between employer and employee is perceived. If the relationship between the two will last after the project, then the employee is independent but if the relationship has no time limit, then the employee is considered taxable.

Identifying Taxable Wages

To compensate for the services, taxes are paid and taxes are applicable on bonuses, gifts, and salaries. Some sort of services is not considered taxable like expenses of travel and meals in business tours. Reports of expenses should be shown and verified by the employees for expenses that are not taxable. But these expenses must be essential and related to business.

Calculation of Withholding

As a business owner, you should identify the taxable employees and the taxable income amount. Then you should also identify the income amount that should be deducted from the salary for various taxes.

Federal Taxes

Federal tax should be deducted from the salary payment. The internal revenue system has 2 tax table systems by which the owners can calculate the amount which must be deducted from the salary of employees. These tables are percentage and wedge brackets.

The wage bracket table is set aside for 5 different payroll intervals which are every day, every week, twice a week, twice a month, and every month. The owner selects the payroll interval and income of employees and then looks in the table to a column that will indicate the number of exemptions to know about the amounts which must be withdrawn.

The percentage table is set aside for 8 different payroll intervals which are every day, every week, twice a week, twice a month, every month, four times a year, twice a year, and every year. They are also separated according to their bachelorhood. Income of employees is first reduced by cutting the tax payment and then using the table, owners deduct the income payment according to the marital status of employees and the wage bracket.

It depends upon the business owner to determine that which income table suits them best according to their business. The percentage table is very comprehensive in payroll intervals. In case of employees are getting paid at different intervals, then the percentage table is most appropriate. For instance, if employees are being paid four times a year then the percentage table is more appropriate than the wage bracket table.

FICA

The Federal Insurance Contributions Act allows business owners to deduct the medical and security taxes from the salary of employees. According to FICA both owners and employees should pay half of this tax.

FICA is not affected by the claims made by employees about the amount of tax payment withdrawn from employees’ salaries. To have an idea of the tax payment that you should pay and the amount which must be deducted from the employee’s salary you should multiply the employee’s income with the tax rate.

Social security wage is the tax amount that is applicable only on the first one lac forty-two thousand and eight hundred dollars of the salary. Changes are made in this amount each year. However, there is no income limit for medical tax.

The Bottom Line

It is very difficult to calculate payroll taxes. Moreover, it is crucial to clear payments timely to avoid any penalty and late payments. You have two options to pay the federal tax, online through an electronic tax system or specific banks that are licensed to take payments of federal tax. If you want to pay your tax payment, then each payment should go along with form 8109.

The FUTA taxes are required to be cleared four times a year and FICA and income taxes should be cleared every month or twice a month. A notice is sent by internal revenue service to the business owner at year-end which includes details about the tax method to be used for next year.

The promptness of a deposit is determined by the date on which the deposit is received. In the case of a deposit that is mailed, the deposit is considered on time if it was deposited two days before the last deposit date even if it is received after the due date.

Chances are, if you were to pull out your latest pay stub, you would see two important lines among the list of taxes taken out of your wages: FICA and MEDFICA. If you were to do the math, these two lines, standing for Federal Insurance Contributions Act and Medicare Federal Insurance Contributions Act respectively, take up 7.65 percent of your wages.

However, when it comes to these payroll taxes, as they are commonly known, there is a lot more than meets the eye. In two separate blog posts, we will dive into several important issues: what payroll taxes are exactly, who pays them, how effective they are, and some of the controversy that surrounds them. This blog post covers the first two topics, while the next will cover the latter two.

What are Payroll Taxes?

Put simply, payroll taxes are taxes paid on the wages and salaries of employees. These taxes are used to finance social insurance programs, such as Social Security and Medicare. According to recent Tax Foundation research, these social insurance taxes make up 23.05 percent of combined federal, state, and local government revenue – the second largest source of government revenue in the United States.

The largest of these social insurance taxes are the two federal payroll taxes, which show up as FICA and MEDFICA on your pay stub. The first is a 12.4 percent tax to fund Social Security, and the second is a 2.9 percent tax to fund Medicare, for a combined rate of 15.3 percent. Half of payroll taxes (7.65 percent) are remitted directly by employers, while the other half (7.65 percent) are taken out of workers’ paychecks.

Who Really Pays Payroll Taxes?

Perhaps one of the best-kept secrets of payroll taxes is that employees effectively pay almost the entire payroll tax, instead of splitting the burden with their employers.

This is because tax incidence is not determined by law, but by markets. In fact, the person who is required to pay a tax to the federal government is often different than the person who bears the tax burden. Usually, the marketplace decides how the tax burden is divided between buyers and sellers, based on which party is more sensitive to changes in prices (economists call this “relative price elasticities”).

It turns out that the supply of labor – that is, workers’ willingness to work – is much less sensitive to taxes than the demand for labor – or employers’ willingness to hire. This is because workers who need a job are not as responsive to changes in wages, but businesses are able to “shop around” for the best workers or shift production to different locations. The graph below roughly illustrates how the labor

 market distributes the payroll tax burden. The fact that the labor supply line is steeper than the labor demand line is a way of showing that workers are less sensitive to changes in wages than employers.

This means that, rather than workers and employers each paying 7.65 percent in payroll taxes, employers send their portion of the tax to the government and then decrease workers’ wages by almost 7.65 percent. Next, workers pay their 7.65 percent share on those wages. In effect, there is hardly such a thing as the “employer-side” payroll tax, because almost the entire burden of the payroll tax is passed on to employees in the form of lower wages.

Payroll Tax Transparency

Besides the fact that the federal government’s imposition of “employer-side” payroll taxes is misleading, it also leads to a possible problem: it masks the costs of the programs that payroll taxes pay for. That is, rather than directly listing the ordinary taxpayers’ share of payments for Social Security and Medicare, half of the taxes that fund the programs are hidden from workers, in the form of lower wages.

This is an issue because it violates the principle of tax transparency: a tenet that states that tax burdens should not be hidden from taxpayers in complex structures. Because roughly half of the payroll taxes that fund Social Security and Medicare are hidden in the form of lower wages, rather than being entirely spelled out on our pay stubs, voters may underestimate the true budgetary impact of these social programs.

In summary, payroll taxes are a significant source of government revenue, but the burden of the payroll tax and the government programs they pay for may not be entirely apparent to taxpayers, due to how the taxes are levied.

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.

Understanding Payroll Tax Obligations

Any company with personnel is obligated to deduct and pay relevant local, state, and federal taxes from employees’ wages. As a result, FICA (Medicare and Social Security taxes), as well as local, state, and federal income taxes, are generally withheld from employees’ wages.

Additional withholding responsibilities include FUTA (Federal Unemployment Tax Act) and disability insurance taxes in states including Hawaii, California, New York, New Jersey, and Rhode Island. Failure to pay taxes or forgoing a payment can result in significant penalties and fines, so it’s critical to assess and meet all payroll tax obligations on time.

If a small-business owner is the only employee of the corporation, the standards mentioned above apply to the owner’s paychecks, even if the company is incorporated and has no outside employees. If the company is not incorporated and there are no workers, the operator must pay quarterly estimated taxes on self-employment earnings.

How to Calculate Payroll Taxes

Payroll taxes are calculated in three steps:

1. Determining who is a taxable worker.

2. Calculating taxable wages

3. Determine the amount to be withheld.

Determining Taxable Workers

Employees and independent contractors are generally the two classes of workers. Employees are considered taxable workers who must have payroll taxes withheld, whereas independent contractors must pay their own taxes directly. Workers are usually considered employees if you have the authority to guide and control how they conduct their work, as opposed to just the end result.

The distinction between independent contractors and employees, on the other hand, is not always clear. The Internal Revenue Service (IRS) provides common law rules that encompass behavioral, financial, and relationship tests to assist business owners in determining which workers are taxable employees:

The Behavioral Test

This standard is met when an employer has the authority to direct and control a worker, meaning the worker is considered an employee. Although the employer is not required to direct or control the employee, he or she has the option to do so.

In Closing

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.