Payroll Tax Responsibilities as An Employer

Taxes are a pain and dealing with payroll taxes may be one of the least fun activities an entrepreneur has to deal with. But, the taxes are owed so we better make sure we get this right.

Note: If you decide that taking care of payroll taxes for your organization is too much for you, don’t worry. There are professionals who can help you make sure it is done right. Contact your CPA and they can do the work for you or point you to a reputable service that can.

Payroll taxes are the easiest way for entrepreneurs to get in trouble with the IRS. Why? Because it is too easy for a cash strapped entrepreneur to “borrow” the government’s money with plans to pay it back really soon. The snowball gets started and it can become very difficult to catch back up.

Even if you pay someone else to handle payroll taxes for you, you need to make sure the taxes are being paid. This is serious business. Taxes that are withheld by an employer to be paid to the IRS are considered “trust fund taxes” and cannot be discharged in a bankruptcy case. The IRS can even go after your retirement accounts to collect.

Therefore, we must set up our payroll tax system right from the beginning.

What Are Payroll Taxes?

Payroll taxes are those taxes you have to consider when you pay employees. They are dependent on your payroll and include the following:

  • Federal, state and local income taxes withheld from employee paychecks.
  • FICA taxes withheld from employee paychecks, with the employer paying an equal amount. FICA taxes are made up of Social Security and Medicare taxes. Combined, those taxes amount to 7.65% of the employee’s gross pay withheld from the employee and another 7.65% paid by the employer. There is also an additional Medicare tax of .9% that must be withheld from employees who make over $250,000 if married filing jointly, $125,000 married filing separately or $200,000 if filing single. The amount of gross pay subject to Social Security taxes is capped each year. Medicare taxes are not capped.
  • Unemployment taxes paid solely by the employer.
  • Amounts to state and federal worker’s compensation funds paid solely by the employer.

What Are My Responsibilities?

As an employer, your payroll tax responsibilities are:

  • Collect information from employees on a W-4 form when they are hired so you can withhold federal income taxes as directed by the employee.
  • Withhold appropriate taxes from employees. The taxes withheld include federal, state and local income taxes and FICA taxes.
  • Set aside these funds until you pay them. These funds are not to be used for any other purpose. Always keep these funds way far away from your operating accounts and pay them as quickly as you can to the appropriate authorities. You do not want to be tempted to “borrow” these funds!
  • Pay the taxes to the appropriate agency as soon as possible. You will pay the federal income tax withholding and FICA (Social Security and Medicare) to the IRS.
  • Report taxes owed. Below are the federal reports required.
    • Form 941 – Employer’s Quarterly Wage and Tax Report
      • You can file an annual Form 944 if your annual liability for all Social Security, Medicare and withheld federal income taxes is $1,000 or less, but you must contact the IRS for permission if they have not already told you to file Form 944.
      • Used to report the withholdings for federal income taxes and FICA taxes. Also reports the employer payments due on FICA taxes.
      • Note: Unless your payroll tax obligation is less than $2,500 in a quarter, you should have already paid all of the taxes owed via the EFTPS system. Form 941 is for reporting, not paying.
      • Due at the end of April, July, October and January.
    • Form 940 – Unemployment Tax Report
      • This form is filed annually and due by January 31. Form 940 is used to report and pay unemployment taxes to the IRS.
  • Provide other reports to federal, state and local agencies as required. Check with your local department of labor to ensure you are doing all you should.

When Do I Pay?

The IRS determines your deposit schedule based on your total gross Social Security/Medicare liability for the 12-month period ending on the most recent June 30th. For instance, the look-back period to submit employment tax deposits in 2019 would be based on the 12-month period ending June 30 of 2018.

The best way to determine your gross Social Security/Medicare liability is to look at the 941 Forms you filed for each quarter. Add up the amounts listed as “Total Taxes After Adjustments” for each quarter to determine your tax deposit schedule.

  • If you are a new employer and did not have employees during the look-back period, you are a monthly depositor.
  • If your payroll tax obligation is less than $2,500 in a quarter, you can deposit the taxes with your Form 941 or 944.
  • If your total payroll tax liability for the look-back period was $50,000 or less, you are a monthly depositor. Deposits must be made by the 15th of the following month.
  • If your total payroll tax liability for the look-back period was $50,000 or more, you are a semi-weekly depositor.
    • Taxes on payrolls paid on Saturday, Sunday, Monday or Tuesday are paid by the following Friday.
    • Taxes on payrolls paid on Wednesday, Thursday or Friday are due by the following Wednesday.
  • If you accumulate $100,000 or more in taxes on any day during a monthly or semi-weekly deposit period, you must deposit the tax by the next business day.

How Do I Pay?

The IRS requires that all payroll tax deposits be made electronically, using the EFTPS Online System. You can enroll by going to the EFTPS Website and clicking on “Enroll.”

You will need your Employer ID Number (EIN) and your business contact information. You will then be asked to authorize transactions. You can do this by providing your business checking account information or you can check with your financial institution to see if they will do it for you.

A Little Tricky – For your payment to be considered on time by the IRS, you must submit the deposit by 8 p.m. Eastern time the day before the deposit is due. If you miss the night before deadline, you can still get your taxes in on time by using the Federal Tax Collection Service. You can learn more about this option by going to IRS.gov/SameDayWire.

Clearly, collecting and paying payroll taxes is not quick and easy. If you do not have the time, energy or capabilities to deal with this level of minutia, pay a professional to do it for you!

As entrepreneurs, we must focus our time and energy on making sales and delivering value to our clients. Do not let something like payroll taxes get in the way of that!

If you want to do this on your own, you can find lots of details and examples in IRS Publication 15 – Employer’s Tax Guide.

Don’t forget to check with your local Department of Labor to make sure you are doing everything right locally.

Disclaimer: This is blog is not intended as tax or legal advice. Please contact your qualified tax representative for help!

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