Think back to your first paycheck — the satisfying shred of you ripping open the envelope, the feel of the crisp paper in your eager hands, and the shock at seeing the difference between what you earned and what you took home. Then, as an employee, payroll taxes were just an annoying constant that was simply a part of life, but now, as an employer, payroll taxes are a whole other beast. There are many benefits of payroll outsourcing, and if you’re concerned about how to handle this complex aspect of payroll, keep reading to learn five easy tips on effectively managing your payroll taxes.
What Exactly Are Payroll Taxes?
To put it simply, payroll taxes are the taxes that you, as an employer, are required to withhold from employees and to pay directly to government agencies. The withheld amounts include: federal, state, half of FICA (Social Security and Medicare) taxes, and possibly local income taxes. Paid amounts include the other half of FICA taxes, federal and state unemployment taxes, and, in some states, disability insurance taxes, and are paid directly from the employer’s funds.
Since 2016, there was an increase in the Medicare taxes for employees that earn over $200,000 per year. The employer is required to withhold an additional $0.009 tax on the wages over the $200,000. The employer does not have an additional tax on these wages over $200,000. It is an employee tax only.
5 Steps to Managing Your Payroll Taxes
The best thing you can do to effectively manage your payroll taxes is to make all your payments when they are due. If you’re late, you’ll get hit with costly penalties. With that in mind, here are five other steps to managing your payroll taxes effectively.
Step #1: Understanding Who Your Taxable Workers Are
You need to determine which of your workers are truly employees and which are independent contractors. Payroll taxes are only required for true employees. If you need to freshen up on the difference between the independent contractors and employees, check out our blog here . Typically, if a worker is economically reliant on you, they are then considered an employee. Other factors for employment include the degree of control you exercise over the worker like when, where, and how the work is done.
Step #2: Determine What Compensation is Taxable
After you have determined which workers are employees, you then need to determine which forms of employee compensation are taxable and which forms reduce the amount of taxable compensation. Aside from the obvious basic wages and salaries taxes, other compensations you’ll want to consider are: expense reimbursements, tips, health and life insurance, fringe benefits, bonuses, non-cash payments, and premiums.
Step #3: Determine Which Payroll Taxes Apply
Knowing the types of tax obligations that arise when you have employees and learning how to compute and pay the amounts that must be paid is crucial to successfully managing your payroll taxes. The IRS Publication 15, (Circular E) Employer’s Tax Guide can help you understand your federal tax obligations, or, if you need someone to explain it in more layman’s terms, contact your local LBMC representative.
Step #4: Familiarize Yourself with Payroll Tax Returns and Payments
IRS Publication 15 can also teach you about the forms, returns, filling, and payment procedures for your payroll taxes. It’s important to be aware of deadlines and be sure to mark important dates. Be sure to note that payment and filing schedules often differ, and unemployment taxes are reported and paid separately from income tax and FICA payments. You’ll incur some pretty hefty fines if you fail to make payments or file timely returns.
Step #5: Determine Your Self-Employment Taxes
If you don’t hire anyone to work for your business, you are always going to have at least one employee — yourself. Incorporating yourself will make a big difference in your taxes, and if you do so, you’ll likely have all the tax responsibilities as if you had hired another employee. If you are a sole-proprietor, you’ll have to pay estimated income tax and self-employment (SECA) taxes.
If you need guidance in effectively managing your payroll taxes, contact your local LBMC Employment Partners' representative. As one of the top payroll companies in Tennessee, we’ll help guide you through each and every step of the way—from managing payroll to outsourcing payroll to payroll tax services—ensuring that you are in compliance with all tax codes. Not only that, but working with LBMC EP will help you avoid penalties: your payroll taxes will be filed correctly and on time.