Learn more about keeping your business compliant with payroll tax requirements.
Payroll taxes involve a variety of difficult issues for the small business owner, which center around determining who is a taxable employee, what compensation is taxable, which payroll taxes apply, and when and how to make the tax payments.
Employers are required to make federal payroll tax payments to the government, as well as filing the proper reporting and informational returns. Employers must also provide employees and contractors with W-2 and 1099 reports explaining the compensation paid and withholding amounts. There may be state requirements as well. The rules can be complex and penalties for noncompliance severe, which is why the administration of payroll tax responsibilities is often outsourced by small businesses.
Using a payroll service can reduce the aggravation associated with your employment tax responsibilities, but you remain responsible for ensuring that the obligations are actually met.
Misclassifying a worker as an independent contractor, rather than an employee, is one of the more costly mistakes a business owner can make. The IRS's voluntary worker reclassification program helps lower the cost of correcting that mistake a bit less expensive--and a temporary extension makes it available to more employers. But you must act now because the expanded program expires on June 30, 2013.
FICA taxes are not due on severance payments that meet certain requirements, according to the Sixth Circuit Court of Appeals. Taxpayers in Kentucky, Minnesota, Ohio and Tennessee will want to see if the ruling applies to payments that they made or received.
The IRS is on the lookout for service charges that are being incorrectly characterized as tips. The special payroll tax rules that apply to tip income do not apply to service charge income. In certain cases where business practice or system changes are necessary to apply the rule, the rules will be applied only for charges after December 31, 2013.
Employers doing business in California, Hawaii, New Jersey, New York, Puerto Rico, and Rhode Island may be required to withhold and/or pay taxes for mandated-disability insurance programs.
Employers in states that impose an income tax are required to report to employees the amount paid to them in taxable compensation and the amount withheld from their wages for income taxes for the year. Some states also require reports for the amount of compensation paid to independent contractors to be provided.
Employers in the majority of states are required to file timely returns and make timely payments of withheld state income taxes.
Misclassifying a worker as an independent contractor, rather than an employee, is one of the more costly mistakes a business owner can make. A new program launched by the IRS can help make correcting that mistake a bit less expensive.
'What Compensation is Taxable?' reports on the many types of compensation and how they are treated under payroll tax law.
An employer's federal payroll tax responsibilities include withholding from an employee's compensation and paying an employer's contribution for Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA).
Self-employment taxes are payroll taxes that small business owners are subject to and that carry varying payment and filing responsibilities depending on the form of the business.
To fund unemployment compensation benefit programs, employers are subject to federal and state unemployment taxes based on various factors. These factors include the amounts employers pay their employees, the type and age of the business, and the unemployment claims filed against the business.
Employers in states with an income tax have state (and sometimes local) payroll tax withholding, payment and reporting obligations. Multistate employment withholding may be governed by reciprocal agreements between states. In addition, several states have mandated disability programs which impose payroll tax responsibilities on employers.
Employers face numerous payroll tax responsibilities which include withholding, paying and reporting federal, state and local income tax, Social Security and Medicare, unemployment taxes, and in a few states, disability insurance taxes. Federal income tax withholding requires employers to properly calculate the withholding amount from an employee's compensation, taking into account the employee's withholding exemptions claimed on IRS Form W-4.
Large food and beverage establishments must follow tip allocation rules in the absence of a good faith tip allocation agreeement between the business and its employees. The case study, Sydney's Seafood, illustrates this type of tip allocation procedure.
Employers with tipped employees have payroll tax withholding, payment, and reporting responsibilities for tips that are considered taxable compensation. Some employers will qualify as large food and beverage establishments and may be subject to special tip allocation and reporting rules.
Compensation takes many forms: some types are subject to payroll taxes and some are not. Advances and loans, gifts, awards, and prizes, employee fringe benefits, business expense reimbursements, vacation and other time-off pay are among the types of compensation that you'll need to analyze in order to fulfill your withholding and payment obligations as an employer. In addition, special rules apply to noncash wages and payments for what is considered casual labor.
The classification of workers as employees or independent contractors determines whether an employer is responsible for withholding and paying payroll taxes. The worker's classification is based chiefly on whether you have the right to direct or control the worker's work. The IRS has a 20-factor analysis you can use to assist you in making a determination. There is also a safe haven rule, as well as the opportunity to request a ruling from the IRS as to employee or independent contractor status.
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