Hiring your first employee is an exciting milestone for a small business.
It also creates new responsibilities.
Payroll isn’t simply about calculating an employee’s paycheck. Employers also need to withhold certain taxes, make employer tax payments, submit payroll tax deposits, and file required reports.
Understanding the basics can help you avoid costly mistakes.
What Are Payroll Taxes?
Payroll taxes generally include taxes associated with employee wages.
For federal purposes, employers commonly deal with federal income tax withholding, Social Security and Medicare taxes, and federal unemployment tax.
State payroll responsibilities can also apply.
The specific requirements depend on your business, employees, and circumstances.
Federal Income Tax Withholding
Employers generally withhold federal income tax from employee wages based on information provided by the employee, including Form W-4.
The amount withheld can vary from employee to employee.
The employer then deposits the withheld taxes according to the applicable federal deposit schedule.
Social Security and Medicare Taxes
Social Security and Medicare taxes are commonly referred to as FICA taxes.
These taxes involve both the employee and employer.
The employee’s share is withheld from wages, while the employer is generally responsible for paying a matching employer portion.
There are specific rules governing these taxes, including wage limits and additional Medicare tax considerations.
Federal Unemployment Tax
Federal unemployment tax, commonly called FUTA, is another employer responsibility.
Unlike federal income tax withholding, FUTA is generally an employer-paid tax rather than an amount withheld from an employee’s paycheck.
State unemployment tax requirements may also apply.
Payroll Deposits and Payroll Returns
Payroll taxes don’t simply get reported once a year.
Employers may have to deposit payroll taxes throughout the year according to a schedule determined by federal requirements.
Employers also file payroll tax returns.
The IRS publishes an employer tax calendar that includes federal employment tax deposit and filing deadlines.
Missing a payroll tax deposit can result in penalties, so having a reliable payroll process is important.
Year-End Payroll Reporting
Payroll responsibilities continue at the end of the year.
Employers generally need to provide employees with Forms W-2 and file required copies with the appropriate government agencies.
Businesses that pay independent contractors may also have information reporting responsibilities, including certain Forms 1099.
Accurate records throughout the year make year-end reporting much easier.
Keep Employee and Contractor Payments Organized
One common problem for small businesses is failing to distinguish between employees and independent contractors.
The classification is important because different rules can apply to each.
Simply calling someone a contractor does not automatically make them one for tax purposes.
If you’re unsure about worker classification, ask a qualified tax professional before making assumptions.
Payroll Requires Consistency
Payroll mistakes can affect both the business and its employees.
A reliable payroll process should include:
- Accurate employee information
- Proper tax withholding
- Timely payroll tax deposits
- Organized payroll records
- Regular reconciliation
- Required quarterly reporting
- Accurate year-end forms
Payroll software can help, but software does not eliminate the need for proper setup and review.
Why Small Businesses Outsource Payroll
Payroll can take a significant amount of time, especially as a business grows.
Some business owners choose to outsource payroll processing so they can spend more time on operations and customers.
Professional payroll support can also help keep payroll records organized and ensure that important reporting responsibilities are not overlooked.
Don’t Treat Payroll Taxes as an Afterthought
Payroll taxes are an ongoing responsibility.
The best time to establish good payroll procedures is before payroll becomes complicated.
If you are hiring your first employee, expanding your staff, or simply want help managing payroll responsibilities, it may be worth discussing your options with an accounting professional.
Transactions, LLC provides payroll processing and compliance reporting services for businesses in Mount Airy and throughout Northwest North Carolina.