Why Are Payroll Taxes So Difficult?
Let’s face it, taxes are complicated, especially if you own a small business. Read below about tax concerns to avoid some of the most common pitfalls experienced by small business owners today.
As your business grows, you will probably need to hire employees. Some of the most common tax concerns involve employee tax issues. You must file timely payroll tax returns and make the required tax deposits when you hire employees.
Payroll taxes include three types of taxes:
Income Tax: You must withhold the proper income tax from each employee’s paycheck throughout the year.
-Social Security and Medicare Tax or FICA-You must withhold the employee’s share of FICA taxes from each paycheck, and you must match that amount.
-Federal Unemployment Tax or FUTA-This tax goes to the unemployment insurance system and is paid by the employer. The employee pays no part of FUTA.
Always pay your payroll taxes in full and on time. If you don’t, the IRS adds interest and hefty penalties. The interest and penalties can quickly grow if you don’t pay them immediately. These fees can be enormous and can cause businesses to fail if they cannot afford to pay the fees.
Another common tax issue is misclassifying workers. Workers are usually classified as either regular employees or independent contractors. Business owners have payroll tax withholding and reporting obligations for all employees; however, business owners don’t have to withhold or make contributions for payroll taxes for genuine independent contractors.
Calling an employee an independent contractor saves a lot of time in complying with IRS reporting requirements. It also saves money-you don’t have to make the employer’s share of the FICA contributions, and you won’t have to pay unemployment compensation. It costs a business 20 percent to 40 percent more per worker to treat them as employees. While it may be tempting to use independent contractors rather than employees, the IRS is very aware of the benefits of misclassifying an employee as an independent contractor and will impose stiff penalties for those who break the rule.
If you plan to use independent contractors rather than employees, take the IRS test (http://www.irs.gov/pub/irs-pdf/p1779.pdf), which lists 20 factors to determine whether a worker is an employee or contractor.
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