Starting a business is not only about how to market and sell the products and services. It also involves taking care of acquiring the needed business permits and taxes. Running a small business is tough, and keeping a small business legal is even tougher. One of the important things that a small business should keep track of is the payroll tax. If this is not done right, then the business might end up being in huge trouble.
It is a must that small business owners have knowledge about the payroll tax basics for their small business and they should have small business plans prepared. In this article we will be tackling payroll tax basics that every small business owner needs to know to run their small business legally and keep things legal with the business.
The Common Acronyms You Will Encounter When Dealing with Payroll Taxes
Acronyms are common in business and they are used to make the conversations about taxes and other business-related stuff easy to remember and utter, not mention that they are time-saving and space-saving. But how can something be easy when you don’t even know what they are. The following is a list of the most common acronyms that you will encounter when you are dealing with payroll taxes for your small business.
- OASDI – Old Age, Survivor and Disability Insurance, more popularly as Social Security. The government imposes taxes on an employee’s personally earned income to be able to fund this program. The employer pays part of this tax while the employee pays the other half. The employer will make the appropriate deductions and will have it reflected in the employee’s payslip.
- FICA – It stands for Federal Insurance Contributions Act. This federal payroll tax is imposed by the United States to fund Social Security and Medicare. This payroll tax is shouldered by both employer and employee.
- FUTA – It is the Federal Unemployment Tax Act. This payroll tax is imposed by the federal government to employers. The tax is not withheld by the employer from the salary of their employees, but they pay it directly to the federal government. The payroll tax is based on how much the employer pays their employees.
- SUTA – The State Unemployment Tax Act. It is the counterpart of FUTA that requires employers to pay for their employees. The rates in SUTA vary depending on the state because each state has their own set of unemployment tax rates.
- FTD – Federal Tax Deposit, or the taxes that the employer sends to IRS.
- IRS– It stands for Internal Revenue Service, which is a branch of the federal government that takes care of revenue-related services.
- TFRP – Trust Fund Recovery Penalty is part of the law that the United States Congress has passed to ensure that employers sample report withheld taxes on time.
What Is a Payroll Tax?
Employers and employees are both responsible for paying their payroll taxes. A percentage of the employee’s salary goes to paying their payroll taxes. Payroll taxes are divided into categories: the first one are the deductions from the employee’s salary and the second category are the taxes being shouldered by the employer. In the United States, there are seven states that do not impose personal payroll taxes and they are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Payroll taxes also vary from one country to the other.
Payroll taxes can be federal payroll taxes or state payroll taxes. Each of these taxes are discussed below.
Federal Payroll Taxes
It is also known as the federal income tax forms, which is collected by the federal government or the Internal Revenue Services from both the employer and their employees. It is applied on all of the taxable earnings of individuals, businesses, corporations, and other legal entities in annual basis.
The federal payroll taxes consist mainly of the following:
- Social Security – Social Security taxes are used to fund Social Security programs and is otherwise known as the Old Age, Survivor and Disability Insurance program or OASDI program. It provides Social Security benefits and assistance to all Social Security beneficiaries.
- Medicare – Just like Social Security taxes, both employers and employees pay part of this tax. The tax is collected to fund hospital insurance components that are under the Medicare benefits.
State Payroll Taxes
In the United States, employers and employees pay state payroll taxes, also known as state income tax extension forms, on top of the federal payroll taxes that are being collected from their salary.
State payroll taxes include the following:
- Unemployment Insurance – The State Unemployment Tax Act or SUTA is an insurance being funded by collecting this tax. The act provides that eligible employees will receive unemployment benefits if they lose their jobs but it’s not their fault.
- Disability Insurance – The state of California, Hawaii, New Jersey, New York, Rhode Island, and Puerto Rico are the five states that provide this kind of insurance. This disability insurance covers non-work–related sickness or injuries.
How to Report Your Payroll Tax
Since there are a lot of payroll taxes that small business owners need to take care of, they will need to become familiar with the forms used for them. Here is how you can report your payroll taxes.
- A small business will need to report their payroll tax returns regularly depending on the size of their payroll. They can have it reported annually or quarterly.
- To report the federal unemployment taxes that you, the small business owner, has paid, you will need to use the IRS Form 940.
- For reporting your payroll taxes, the IRS Form 941 or the Employer’s Quarterly federal tax form should be used.
Take note of these forms so that you will have a hard time determining which one is which. It is also of importance that you pay for these payroll taxes on time to avoid scary penalties. If you don’t want to go through this much trouble, you can outsource your payroll. You may checkout the benefits of outsourcing payroll before you decide to do it. If there is anything that you need to complaint about in IRS or if you have a problem about a certain record, you can use these IRS complaint forms.
Why Is It Important to Pay Your Payroll Taxes on Time?
Since excel payroll taxes are not actually paid by each employee in person, their employers withhold these taxes and pay them at the same time to IRS or the Internal Revenue Services. The collected funds will be in the hands of the employer as trust fund taxes. These taxes need to be paid or reported to the authorities on time at all times. To encourage employers from making sure that they do this, the United States Congress has passed a law that allows the Internal Revenue Service to charge penalties to employers who fail to pay their dues on time. The penalty is charged on the self employment tax forms and the Trust Fund Recovery Penalty. A 15% failure to deposit fee is charged on the employer for not being able to pay their taxes on time. That is a big amount and you would rather have that amount spent on other things than use it to pay for a penalty that can be avoided.
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