Payroll Taxes: What They Are, How They Work, and Why Your Business Needs Them

Everyone needs to pay taxes, including businesses and larger corporations. For most businesses, payroll taxes are the primary means of paying taxes to the government for the money earned through the business. But when a business is struggling financially, one of the first things to lose track of can often be taxes for the payroll. Fortunately, getting help from tax experts can help you recover and get your business back on track.

Payroll Taxes: What They Are, How They Work, and Why Your Business Needs ThemA payroll tax is essentially a business responsibility that says business owners need to withhold a certain amount of payment to employees to give to the government, as well as the match that amounts from the employer's own earnings to give to the government. That's right - employers have to make sure that a certain amount of employee wages are withheld for taxes and employers have to pay their own taxes for the same pay period at the same percentage.

These taxes are generally set up and tracked by your payroll department. The wages and salaries of your employees are typically automatically deducted for these taxes, which your employees may reclaim part of during their own tax filing. The taxes for payroll you pay for the government may also be automatically deducted or filed each pay period or quarter, depending on your business.

How These Taxes Work

Employers have the responsibility to set up payroll programs that will automatically deduct certain taxes from an employee's wages. Generally, taxes are withheld during each payroll period, which alters the net income of the employee. Most of the time, the amount of taxes withheld during each pay period is determined by the wages of the employee, although the percentage for different taxes is the same regardless of how much an employee earns.

For example, social security tax withholding is 6.2% for both the employer and the employee, while taxes for Medicare is 1.45% for both employer and employee. Taxes are calculated by the gross income of both employer and employee. For example, if a pay period earns $100, then the taxes owed would be $6.20 for social security and $1.45 for Medicare.


Examples of Payroll Tax

So, what are examples of these taxes? In general, most businesses will need to set up payroll tax for federal regulations and, depending on state law, some local government funding. If your business operates in a state that also mandates state taxes be taken out for an employee's wages, then you are also obligated to ensure that this is done during each payroll period. Some examples of the federal taxes that should be on payroll include:

FICA

FICA is the Federal Insurance Contributions Act and essentially mandates that a certain percentage of wages is deducted from each employee and employer's income during a pay period. These taxes are used to pay for many social programs from the government, including some Social Security retirement funds, SSI disability funds, survivor and spousal benefits, and even part of the Medicare budget.

Local Taxes

In some states, there are additional local taxes that must be paid each pay period. For example, some states may have legislation that mandates a small percentage of each pay period should be withheld for social programs, paid family leave, or other taxes determined by local or state governments. These taxes must also be paid, in addition to the federal taxes.

What About Exemptions?

Some employees may qualify for payroll tax exemptions based on their specific financial and personal circumstances. However, that's on the employee's end of things. While an employer can provide an employee with the documents necessary to file for tax exemption and the employee can file this document with the company, it's still the responsibility of you, as the employer, to notify the federal government of this exemption with the proper forms.

For employees who file for tax-exempt status, they should be aware that this exemption usually only applies to some federal taxes, and that when it's time to file individual income taxes, they will have to pay the government back for any taxes that were exempt in payroll. Essentially, any exemptions are just an alternate way to account for taxes owed to the government.

What Happens If You Don't Pay Payroll Tax?

Businesses that do not pay payroll taxes are not compliant with the laws of the US government and that can have severe penalties. These penalties usually start as small additional bills that need to be paid to the IRS.

However, the IRS may decide a business is guilty of tax evasion if payroll tax is never paid, which can result in a maximum penalty of a $500,000 fine and even up to five years in prison. On top of that, business owners are still responsible for paying the recovery penalty for missing payments and the unpaid tax that is owed to the government.

What If You Only Miss a Payment?

That said, the IRS does give businesses some time to be compliant with these taxes. If you miss paying taxes for a payroll period or if you're late on the payment deadline, which is generally up to five days after the deadline, then the most that will happen is that the deposits you make will have a certain penalty that you will also need to pay.

For example, if your payment is five days late, then you will pay a 2% penalty in addition to the payroll tax. The later your payment is, the higher your penalty percentage will be. This gives you some time to get back on track before the IRS takes more drastic action. Generally, businesses who are late or miss a pay period will receive a notice from the IRS. Continually missed payments will eventually lead to civil or criminal penalties.

How Can Tax Experts Help?

Whether you've only missed a few deadlines or you're facing higher penalties from the IRS, a tax expert can help you get your business on track. For example, a tax expert may be able to help you negotiate the back pay to the IRS with the Offer in Compromise for the payroll tax so you can settle the amount owed without bankrupting your business. If your business is facing a crisis, then the absolute best thing you can do is seek advice from our tax experts at Santa Ana.

On the whole, however, a tax expert can do the most good for your business when their skills are employed as a preventative measure. You can hire a tax specialist for your payroll that will prepare and file your payroll tax returns for the month, quarter, or year, depending on your business. A tax expert can also help you make adjustments for tax notices, amendments to employee tax forms, and audits from the IRS.

A business needs to comply with payroll taxes, particularly if you want to keep your business operating smoothly and avoid any penalties from the IRS. From helping you withhold employee wages for taxes to helping you negotiate with the IRS for missed payroll tax deadlines, a tax expert can give you the help you need for your business to succeed. For more information about how to manage your payroll taxes, please contact Tax Alliance at Santa Ana today.

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