By Shrad Rao, CEO of Wagepoint
Managing payroll, and ensuring all the relevant taxes are paid, is a key part of the responsibility that comes with having staff. Employees want a paycheck on time. The government wants its money. And at the end of the day, all you want to do is catch up on your sleep!
But making a mistake, especially when it comes to government taxes and regulations, could land you in trouble with the Internal Revenue Service (IRS). No business owner needs the added headache of an audit, and even a late payment could result in a penalty. Sleep might not feel like an option.
In America, there are various levels of government to pay at different times of the year: federal, state, local, as well as medical insurance to cover and workers compensation, depending on your state. There’s also all the paperwork that goes with it. All of this work is encouraging some small business owners to outsource managing payroll. Legally, however, this is still your responsibility – the IRS doesn’t accept excuses – so it helps to understand five key aspects of payroll beforehand.
When a new employer starts hiring, he needs to fill out an IRS W-4 form. This determines the amount of deductions that need to be set aside. The IRS Withholding Calculator is your way of ensuring the right federal, state and local taxes are being paid.
Not counting the salary and any other amounts you pay an employee, these are the different outgoings to factor in when you start hiring:
- Federal taxes (withholding tax: pay-as-you-go, paid directly to the IRS)
- State and local taxes (depending on your state, city, county)
- Workers’ Compensation (depending on your state)
- Healthcare, Social Security and Medicare deductions, known as FICA (Federal Insurance Contributions Act), SUI and FUTA (State and Federal Unemployment Taxes)
The amounts for each depend entirely on the employee’s salary, any other taxable deductions (bonuses, expenses, benefits in kind – like fuel allowance or a phone) and their own personal tax situation, which the W-4 form determines.
2. New Hire Reporting.
Did you know you have to report all of your new hires to your state within 20 days of them beginning work? Since 1996, all new hires and re-hired employees must be reported in accordance with the Personal Responsibility and Work Opportunity Reconciliation Act. This information is used to help child support programs across the nation. Most states provide a form and a fax number where you can send the W-4 information for each new hire.
If you have employees in multiple states, you can report all your new hires in one state or send the reports to each state where the new hires are working. If you want to report all of the new hires in one state, you can register with the federal Office of Child Support Enforcement.
3. End-of-Year Reporting.
As the new year starts, employers have to ensure they have mailed or provided their employees the IRS W-2 form no later than January 31. The amounts of deductible taxes withheld must exactly match your Form 941, Employers Federal Quarterly Tax Returns, during the year, as well as quarterly reports to your relevant State Department.
Once that form is filled out (which you can also do online) you have to send Copy A of the W-2, along with the electronic transmittal form, W-3, no later than March 2.
4. Employer or Contractor?
Many small business owners benefit from working with contractors when they are still growing. It helps keeps costs and risks low. A contractor, however, still has to be able to work with other clients, set their own hours and pay their own taxes. Once they are a de-facto employee, it’s time to make them a real one, otherwise you are crossing a line with the IRS.
If you have any doubts or concerns, there’s IRS Form SS-8, which will allow them to issue a ruling on the matter. Beware, while the IRS likes to have their payments on time and will issue fines and penalties when you are late, it can take six months to get a ruling from them on the Form SS-8.
5. Employee Records.
Form I-9, which checks whether someone can legally work in the U.S., must be kept on record for either three years, or only one year from an employee’s termination date, depending on how long he or she was in your employment.
The W-4 form employees fill out when they join must also be kept on record, as most copies of the forms you send to the individual State Tax Department. Some states have several agencies that you have to deal with as an employer. If you don’t know, call. Most state agencies are more than happy to help you understand the taxes and make sure you are filing all of the correct information.
The bottom line.
Payroll is mission critical. Without it running smoothly, you could quickly find yourself with angry employees and an IRS agent knocking impatiently at your door. There is, as outlined above, a lot to think about and remember.
Late payment of withheld taxes (intentional or not) will result in a penalty. Failure to pay this and address the balances of taxes due will result in collection proceedings. The IRS can and does seize business bank accounts and other financial assets in order to recover unpaid amounts. Civil or criminal proceedings can follow, with tax evaders getting maximum fines of $500,000 and five years in prison.
This is perhaps why some small business owners prefer to outsource this function. A good payroll firm will take care of all of this for you, including all the paperwork, and make sure everyone gets the right amount of money at the right time. Do your homework before picking one however; you want someone you can trust to look after payroll. It’s your paycheck at the end of the day, too.
Shrad Rao is the founder and CEO of Wagepoint, which simplifies the function of payroll to help small businesses owners feel awesome about payroll.