The laws governing taxes in the United States are very clear and all citizens are expected to pay their taxes to the government. Failure to pay or exercising in activities that are aimed at evading taxes is illegal and could lead to serious consequences when one is found. There are several types of taxes designed for different people and entities operating within the United States and it is important to understand them so that you can know the ones you are supposed to pay. One of the most common ones you will come across is known as payroll tax and here is all you need to know about this kind of tax
What Are Payroll Taxes?
These are taxes imposed on the employers and employees by the federal, state and local governments. It differs from the income taxes since it refers to all the other taxes that are taken out of your pay that is not income tax. This tax must be collected for any business that employs staff members apart from the owner. In other terms, they refer to the amount of money that the employer is expected to withhold from the amount paid to the employees on behalf of the government. Aside from the requirements by the federal and state governments, additional money must be withheld to cater for social security and Medicare taxes.
What Is The Process Involved?
The payroll tax procedure begins with paying employees. Keep in mind that you need to prepare for these taxes before you even hire your first worker. There are some tasks that you need to go through and some registrations that you should have. You must have an employer ID number which is got after registering with the IRS. You can do this online and get the number within a short time. You should also register with your state for different types of taxes such as income taxes and unemployment taxes.
When you pay your employees, you must hold payroll taxes and other related dues from the amount you give out to them, say at the end of every month. You need to keep a clear record of the payroll taxes deducted while setting some money to pay for your contribution to these payroll taxes on your side as an employer.
When Are These Taxes Due?
All the payroll taxes collected are paid to the IRS twice or once every month depending on the money owed to the IRS. If the number of employees working for you is small, and thus your payroll liability is a bit low, you could opt to pay every month. On the other hand, if your employees are quite a number, you are required to pay twice every month.
Differentiating A Contractor and An Employee
Some entrepreneurs see these taxes as a huge inconvenience for them and may opt to treat all their employees as independent contractors and evade these taxes. This way they won’t be forced to withhold and report the amount involved will only be needed to send the contractor a 1099 form once a year and would not be required to pay their share of the payroll tax as specified by the IRS. This may seem to be a smart way of evading payroll taxes and all the hassle involved in paying it, but there are some dangers that may come back and haunt your business later on.
According to the law, employers are not obliged to pay payroll taxes to independent contractors. The contractor is on their own and they should declare their income to the government and have their taxes deducted differently. It is important to understand the rules set by the IRS, defining an employee and a contractor to avoid some of the fines that can be slapped on you for declaring an employee as an independent contractor. The difference mainly lies in the amount of control that you have over your employees. Even if your employees work from their own houses at their own time and pace, but you still have control over what they do, they are regarded as employees and not independent contractors.
What Is The Best Way To Handle Payroll Taxes?
If you own a huge business and have several employees, you might find it to be hard trying to maintain all these records. All the records presented to the IRS should be accurate to avoid them having any doubts regarding your intentions. However, there is no fixed way that all business people are supposed to handle these taxes. One possible way is getting a virtual bookkeeping service or downloading a reliable payroll software, you may even want to check into tax attorney cost in Dayton Ohio. Such tools are efficient as they can calculate your payroll taxes, obtained from the employers pay and their deductions before giving you the final figure and stating the amount you are required to contribute to these taxes.
Important Things When Calculating Payroll Taxes
The essential part of these taxes is knowing how to calculate them, to avoid cases of you overpaying or underpaying them. To do this, you should have information regarding the existing state and federal tax rates. Aside from that, you should be aware of the federal FICA rates as these will be calculated with respect to what the employee earns. Keep in mind that these rates keep on changing after some time and you should be updated and avoid calculating payroll taxes using obsolete rates.
How Are These Taxes Filed With The IRS?
All employers are required to file a report quarterly on form 941. This form indicates the amount of money collected for income tax withheld by the employer, the amount collected for the social security and Medicare and the total amount owed to the IRS, including the employers’ portion.
The information presented above shows some of the important things that you need to be aware of concerning payroll taxes. It is essential for you as an employer to file these taxes correctly to avoid jeopardizing your business in the future when the IRS catches up with you for failing or incorrectly filing these taxes.