What You Need to Know About Payroll Taxes

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Congratulations! Your business is growing and you need employees. However, that joy and excitement can turn to stress and anxiety if you don't understand the in's and out's of payroll.

As a small business with a payroll, here’s a sobering thought: you are in a very real sense a de facto agent of the IRS. You collect and hold onto the funds until it comes time to file your quarterly (or annual) Employer’s Federal Tax Return, whereupon you are required to make a payment to the IRS.

You undoubtedly know that along with the income tax withholding, there are employment taxes that include Social Security and Medicare. What most small business owners don't realize is that as an employer you also foot the bill for the federal and state unemployment fund (FUTA) and must file an annual tax return for FUTA.

Keeping up is the Challenge 

For the average business owner, it is more than a matter of trying to adhere to the 10,000-page federal tax code. In addition to making sure that employees’ payroll income taxes are withheld and reported, there are also those FICA deductions and the employer’s share to pay. 

Employers deduct FICA payments and contribute matching funds as follows:

• Social Security tax – 6.2 percent 

• Medicare tax – 1.45 percent (Beginning with tax year 2013, employees earning over $200,000 pay an additional 0.09 percent, but the employer does not have to match the surtax.) 

When the employer does everything required by the IRS, the employee’s Social Security, Medicare and other retirement accounts accumulate for retirement. Again, it is the employee’s money that is entrusted into the care of the employer and is a responsibility that should not be taken lightly. 

Employees Share in the Responsibility

The employee, of course, has an important role when it comes to paying income taxes. The system is essentially pay as you go. The employee must pay the income taxes as the money is earned, rather than just wait until the end of the year to catch up. It is the employee’s responsibility to make sure sufficient income tax is being deducted each pay period. 

In most cases, if the employee owes more than $1,000 at the end of the tax year, the IRS will assess an additional underpayment penalty. If the underpayment does not involve fraud, the employee could be facing a 20 percent penalty assessment on the amount of the additional taxes owed. Add fraud into the mix, and things can get quite painful as the IRS can apply heavy civil and criminal sanctions for willful tax evasion.For the honest employee who wants to avoid underpayment, the IRS provides an online withholding calculator. This tool is especially useful for anyone who has additional outside income and needs to have more than just the standard amount deducted from a regular paycheck.

Here are 10 steps to help you set up a payroll system for your small business:

1. Obtain an Employer Identification Number (EIN) 

2. Check Whether You Need State/Local IDs 

3. Understand Independent Contractor vs. Employee  

4. Take Care of Employee Paperwork (W-4 vs. W-9) 

5. Determine a Pay Period 

6. Carefully Document Your Employee Compensation Terms 

7. Choosing a Payroll System  

8. Run a Payroll

9. Keep Proper Records 

10. Report Payroll Taxes

Whether you have one employee or 100, setting up a payroll system not only streamlines your ability to stay on top of your legal and regulatory responsibilities as an employer, but it can also save you time and help protect you from incurring costly Internal Revenue Service (IRS) penalties.

Is There Still Time to Lower Your Tax Bill for 2014?

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If you go shopping, you will see Christmas decorations in all the stores. Not only is it a reminder to do your holiday shopping, but it also reminds you the year is almost over. And not long after the ball drops on New Year’s Eve, you will need to start getting your information together for your tax return. 

Did you have a good year income wise, and are nervous about what your tax bill is going to look like? Or did you owe a large amount last year and want to reduce what you owe this year? There are a few things you can do to reduce the amount you owe, or to increase your refund, in the time remaining in the year to reduce your tax bill.
Contribute More in Quarterly Estimated Taxes

If you think you will owe a larger amount this year, the easiest thing to do is pay as you go. While the IRS’s “Safe Harbor Rule” allows that small business owners only have to pay in the same amount as they paid in taxes the previous year to meet their quarterly estimated tax obligations, if you had a great year, you probably want to step up your quarterly payments. This prevents you from having to pay a big balloon payment on April 15th!
Defer Income until the Following YearThis may sound a little crazy, but hold off on billing and collecting money from clients. While this may seem counterintuitive, it actually makes sense when you think about how the IRS taxes you. Tax returns are done on the cash basis, which means that the taxes are levied on the amounts that you actually collected by December 31st. If you had done some work for the client, but collect the money after the New Year, you won’t be taxed on it until the following year.
Contribute to a Charity

Consider contributing it to a local charity. Make sure they are a non-profit before writing a check. If you donate some used office equipment to them, be sure to catalog everything you donated, and get a receipt with the name and address of the organization to whom you made the donation. 

Go on a Spending Spree

Yes, you read that right. But we’re not talking about a trip to the high end department store to stock up on clothes. Do you have some office equipment on its last legs, or that you were thinking of upgrading in the coming year? Consider buying it this year so you can take the deduction in this current year. 
In addition, now might be a good time to stock up on office supplies. You will be able to deduct what you spent on them this year as well. There are a number of things you can do to lower your tax bill before the year ends. Check with your accountant about the options in this article if you have any questions. 

3 Things Your Accountant Wishes You Knew

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Motorcyclists, cops, and Trekkies all of their own "codes." And although your accountant's code of conduct might not be as obvious as the others', they still have one. What you say and how you deal with them makes a difference. But like other arcane worlds, it's hard to learn the ins and outs on your own. 

That's why we've taken the time to reach out to accountants and ask them what they wish their customers knew before they walked in the door. 

Be Proactive

One common response we got from accountants is that they wished clients would take more responsibility for their actions and finances. Often clients will hand off a box of receipts and ask the accountant to basically do a magic trick and fix everything. However, it’s better if you actually participate. 

“Spending the time to review your business operations on an annual basis can be a time to create opportunities for tax savings or keep your compliance in check,” says Lauren Stinson from Windward Tax. “We are here to help you.” 

“I cannot get your return done without all the information I ask for,” says George Sleeman of Tax Man to You. The only way to do this is if you understand your own finances, at least on some level. Otherwise you’ll be more inclined to leave something out accidentally. 

Ask Questions

If you’re confused, don’t stay silent! The more you understand the better off everyone will be, including your accountant. A well-informed client also means an accountant can quickly do what they need to do and not face unnecessarily backlash from someone wary of everything they’re doing. 

“Give me a call if you have a question,” says Chris Peden of The Accounting Scribe, “no matter how insignificant the matter may seem. I would rather have them ask me what they think is a stupid question, than not ask and have something that should have been reported go unreported.” 

“Not all spending is deductible,” Sleeman also said. “Also, you cannot expense everyday clothing because you wear a suit to work.” 

The more questions you ask about subjects like this, the sooner you stop trying to get away with expensing items like this. This makes the accountant’s (and your) life much easier. 

Be Realistic

Don’t expect miracles from your accountant. While sometimes it does seem like they wave a magic wand and everything is fixed, they go through a lot of hair-pulling and mind-warping to get your money in order. However, the more you pressure them, the more heavy sighs you’ll hear when you walk through the door. 

“I cannot get your return done in an hour,” Sleeman continues. Such ridiculous expectations are not only stressful to both parties, it’s just not possible. Also, the chance for errors skyrockets if you put unnecessary pressure on them. 

Has anything in this post opened your eyes about your accountant? Let us know in the comments!