4 Things You Need to Know About Payroll Tax

Ignoring payroll tax can cost you.

As a business owner, you rely on your employees. After all, they are the backbone of your company. They keep things running, organized, and progressing for you on a daily basis. And without these dedicated team members, your success and growth might be compromised

That’s why it’s important to compensate workers for all the hard work they do. But, many business owners under-estimate how complex payroll, and taxes, can be.

That’s because, payroll is so much more than a worker’s wage. Which is why we’ve outlined the 4 things you need to know about it.

Who Qualifies for It?

Workers can be classified as a number of different things. Depending on this classification, they might not qualify for payroll, and therefore, you won’t need to worry about paying taxes for them.

However, keep in mind, that incorrect classification of a worker can result in consequences. From unpaid taxes, to fines, and additional fees; understand who exactly qualifies and who does not.

Not all part-time, seasonal, short-term or occasional workers can be considered independent contractors. Some business owners might be tempted to claim them as such because it will cost less money in the long- run.

However, The IRS will not be forgiving if they find out. The IRS will take into consideration what items you provide to them (such as equipment, a workspace) and any other tools (such as insurance or vacation). Based on these conditions, they might audit your account and determine these are actually your employees. If this is the case, you can be on the hook for unpaid employment tax, fines, interest, and more.

If you’re unsure of who exactly is considered an ‘employee’, consider speaking to a professional, like us at A.P Tax and Accounting. We can review your contract, reasoning, and classifications to see if your workers are all labeled correctly. That way, there is no surprise come tax season.

How it’s Calculated

Employers are often required to withhold a number of taxes on an employee’s payroll. These typically include federal income tax, social security, Medicare, state, city, county, local income tax, and state-specific taxes (for example disability).

But, these vary depending on where you live. And, where the business is operating. So be sure to speak with a financial professional to make sure everything you are taking off an employee’s paycheck is correct.

What the Rates are

State, city, local, and municipal tax rates are different for each state. Plus, the rate of federal tax is based on an employee’s W-4 form so it’s important to take your time researching before applying a deduction.

As of 2019, the rate of social security deductions for an employee is 6.2% on the first $132,900 earned. Whereas Medicare tax is 1.45% on the first $200,000 paid and 0.9% for anything over that.

Unemployment is now 6.0% on the first $7,000 paid to each employee. However, most employers would be eligible for a credit back on this amount (as much as 5.4% of taxable wages).

But, state unemployment tax rates can be tricky. They are dependent on the type of industry, length of employment, size of unemployment claims, and more. Which is why it’s best to speak with a member of our team to determine the exact percentage you should be taking from worker pay.

When they Need to Be Paid

Although most employers will be expected to make federal tax payments bi-weekly or monthly, it can vary. The dates you’ll need to pay depends on the amount you owe (or your tax liability).

And, you should receive a notice from the IRS outlining a deposit schedule. These are often sent towards the end of the calendar year, so you can prepare for the upcoming 12 months.

Just to make things more complex, state taxes do differ. Meaning, you will have to refer to your state’s laws to determine what the tax deposit schedule for your area is.

Payroll tax is also subjective and based on the dates you paid your employees.

Ultimately, calculating payroll tax is overwhelming. Not only can this process seem tedious and time-consuming but it can leave you in serious financial trouble if not done right. Avoid any errors or disagreements with your workers by using one of our professionals to review your payroll today.

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