Small business owners face a tangle of local, state and federal taxes. Many opt to hire an accountant or tax professional to deal with them, but since you’re the one who is ultimately accountable for fulfilling tax obligations, it’s important to understand your responsibilities. Payroll taxes often involve detailed rules that require careful attention to avoid fines and penalties. Here are seven things you should know about payroll taxes.|
1. Tax withholding obligations vary by state. Payroll taxes normally include FICA (Medicare and Social Security taxes), unemployment tax and federal, state and local income taxes. Some states also require employers to withhold disability insurance taxes. Payroll taxes may be more complex for businesses with employees in more than one state.
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2. Additional Medicare Tax took effect Jan. 1, 2013. This tax applies to an individual’s Medicare wages that exceed a threshold amount based on the taxpayer’s filing status. Employers are responsible for withholding the 0.9% Additional Medicare Tax on an employee’s wages that exceed $200,000 in a calendar year. Withholding must begin in the pay period in which wages exceeding $200,000 are paid. Unlike Social Security and Medicare taxes (FICA), there is no employer match for Additional Medicare Tax.
3. Deposit timing matters. The schedule you must adhere to for making deposits of income tax withheld, as well as FICA taxes, is determined by your tax liability during a lookback period in a previous year. It does not depend on how often you pay your employees. See IRS Publication 15, “(Circular E), Employer’s Tax Guide.”
4. The line separating employees from independent contractors is not always clear. Employees are subject to payroll taxes, while independent contractors are responsible for paying their own taxes. The IRS has common law rules to help business owners determine which workers are taxable employees. They include behavioral, financial and relationship tests.
5. It’s not your money. Money collected from employees’ paychecks for payroll taxes does not belong to a business. All the money collected this way must be deposited to the appropriate tax jurisdictions. An employer cannot borrow from payroll taxes to pay operating expenses.
6. Laws change. Setting up a payroll program is not a one-time event. Federal, state and local tax requirements can be revised at any time, and you need to stay up-to-date with the changes. It’s crucial that you constantly evaluate and update your payroll program as needed to ensure your withholding is in line with what’s required.
7. All federal tax deposits must be made by electronic funds transfer.
Generally, electronic fund transfers are made using the Electronic Federal Tax Payment System (EFTPS). If you do not want to use EFTPS, you can submit your payments using American River Bank’s
Online Banking or you can arrange for your tax professional or payroll service to make electronic deposits on your behalf.
Questions about using Online Banking for electronic deposits? Contact Us!
Please note that neither this financial institution nor any of its affiliates give tax or legal advice. Consult your tax advisor regarding your individual circumstances.