What is Payroll Tax Withholding?

Payroll tax withholding is the process of deducting a portion of an employee’s gross wages to cover their share of federal, state, and sometimes local taxes. As an employer, you’re responsible for withholding these taxes and remitting them to the appropriate government agencies.

Why is it Important?

Withholding taxes helps ensure that employees pay their income taxes throughout the year rather than facing a large tax bill at the end of the year. It also simplifies the tax filing process for both employees and employers.

What Taxes Do You Need to Withhold?

Typically, you’ll need to withhold the following taxes from your employees’ paychecks:

• Federal Income Tax: Determined based on the employee’s Form W-4, which indicates their filing status, allowances, and other factors.
• Social Security Tax: A flat 6.2% of an employee’s wages up to a certain annual limit.
• Medicare Tax: A flat 1.45% of an employee’s wages, with an additional 0.9% tax for higher-income earners.
• State Income Tax: Varies by state and may be based on the employee’s state-specific W-4 form.
• Local Income Tax: Applicable in some cities and counties, with rates and calculation methods varying.

Your Responsibilities as an Employer

As the employer, you have several key responsibilities when it comes to payroll tax withholding:

1. Calculate the Taxes: Use payroll software or manual calculations to determine the amount of taxes to withhold from each employee’s paycheck.
2. Withhold the Taxes: Deduct the calculated taxes from your employees’ gross wages and record the amounts withheld.
3. Report the Taxes: File quarterly reports with the IRS (Form 941) and your state’s tax agency, detailing the wages paid and taxes withheld.
4. Remit the Taxes: Deposit the withheld taxes with the IRS and state tax agency by the specified deadlines.
5. Document Everything: Maintain accurate records of employee wages, hours worked, taxes withheld, and tax payments.

Tips for Managing Payroll Taxes

• Use Payroll Software: Payroll software can automate calculations, withholdings, and filings, reducing the risk of errors.
• Stay Organized: Keep detailed records of employee information, tax forms, and payment receipts.
• Understand Deadlines: Familiarize yourself with federal, state, and local tax deposit and filing deadlines.
• Consider Professional Help: If payroll taxes become overwhelming, consider hiring a payroll service or tax professional.

Common Payroll Tax Mistakes

To avoid common pitfalls, be aware of these potential mistakes:

• Incorrect Tax Calculations: Errors in calculating withholding amounts can lead to underpayment or overpayment of taxes.
• Missed Deposit Deadlines: Late deposits can result in penalties and interest.
• Failure to File Reports: Not filing required reports can also lead to penalties.

By understanding the basics of payroll tax withholding and following best practices, you can effectively manage this essential business function while minimizing the risk of errors and penalties.

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You have two options: do it yourself or outsource. 

How to DIY Payroll

First, you need to appropriately compute payroll taxes. You can start by finding current rates. The percentages are decided every year.

Let’s take it step-by-step:

1. Employees will need to fill out their W-4 to state filing status and dictate individual allowances. Allowances and dependants tell you how much payroll taxes are taken. 
2. Before you attempt payroll, you need to make sure you have an Employer Identification Number (EIN). An EIN is used by the IRS to recognize a business that pays employees. You may also be required to acquire a state EIN.
3. You need to keep in mind three important dates: employee paydays, tax due days, and tax filing deadlines.
4. When you are ready to pay your employees, you need to figure out which federal and state taxes to reserve. I recommend using the IRS Withholding Calculator or a steadfast paycheck calculator. 
5. When ready, you need to submit state, federal, and local tax deposits. 
6. Lastly, you will need to send in the employer federal tax return and local or state return. Furthermore, be prepared for your annual filings and W-2s towards the end of the year.

The benefits of doing this yourself are all about how much control you have over the process. When you do payroll you can review and correct information before mistakes are made. If payroll is outsourced, you may encounter the risk of not knowing about errors until it is too late to fix them. 

However, taking the pains of payroll on yourself requires patience and planning for each pay cycle. Also, doing payroll yourself takes the benefits of accounting specialists out of the equation. 

Outsourcing payroll

While some entrepreneurs struggle at first to relinquish an integral piece of their business, outsourcing your payroll often comes with a lot gained in return.

Payroll outsourcing is the use of an external business to handle the management of your business’s payroll. So, instead of an in-house payroll or HR professional, a trustworthy third-party company takes care of the details. Choosing to outsource payroll may put your mind at ease because you are allowing a qualified professional to handle the situation. 

Outsourcing payroll will be easier than you think. Remember that placing effort into this may save you a lot of time and money in the long run. 

Which aspect of payroll would be most useful to you to outsource? Is there any facet of payroll management that you would like to keep in-house? 

Keep in mind the different sides of payroll. Some services out there can only help with basic payroll functions but others can also help with human resource management. 

Now, it is time to do some research. Some services allow you to choose how involved they will be in your payroll situation. By choosing the correct level you will be able to have personal security and peace of mind at a cost you decide. 

For a provider, you want one that has the capabilities to quickly and easily integrate with your system.

It’s good to consider outsourcing payroll if you find that in-house management is laborious, expensive, leads to recurrent mistakes, or leads to potential legal trouble. You can start your payroll outsourcing adventure by creating a budget, deciding on the features you want, doing personal research, and then choosing a cost-efficient service.

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Establish a Transparent Payroll Blueprint

It’s critical to be aware of any and all things that relate to labor regulations. It’s just as critical to follow them all, too. If you want to handle payroll like a champion, then you should start by establishing a tangible payroll blueprint. The last thing you want to do is make any legal errors. It’s essential to abide by all rules that are set forth by the IRS. It can help to come up with a rock-solid blueprint beforehand. Make sure all of your team members grasp it just as well as you do. Talk to them at length about employee benefits, payment periods and anything else along those lines.

Come Up With a Payment Timeframe

Be sure to come up with a payment timeframe that makes sense. You want to make your payments as predictable as possible. They should function like clockwork for smooth sailing. You should think about payment intervals (frequency matters). It can be a terrific idea to assess state and federal rules in order to see to it that you accommodate your specific region’s payday laws to a tee. You may want to pay your team members once a week, bi-weekly, or perhaps even once a month. You can pick a schedule that is in line with your individual requirements. Just go above and beyond to be reliable. Tardy payments are never okay for anyone as not only do people depend on that income, but it can permanently damage your employees trust in your abilities.

Grasp All Laws That Relate to Wages

You can master payroll by studying up on any and all laws that relate to wages. Businesses have to be in tune with state and federal regulations that are out there. You have to be aware of your employer status. You have to be aware of the financial and legal duties that tie in with that as well. You should find out everything you can about the correct employment taxes that apply to your company. Find out about state and local options. You should learn everything you can about suitable income tax approaches that are geared toward individual team members. Precise payments are of the essence at all times.

Outsource Your Payroll Requirements

There are so many small business owners who have jam-packed schedules. If you don’t have spare time to tackle payroll, then that’s okay. Research highly regarded companies that offer payroll services to small businesses just like your own. Hiring outside assistance may reduce your burden considerably.

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What is the Paycheck Protection Program? 

At its core, the Paycheck Protection Program is a business loan that is especially designed to assist small businesses through the COVID-19 outbreak. It was passed as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. 
 
As its name suggests, the Paycheck Protection Program comes in the form of direct cash assistance to help employers manage workforce payroll without any interruption. This is meant to assist business owners in retaining their staff and protecting their livelihood from getting irreparably affected by the novel coronavirus.  
 
It is also an unsecured loan, which means that you don’t have to provide any asset as collateral. If you qualify as a small business owner, proprietor or independent contractor, your application is eligible to get processed without a secured asset. 

Does it come with any special relief? 
 
To ensure that the Paycheck Protection Program doesn’t affect the long term financial management of your small business, it is offered at the specialized interest rate of 1 percent and a loan maturity date of 2 years. 
 
The loan is also forgivable after disbursement. If you prove that at least 75 percent of the amount is used for payroll, you won’t have to pay off the loan. Other expenses from the cash assistance can include mortgage or rent payments, as well as utility bills. 
 
The loan also comes with the special relief of delayed repayment. This means that you won’t have to make a monthly repayment for 6 months.  

Who can apply for the Paycheck Protection Loan? 
 
All businesses that fall under the U.S. Small Business Administration (SBA) size standards qualify for the loan.  
 
Since the size standards vary on a case to case basis, it is important that you check these requirements before moving forward with your application. 
 
Special considerations are also made for certain industries and sectors, which are outlined and explained by the SBA. You can refer to SBA resources to check information specific to your business or its respective segment. 

Who can help you get the loan? 
 
Since the Paycheck Protection Program loan is being facilitated by the SBA, it is available through all SBA affiliated lenders.  
 
You can also reach out to the following institutions to initiate the application process.  

• Federally insured depository institutions.  
• Federally insured credit unions. 
• Farm Credit System institutions. 

According to the SBA, it is working to make the loan available through other lenders. However, no announcements have been made on that part yet. 

How can you apply for the program? 
 
Apart from reaching out to one of the institutions mentioned above, you can start preparing for your application by downloading the required form through the SBA website.  
 
You can then file your application and follow the required steps to get the loan for your business.  
 
It is prudent to mention that at the time of writing, the SBA is not accepting any new applications due to running out of loan appropriations. This might change in the future, which is why you must keep an eye out for updates regarding this developing situation. 

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Go Digital

In today’s modern, hi-tech world, one of the quickest and simplest ways to streamline your payroll is to simply go paperless. Paper timecards, paychecks, and pay stubs all cost money and have to be kept track of, costing time. It’s not just the cost of paper that you’ll save on; equipment such as printers, photocopiers and scanners are all expensive and you’ll be able to reduce that cost as well. Going paperless is a relatively simple process. The majority of workers you employ today will own smartphones; they can use these to clock in and out and keep track of their hours; just one example of a way you can start digitizing your payroll system. Keeping all of your financial information on paper is also a potential security risk that you can help to eliminate by switching to digital. Digitize as much of your payroll process as you can to save money, improve efficiency, and reduce waste.

Use The Most Up-To-Date Software

Whether you’ve already gone fully paperless, or are in the process of doing so, your payroll software should always be fully up-to-date. Whenever upgrades become available, you should take advantage of them in order to keep your payroll quick, efficient, and inexpensive. As your company grows, you’ll need to ensure your software keeps up; for example, you may need a program that can automatically generate 1099 forms if you employ independent contractors. The right program can do pretty much anything you’ll need; for example, many of them can streamline your HR and handle your taxes as well.

Keep Yourself, And Your Staff, Informed

Keeping yourself and your workforce properly informed is another critical step in the process of streamlining your payroll. It’s not enough to train your workforce once and decide that’s enough; as your business grows, your needs evolve, laws change, and technology improves, you’ll need to continuously update your staff. Occasionally, this will mean bringing in professionals to hold formal companywide trainings; sometimes, it will simply mean required reading material or training videos. Either way, keeping everyone in your company informed of all updates and changes is a must to maintain a quick payroll process.

Outsource, If Necessary

While following the advice given in this article will help you save a great deal of time and money, it’s also a lot for a small business owner to have to keep in mind. In many cases, you may be better off if you choose to outsource your payroll. A reputable payroll company can handle nearly everything for you. They’ll keep track of your staff and make sure they’re paid correctly and on time. They’ll also always have access to the latest software and be educated on the latest legislation regarding payroll in your state. When it comes to compensating your workers, one of the biggest challenges is the proper handling of payroll taxes. Outsourcing means that your taxes will be in the hands of educated professionals. Of course, choosing the right company to handle your payroll isn’t always easy. Make sure that you carefully vet any potential firms you are considering. Read reviews, check references, and don’t be afraid to ask questions! If you’re unsure of anything, a great payroll company will be able to put your mind at ease.

Check out our Google, Yelp, and Yahoo Reviews -or- Read our Self Employed Tax Guide.

Find a Meeting Location Near You.

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You’ll save time – and time is money!

When you decided to start a business, chances are it wasn’t because you enjoyed poring over mounds of paperwork for hours on end. Nevertheless, that’s just what you may find yourself doing when trying to work out the finer details of your payroll. While it may have started off simple enough, as your business grew and expanded the payroll became more and more complicated. Every moment you spend ironing out the details of payroll is a moment you can’t devote to other business matters. Not only is this inconvenient for you, it can become downright costly. After all, your time is valuable! Any time you, or one of your valued employees, spends working on payroll is time you can’t devote to bringing more money in.

You’ll reduce errors – and save money that way, too!

Errors in your payroll can prove to be costly for your business. As you know, it’s not as simple as just paying your staff. There’s insurance, taxes (both state and federal) and a bevy of other financial considerations. If you make a mistake somewhere along the way, chances are you will shoulder a serious financial penalty as a result. For example, if you don’t calculate your taxes correctly, or if you are late on a payment, you can get hit with a fine. The easiest way to avoid all this hassle is by outsourcing payroll; put your finances in the hands of seasoned professionals and you’ll greatly reduce the chances of costly mistakes.

You’ll be a lot more adaptable

Part of what makes payroll so complex is its ever-changing nature. Tax laws are always in flux and your staffing needs are always changing too. Some weeks, your part-time employees will work many more hours than others; with every change, you’ll find yourself starting from scratch. A professional payroll service will not face this problem. They are constantly being trained in the latest changes to tax law and they’re also trained to handle a varying level of employee hours. Ensure your company can weather the ever changing business climate by outsourcing payroll.

A payroll service handles more than just paychecks

If you outsource to a reliable payroll company, they’ll do a lot more than just issue your company’s paychecks. Not only can they calculate the amount of money owed to each employee, they can also work out tax obligations for each individual. They’ll allow employees to designate a certain amount of each paycheck to a 401(k), should they wish to do so. A payroll service will also calculate how much your company owes in payroll taxes.

Outsourcing payroll

If, after reading this article, you are considering outsourcing payroll, we think that’s a great step to take for your business! Make sure you do the necessary research and contact any potential companies you are considering using. There are a few questions you should always ask. What is the cost of the service? What services will you get for that cost? How are taxes handled? Make sure to contact a few references, as well. Check to see if the service is reliable and if previous customers have been satisfied.

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Many business owners are hesitant to hire a new employee due to the heavy burden of payroll taxes.  To combat this, the government has passed a new law called the Hiring Incentives to Restore Employment (HIRE) Act.  This act provides two new benefits to employers who hire workers who were previously unemployed or who were only working part time.

The first benefit gives employers who hire qualified unemployed workers an exemption from paying Social Security taxes of 6.2% on wages paid to these workers after March 18th, 2010.  Employers would still need to withhold the employee’s share of Social Security taxes, and both the employer and the employee will still pay Medicare taxes.  The benefit will not impact the employee’s future Social Security benefits. 

The unemployed worker must be hired after Feb. 3rd, 2010 and before January 1, 2011 to qualify.  Each qualified employee must also provide a statement certifying that he or she worked no more than 40 hours during the 60 days prior to beginning work.  The IRS is working to create a form that employees can use to make this statement.

The second benefit is an additional business tax credit, up to $1,000 per qualified employee, that business may claim on their 2011 tax returns.  The workers must be retained for at least a year to be eligible for the credit.

These benefits are available to nearly all types of employers, with the exception of household employers.  Additionally, family members and other relatives do not qualify for the payroll tax exemption.

Employers will be able to claim the payroll tax benefit on the payroll taxes that they usually file with the IRS, beginning with the second quarter of 2010.  The IRS is preparing revised forms that should be available soon. 

Consult with your tax advisor to find out if you qualify for these tax benefits.

Tawni Berg, CPA
Seattle/Bellevue Tax Accountants

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