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.
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.