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.
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.
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.
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 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.
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.