Your Small Business Payroll Compliance Checklist
When you become an employer, you must follow all payroll laws to avoid financial penalties, lawsuits, and even worse, being forced to close your business. Payroll laws specifically govern how you pay your employees and taxes as well as how you report this information. To name a few, this includes overtime pay requirements, payroll taxes, and quarterly and annual tax forms. You must follow both federal and state laws to maintain payroll compliance; state laws, which vary based on your location, seem to trip some employers up more. Payroll compliance refers to steps every employer must take to abide by the tax regulations, wage and hour rules and other applicable requirements related to payroll. On top of the federal regulations you must follow in order to remain compliant with your payroll practices, there are also state payroll compliance requirements to adhere to as well. As you may imagine, your state obligations will depend on the state where your business is located and will vary from state to state.
The form is also used to report FICA taxes to the Social Security Administration. The State Unemployment Tax Act is a type of payroll tax that states require employers to pay. Unemployment Insurance is a federal-state program jointly financed through federal and state employer payroll taxes. The state unemployment tax differs from state to state, the rate being determined by each state separately and within the state for each employer separately. This means that within a given state, firms that lay off a higher percentage of workers and whose employees collect a higher amount of UI benefits pay higher tax rates than firms that lay off fewer workers. While the withholding percentage may vary from employee to employee, all employees are subject to a minimum of federal payroll taxes.
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Moreover, payroll compliance is also necessary to prevent fines and penalties that could negatively impact your business operations. It is easy to disregard some of the IRS requirements, especially when it comes to different forms that all seem similar. However, if taxes are paid without the proper form or with a form that contains inadvertent or deliberate errors, the taxes are not considered paid in full, resulting in penalties.
In essence, this means that there are considerations you need to take every time you run payroll, as well as on quarterly and annual bases for business tax purposes. Payroll compliance, therefore, is a continuous part of the employee life cycle—from the day you hire someone until even after they’ve stopped working at your business.
Although seemingly simple, with all of the paperwork involved with payroll compliance, it can be easy to forget or lose important documents. However, failing to maintain payroll and tax records can be extremely problematic for your business, especially if federal and state tax agencies ask to see them.
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Therefore, to avoid huge and costly mistakes and maintain payroll tax compliance, employers have to understand the differences between various IRS forms. Although many common benefits, like health-savings accounts and commuter plans, are pre-tax, there are other benefits that are subject to tax withholding. If your business offers any of these applicable fringe benefits, therefore, you’re responsible for withholding the appropriate amount from your employees’ paychecks and reporting this information on the respective tax forms. To ensure that your business follows payroll tax compliance regulations in this respect, you’ll want to pay close attention to the benefits you offer employees and any associated tax obligations they may have. Although this may seem like an easily avoidable mistake, in fact, overtime is often miscalculated.
Form W-2 is an IRS tax form used in the United States to report wages paid to employees and the taxes withheld from them. Employers must complete a Form W-2 for each employee to whom they pay a salary, wage, or other compensation as part of the employment relationship. An employer must mail out the Form W-2 to employees on or before January 31. This deadline gives taxpayers about 2 months to prepare their returns before the April 15 income tax due date.
It can be claimed for employees who are retained but not currently working due to the crisis for firms with more than 100 employees, and for all employee wages for firms with 100 or fewer employees. As a result, employers can defer their 6.2% share of the Social Security tax on each employee’s covered wages for the rest of the year and pay half at the end of 2021 and a half at the end of 2022.
Additionally, some employers miscalculate when determining the hourly rate to use to calculate overtime pay based on an employee’s salary or weekly pay. As with all of these payroll compliance mistakes, miscalculating overtime can be problematic, especially if you’re underpaying your employees. In this case, not only are you subject to back pay and fines but you also can be subject to legal action from the underpaid employees. A common payroll compliance mistake that business owners make, therefore, is overlooking or forgetting tax paperwork.
Forgetting To Report Taxes
More than likely, however, you’ll be responsible for withholding state income taxes, reporting new hires, and following any other minimum wage, overtime, or employee pay laws your state may have. As part of your employer compliance requirements for payroll, you must withhold a variety of different taxes from your employee’s paychecks. One of these taxes is federal income tax, which is withheld from every paycheck and determined based on the IRS-specified methods, either by wage bracket or percentage. Federal income tax withholding is also based on the exemptions that each of your employees designated on their W-4 form. The amount withheld for federal income tax can range from 10% to 37% and is reported to both the IRS and the employee using the annual W-2 form.
How often should you reconcile payroll?
How often should you reconcile payroll? You should reconcile payroll during each and every pay period, at least two days before pay day. This helps you avoid any delays with employee paychecks. You’ll also reconcile payroll quarterly using Form 941 and annually at year-end when you print your employees’ W-2s.
Technically, the federal unemployment insurance payroll tax is 6.2 percent of the first $7,000 of an employee’s wages. However, employers in states with their own unemployment insurance tax programs receive a 5.4 percent credit toward their federal tax payment, reducing their tax rate to 0.8 percent. Since all states have federally approved programs, the effective FUTA rate is 0.8 percent. For 2020, the FUTA tax rate is projected to be 6%, according to the IRS.
However, it is important to note that payroll tax changes do not cover other payroll taxes such as the Medicare tax or employee’s share of the Social Security tax. Also, there is no dollar cap on the total amount of employer social security taxes that may be deferred through December 31, 2020. Failing to pay payroll taxes on time can happen to any employer given the different responsibilities they need to keep track of. To avoid this, employers have to closely follow constantly changing IRS announcements and resources. Also, each state has rules for depositing and reporting payroll taxes at the state level. Thus, to secure payroll tax compliance, employers need to pay close attention to state payroll tax regulations in the states where their employees work.
Missing any of these tax reporting deadlines can once again subject your business to IRS fines and penalties. Incorporating the use of the latest technology is recommended to streamline the payroll process and automate the manual processes.
You not only have to meet the federal law requirements but state law requirements as well. The state obligations will vary from state to state, and you must keep payroll compliance concerning your state rules only. Ideally, you would be required to report new hires, withhold state income taxes, and follow laws regarding overpay, minimum wage, and any other employee pay. Your state likely has laws on pay stubs, acceptable ways to pay employees, state unemployment insurance, workers’ compensation, new hiring reporting, state income tax, and more. The CARES Act also provides tax credit for eligible employers to encourage them to continue paying employees. This benefit allows a 50 percent refundable payroll tax credit on wages paid up to $10,000 during the crisis.
This being said, you’ll want to ensure that you maintain your payroll records for all active employees, as well as anyone who has left within the last three years. Furthermore, some states have longer-term requirements for keeping payroll records. You will want to keep these documents organized, secure, and yet, still accessible if necessary. Similarly to what we just discussed above, another common payroll compliance mistake is missing tax filing deadlines. Although businesses may remember all of the appropriate forms they need to complete, they may neglect to file them on time. Different forms have different filing dates, but it’s important to remember that some forms, like Form 941, must be submitted quarterly. However, with year-end tax reporting, like W-2s and 1099s, you must submit the appropriate forms to the IRS, as well as to your employees and contractors.
Although every business is different, generally, you’ll need to complete Form 940 and Form 941, as well as W-2s and 1099s for each employee and contractor. If you forget to complete and submit the necessary payroll tax forms, your business can face fines or penalties from the IRS. One of the other important federal laws governing payroll compliance is the Fair Labor Standards Act . The FLSA regulates overtime, minimum wage, child labor standards, and recordkeeping. As an employer, you must adhere to the applicable statues under the FLSA—including but not limited to paying minimum wage, paying overtime as necessary, and following the age and hours restrictions for workers under 18. Generally, you must pay any eligible employee who works over 40 hours in a given workweek time-and-half for the overtime hours they work. As we mentioned, as part of your payroll processes, you’re subject to the employer payroll compliance requirements laid out by both federal and state laws.
- When you become an employer, you must follow all payroll laws to avoid financial penalties, lawsuits, and even worse, being forced to close your business.
- To name a few, this includes overtime pay requirements, payroll taxes, and quarterly and annual tax forms.
- On top of the federal regulations you must follow in order to remain compliant with your payroll practices, there are also state payroll compliance requirements to adhere to as well.
- Payroll compliance refers to steps every employer must take to abide by the tax regulations, wage and hour rules and other applicable requirements related to payroll.
- You must follow both federal and state laws to maintain payroll compliance; state laws, which vary based on your location, seem to trip some employers up more.
- Payroll laws specifically govern how you pay your employees and taxes as well as how you report this information.
With respect to the payroll compliance requirements for employers, it is vital to withhold a number of different taxes from the paychecks of your employees, and one of such essential taxes is the federal income tax. It is withheld from the paycheck of every employee and is determined based on the methods of the IRS, either by a percentage or wage bracket. Payroll tax and income tax are similar concepts because both taxes are based on an employee’s wages or salary. However, while these terms are used interchangeably, they are different. Since employers are responsible for withholding, reporting, and paying taxes, they need to understand the differences between payroll and income tax to achieve maximum payroll tax compliance. Federal Unemployment Tax is approximately 1 percent of the first $7,000 in wages paid to an employee and is paid in full by the employer.
Common Payroll Compliance Mistakes
These taxes are specified in the Federal Insurance Contributions Act and include federal income, Social Security, federal unemployment, and Medicare taxes. These tax-withholding rules apply regardless of whether employees are part-time, seasonal, or full time. The Internal Revenue Service requires most businesses with employees to withhold and deposit federal payroll, Social Security, and Medicare taxes. Withholding, filing, and remitting payroll taxes can be complicated, but they are tasks that business owners must get right to achieve payroll tax compliance. Failure to make proper tax withholdings or deposits can result in significant fines and penalties for a business.
What are the four payroll processing methods?
There are four main ways employees can be paid (cash, check, direct deposit or debit card). Employers can do the payroll themselves or contract it out to accountants or payroll-service companies.
It is important to note that not all payments made to employees are included in the annual wage that employers use to calculate FUTA payroll tax responsibility. Generally, gross wages, most fringe benefits, and certain employer contributions to employee retirement plans are included in this calculation and this total is subject to the 6% FUTA tax rate. FICA and income taxes are typically deposited on a semiweekly or monthly schedule, depending on your business’s payroll tax liability. FUTA taxes, on the other hand, must be deposited on a quarterly basis.
A common payroll compliance mistake, however, is missing these deposit dates. Therefore, we recommend setting up a schedule and making these payments online using the EFTPS, or electronic federal tax payment system. Federal Insurance Contributions Act taxes, known as FICA taxes, are also federally required for payroll tax compliance. FICA taxes consist of social security and Medicare taxes and, like federal income taxes, must be withheld from your employees’ paychecks. In addition to the FICA taxes you withhold for your employees’ paychecks, you’re responsible for paying these taxes as an employer. FICA taxes should be deposited on a semiweekly or monthly schedule, depending on your business, and reported to the IRS on a quarterly basis using IRS Form 941.