Don’t let the challenge of processing payroll overwhelm you.
Filing your business taxes may be the most frustrating process in your business, and it becomes more complex as you add more staff.
But, it doesn’t have to be that way.
If you understand how payroll taxes work, use automation and set up a reliable process, you can get payroll completed in less time.
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Processing payroll can be summarized in five steps.
Five steps for payroll processing
A small business must complete five steps to calculate payroll tax obligations and submit tax payments:
- Data collection: When an employee is hired, you need to collect withholding tax information on Form W-4. Employers must withhold federal income tax, and may withhold dollars to pay for company-provided benefits. If, for example, you offer a retirement plan, a worker may want payroll dollars withheld and invested in the plan.
- Calculating net pay: The net amount of employee pay is the gross pay less tax withholdings, less any benefit payment withholdings. You’ll also calculate withholdings for Medicare tax and Social Security tax.
- Payments: You must pay the employee’s wages by check, or via direct deposit to a bank account.
- Reporting: A tax filing for federal tax and state tax withholdings must be submitted to the IRS and the state department of revenue. Retirement plan contributions, state unemployment payments, Medicare taxes and Social Security taxes are reported to other entities.
- Withholding payments: All of the tax and benefit payments must be forwarded to the taxing authorities, retirement plan firms and other benefits providers.
Keep in mind that your business must address changes to payroll, which complicates the process and requires more time.
Every year, employees may be added, promoted or let go. Workers also may change the tax and benefit withholdings, based on salary changes or family changes. The tax due for a particular employee can change frequently over time.
You also must determine if each worker you hire is an employee or an independent contractor.
Contractors and tax withholdings
To calculate your federal payroll tax liability correctly, you need to know each worker’s classification. Fortunately, the IRS provides a guide that explains how to assign workers to a particular category.
When your business has a great deal of control over the work performed by a worker, that individual is an employee. If the worker completes a task with little supervision, the independent contractor label will apply.
You must issue a 1099 form to each contractor who is paid $600 or more during the calendar year. If a self-employed worker is paid less than $600, the earnings are still taxable as income, even though a 1099 is not issued.
Once you understand the basics of payroll processing, you can plan your payroll tax deposits.
Submitting tax deposits
Your Employer Identification Number (EIN) is used on each of your federal tax deposit forms. If you pay your tax deposits on time, you’ll avoid payroll tax penalties. Small business owners must pay deposits for these taxes:
- Federal taxes on income
- State income tax
- Federal insurance contributions act (FICA) taxes
- Federal unemployment tax (FUTA)
FICA tax includes taxes to fund Medicare and the Social Security trust fund.
Tax withholdings are reported on Form W-2, and depositing the taxes withheld requires several steps.
Income tax and FICA tax deposits
The internal revenue service requires business owners to make federal income tax deposits and FICA tax deposits.
Before the calendar year begins, review Publication 15 to determine your tax depositing schedule, and take note of each due date. The dollar amount of your tax liability determines when you make deposits, and you report the taxes withheld on Form 941.
- Less than $2,500: If your tax liability is less than $2,500 for the current quarter or the prior quarter, you can submit your payment when you file Form 941.
- Lookback period: If your payroll is more than $2,500, you make deposits either monthly or semi-weekly. To determine which period applies to you, the IRS considers the total taxes reported on Form 941 for the past four quarters. This “lookback period” determines the deposit schedule.
- Monthly schedule depositor: If you reported $50,000 or less of taxes during the lookback period, you use the monthly schedule. Deposits are due on the 15th day of the following month.
- Semi-weekly schedule depositor: If you reported more than $50,000 of taxes during the lookback period, you use the semi-weekly schedule.
The term “semi-weekly” is confusing, so make sure that you’re clear about the deposit schedule.
Tax deposits for payroll paid on Wednesday, Thursday and/or Friday are due by the following Wednesday. If you pay employees on Saturday, Sunday, Monday and/or Tuesday, you submit tax deposits by the following Friday.
The IRS requires monthly and semi-weekly depositors to use electronic funds transfer (EFT) to make deposits. There are several ways to make an EFT payment from your bank account:
- EFTPS system: Most business owners use the Electronic Federal Tax Payment System (EFTPS) to make deposits. This is a free system, and you can enroll on the website.
- ACH payment: You can also submit deposits using an ACH (Automated Clearing House) transaction through your bank.
- Tax preparers and payroll companies: If you use the services of a CPA firm or a payroll company, these firms can make deposits for you.
Each state has a specific process for making state income tax deposits.
State income tax deposits
Check with your state’s department of revenue to verify the tax deposit process. Most states, such as California and New York, have EFT systems to accept tax deposits.
Keep in mind that each state income tax rate is different. If you employ workers in multiple states, you’ll need to know each income tax rate and the process for depositing taxes.
Check with an accountant to determine if you need to collect any local taxes on payroll.
FUTA tax deposits
Federal Unemployment Tax Act (FUTA) and State Unemployment Tax Act (SUTA) were passed to provide temporary income to workers who lose employment, generally when the employee is not at fault.
Small businesses pay unemployment insurance taxes through a joint program between the federal government and the states. Employers are the primary source of tax revenue.
FUTA taxes are calculated and reported on Form 940.
FUTA taxes are paid by ETF, and your quarterly FUTA payments are due on the last day of the first month that follows the end of a quarter. For example, your payment for the quarter ending March 31st is due on April 30th.
Check with your state to determine the deposit schedule for SUTA.
For each tax deposit, you must complete a payroll tax return, which documents the wages paid and amounts withheld from pay.
Completing tax returns
Payroll tax returns are complex, and the information you submit must be accurate.
If you submit tax returns late, you may be subject to a late filing fee.
Federal income tax and FICA return
Form 941, which reports federal income and FICA taxes, is filed quarterly on these dates: April 30th, July 31st, October 31st and January 31st (for the fourth quarter of the previous calendar year).
If you deposit all taxes on the due date, you have 10 additional calendar days to file the return.
State income tax return
Check with your state to verify the state income tax return due date. In many cases, the states use the Form 941 quarterly due dates.
FUTA tax return
The Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return for 2019, is due on January 31st, 2020.
Tax reporting to workers
You must follow IRS guidelines for issuing W-2 forms to employees, and for providing 1099 forms to independent contractors. Businesses also submit W-2 and 1099 data to the federal government.
Your W-2 forms must be submitted to the Social Security Administration (SSA). Some business owners submit paper copies, but most file W-2 forms electronically.
Form W-3, Transmittal of Wage and Tax Statements, reports the total wages and tax withholdings for an employer.
All 2019 W-2 forms and Form W-3 must be submitted to SSA by Jan. 31, 2020. You must also give a W-2 to each employee by that same date. Employees file form W-2 with their personal tax return.
The 1099 form for Miscellaneous Income reports the gross earnings paid, and 1099 forms do not include withholdings for income tax, Medicare or Social Security taxes.
Self-employed contractors post 1099 income to Schedule C, along with expenses. The net profit from self-employment is added to other sources of income on the personal tax return (Form 1040).
Form 1096, Annual Summary and Transmittal of US Information Returns, reports the dollars paid using 1099 forms.
For tax year 2019, all 1099 forms and the 1096 form must be must be submitted to the IRS by Jan. 31, 2020. You must also give a 1099 form to each independent contractor by that same date.
The Fair Labor Standards Act (FSLA) states that payroll records must be kept on file for a minimum of three years. The act also lists the specific information that must be kept by the employer.
Managing the payroll process is complex, and you can complete more payroll tasks in less time if you embrace automation.
Why spreadsheets are a problem
Processing your payroll using spreadsheets is a terrible idea.
- Input errors: You run a high risk of making an input error.
- Broken, incorrect links: Links between cells, and links between spreadsheet tabs, may have errors.
- Current version: You may not use the current version of a particular spreadsheet. It’s also more difficult to save and use the current version of a document.
- Integration: You can’t integrate a spreadsheet with many other applications. If you can’t integrate data, you’ll have to do more input manually.
You can talk with experts who can make the payroll calculations for you. The federal and state tax laws for payroll change frequently, so find an expert who will stay on top of the changes for you.
It’s also important to document all of your payroll tasks.
Document in a procedures manual
Every routine task you perform should be documented in a procedures manual.
Your manual should list each routine task, how the task is performed and who is responsible for completing the work. A procedures manual clarifies how you do business and reduces confusion about your operation. The manual is also a great training tool for your staff.
It’s particularly important to have a reliable system in place to make your tax deposits on time and avoid late submission penalties.
If you create a more efficient payroll process, growing your business is much easier.
Get ready to scale
So, where do you go from here?
- Review your process: Make sure that you have a reliable system for hiring, collecting payroll information, submitting tax deposits and filing tax returns. Talk with your staff about potential problems and make improvements.
- Automate: If you’re using spreadsheets, make the change to payroll automation.
- Ask an expert: CPAs can answer more complicated payroll questions. Lean on these experts to keep your payroll processing on track.
Growing your business requires more people. Use automation to process payroll efficiently and grow your business with confidence.
This article was produced by the Quickbooks Resource Center and syndicated by MediaFeed.org.
Featured Image Credit: DepositPhotos.com.