Having a staff on payroll can seem very commonplace as well as essential to running a small business, but many owners get in trouble with Uncle Sam because they don’t understand the complexity of payroll tax law. On the flipside, by not fully understanding the rules, it’s also common for business owners to overlook ways to manipulate employee pay to save money.
With that said, here are a few tips for business owners to keep their payroll on track and in compliance with the IRS:
1. Make sure that you properly classify your workers. Just because a worker agrees to be paid as an independent contractor doesn’t mean it’s the legal way of paying that person. If the worker performs the same services as offered by your business, the person must usually be classified as an employee. Like with anything related to the tax code, there are exceptions so for more in-depth information on this topic, check out IRS Publication 15.
2. You will need an employer identification number (EIN) and you will need to supply this number to your payroll-processing company. If your business entity is a partnership or corporation, you already have a number. If you do not have an EIN, contact the IRS at 1-800-829-4933 to apply for one.
3. Check with your bank to see if they offer payroll services. Usually banks consider payroll processing a courtesy, which means the price will likely be substantially lower than what other payroll processing companies charge.
4. Set your budget to include not only the wages that must be paid, but the payroll taxes that also must be paid to the federal and state governments. You are required to match the Social Security and Medicare that is withheld from your employee’s pay, which is equivalent to 7.65% of the gross pay. You must also fund the federal unemployment fund by paying FUTA tax. See Publication 15 for more information on rates and requirements. Depending upon the state in which your business is located, you may be required to pay other employment taxes. Find out the rates and include those percentages in your budget.
5. Ask your payroll-processing company to automatically make the federal and state tax deposits for you. Out of sight, out of mind, and in compliance. It can get very expensive very quickly if you do not keep up with payroll tax deposits. In fact, you can be levied a 100% penalty for failure to turn over the withholdings to the government by the due dates. Publication 15 outlines the due dates and other requirements for making the payroll tax deposits. If your in-house bookkeeper makes the deposits, double check to ensure they were made timely.
6. When it’s time to give raises, consider providing them in the form of tax-free fringe benefits such as health, dental, and vision insurance, child care subsidy, a cell phone or a retirement plan. Check out IRS Publication 15-B to see what fringe benefits are available and whether or not they are subject to taxation.
7. As part of the Patient Affordability Act, beginning in 2014, if you have more than 50 employees on staff, you will be required to provide health insurance. You needn’t pay the health insurance premiums, but there must be a plan in place in which your employees may choose to participate.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.