Whether you are a small firm or a giant corporation, if you have employees in your office then you have to pay employment taxes. The IRS has gotten wise now and they have been increasingly hunting down small and mid-sized firms that are failing to calculate, report, and file their payroll taxes on time. If you have employees, it is necessary that you take action now.
Employers are required to not only account for federal income and social security taxes, but they are also required to account for state unemployment tax.
Two of the main reasons why small and mid-sized firms fail to pay payroll taxes is because they lack proper tools for the job and because of the health care act known as the ACA. Moreover, this problem can be easily resolved if you are using a powerful but simple tool like payroll tax software. It will not only help you mitigate compliance risk but also reduce the burden associated with the whole process.
With this thought in mind, here are some of the most common issues faced by small and mid-sized companies with respect to payroll taxes.
Failure to Understand the Associated Cost
The cost of hiring an employee is not always their wages or monthly salary, but as an employer, you are required to pay payroll taxes on the wages or salaries that are paid to your employee like Medicare. So it is imperative that you calculate the true cost of hiring an employee.
Notices and Responding to Them
If you have received a notice, it is vital that you document that notice and respond to it at the earliest time possible. There are a number of reasons why you could receive a notice from the IRS, which makes it necessary to understand the underlying issues in your company and to resolve them quickly. An IRS audit can lead to heavy penalties risking your entire business and America does not need any more businesses failing in this recession.
Classifying Contractors and Employees
With the advent of technology, a lot of companies employ temporary employees who are also sometimes known as independent contractors. It becomes important that you classify these employees properly into different categories. You want this classification because it is compulsory to pay payroll taxes for employees, but it is not mandatory for contractors. This can help you save a lot of money as well as headaches in the long run.
Unless you understand the basics of payroll taxes and the rules associated with them, how are you going to file your payroll taxes properly and on time? So it is necessary that you have some understanding of the concept. For example, it does not matter in which state your employee lives, but it is the place where the employee performs his duty or where work is done will be taken into consideration at the time of filing taxes. These small mistakes can result in huge losses in the form of penalties and mental harassment in the long run.
Some states are kinder to businesses and to workers and have lower taxes. As a manager, you should know these basics.
Failure to Deposit in Time
There are two schedules that have been prescribed by the IRS – semiweekly and monthly. You can open the door for either of the above at the time of filing your payroll taxes and depositing them. The IRS has prescribed very specific guidelines that you are supposed to follow.
The point to be noted here is that the schedule using which you are paying wages or salaries to your employees is irrelevant. Missing a deadline can result in penalties that can lead to substantial losses in the long run.
Borrowing Money from Employee Paychecks
Sometimes small and mid-sized companies face this problem. They run short of cash and they are left with nothing but a liquidity crunch. Some companies under these situations borrow money withheld from their employees’ paychecks. This more or less acts like a short term loan which solves the liquidity problem of the company.
The IRS looks down on this process where the company uses the employee money to pay their own payroll taxes to the government. This can not only lead to civil penalties, but also criminal penalties. The owners are personally liable for the taxes they have paid using this borrowed money.
Reporting vs Depositing
There is a difference between reporting and depositing payroll taxes. Sometimes new small and mid-sized companies can become confused between the two and end up reporting rather than depositing the money.
Deposit requirements are very specific and failure to make the proper deposit in time can lead to penalties as we have discussed earlier. Reporting and depositing are two different processes. When you report to the government, you are notifying them about the amount that you owe them, and when you deposit the money, you are sending money to the government as per your previous reports. Even the deadlines and the schedules for the two are different.
Are you prepared to overcome the above issues?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.