Enjoy this week’s guest post by Candy Messer!
If you are hiring an employee, one of the financial requirements you are responsible for undertaking on behalf of your company is the collection and payment of employment liabilities. Payroll taxes, which are a percentage of wages held from employees’ paychecks plus your company expense and paid to the federal and state governments to fund public programs, can be intimidating to new entrepreneurs, but they don’t have to be. In this guide, we will break down the basics of payroll taxes and how to set yourself up for success when dealing with them.
Obtain an EIN
The first step to taking care of your payroll tax obligations is to obtain an EIN, or Employment Identification Number, for your business. Unless you have a sole proprietorship with no employees, in which case you may be able to operate your company under your own social security number, obtaining an EIN is mandatory as it is used by the IRS to track your tax history. It is also used on many company documents and to open business bank accounts.
You can apply for an EIN on the IRS website by filling out this form and providing your business’s legal name and location as well as a statement about its structure and activities.
Find Out What You Will Owe
Once you’ve obtained an EIN, the next step is to find out to which parties you will owe taxes and how much you must pay them. Payroll taxes are paid to both the federal and state governments, and each has different requirements.
For federal taxes, you first need to verify that each of your employees can legally work in the United States by having them complete form I-9 when being hired. Next, have your workers fill out a W-4 to determine how much should be withheld from their paychecks. You can use the tables provided in IRS Publication 15 to determine the amount you need to withhold if doing your payroll manually without the assistance of payroll software. You must withhold, report, and pay income taxes per the Federal Insurance Contributions Act.
Here is a breakdown of what taxes are included:
- Income Tax
- Social Security Tax (the rate is 6.2% for the employee and employer)
- Medicare Tax (the current rate is 1.5% for the employee and employer, but an extra 0.9% must be withheld if the employee’s wage exceeds $200,000 or their household income is greater than $250,0000)
- FUTA (unemployment) tax- This is paid by the employer, not withheld from employee wages
The above taxes must be paid either monthly or semi-weekly (depending upon the amount of tax paid in the lookback period) to the IRS via electronic funds transfer (FUTA may be paid once a year if not more than $500, or in the quarter once that threshold is met).
Unless your employee lives in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming you will also need to withhold income tax for their state. The amount you withhold will again be based on your employees’ W4s. You are also responsible for SUTA, or state unemployment tax.
If you have employees working in other states, you must register with their state tax agencies to receive a tax withholding number, acquire an unemployment insurance number, and withhold the correct amount of payroll taxes to remit to those agencies.
If you fail to remit taxes correctly and on time, late payments are generally subject to penalties ranging from 2-15%.
Hopefully, these guidelines help you gets started as you set up payroll for your employees!
If all of this is confusing and you would like assistance, please contact Candy. She can help from the enrollment with tax agencies through payroll processing, paying taxes and filing returns. She can be reached at 310-534-5577 or contact@abandp.com.
Candy Messer is a profitability and growth advisor working with entrepreneurs in service-based industries to help them have successful businesses. With experience in the bookkeeping industry since 1998, Candy understands the stresses business owners face and offers customized services to meet their varying needs. Candy was named Woman of the Year for 2009-2010 by the Peninsula Chapter of the American Business Women’s Association, and 2011 Entrepreneur Mom of the Year by Today’s Innovative Woman magazine. In 2012, the El Camino College Foundation honored her as a Distinguished Alumni of the Year. Affordable Bookkeeping and Payroll was named 2016 Small Business of the Year by the Torrance Chamber and Intuit’s (creator of QuickBooks software) 2016 Firm of the Future.
You can find out more information about Affordable Bookkeeping and Payroll Services at www.abandp.com.
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