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.
The Financial Test
This assessment examines an employer’s level of control over the financial aspects of the business. In many industries, a worker’s identity as an independent contractor is bolstered by having extensive control over work materials.
The availability of services is one way to tell the difference between an independent contractor and an employee. For example, an employee cannot advertise services unless they are working outside the firm, whereas as an independent contractor because they are not connected to one company.
The Relationship Test
This test examines how the employer and employee view their relationship. For example, the worker is an independent contractor if the relationship between the employer and the employee is expected to remain until the end of a project or for a set period of time. The worker, on the other hand, is a taxable employee if the relationship has no or few restrictions.
Taxable Wages Defined
Salary, bonuses, and gifts are all examples of taxable wages for services rendered. Some forms of payment, such as travel or food reimbursements for business, are not considered taxable wages. Employees must validate expenditures through receipts or expense reports in order for them to be nontaxable. They must also be needed, reasonable, and relevant to the business.
How to Calculate Withholding
After you’ve determined which employees are taxable and which wages are taxable, you’ll need to figure out how much you need to deduct for federal, state, and local taxes, as well as FUTA and FICA.
For the applicable period, federal income taxes must be withheld from every paycheck. Employers can utilize the IRS’s salary bracket tables or percentage tables to figure out how much to withhold.
The salary bracket tables are divided into five payroll periods (daily, weekly, bi-weekly, semi-monthly, and monthly). Owners choose the appropriate pay period and salary bracket for their employees, then move across the table to the column that displays the amount of claimed exemptions to determine withholding amounts.
The percentage tables are broken down by marital status and are accessible for eight different payroll periods (daily, weekly, bi-weekly, semi-monthly, monthly, quarterly, semi-annually, and annually). Employers begin by deducting the value of claimed exemptions from salaries. Then they check for the withholding amount depending on the wage bracket in the table that corresponds to the employee’s marital status.
It is your obligation as a business owner to examine the two sets of tables and pick which one is the best fit for your company. In terms of payroll intervals, percentage tables are more inclusive. Therefore if you have a situation where various employees are paid at different payroll periods, the percentage table should be your first pick. If your workers are paid quarterly, for instance, the percentage tables are better than the wage bracket tables. Request Publications 15 and 15-A.2 from the IRS or go to http://www.irs.gov/ to obtain these tables.
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.