Payroll Series Part 2 of 4

In Part I of “Understanding the Payroll Process for Small Business” we discussed the legal forms that are necessary to be filled out upon hiring a new employee. In Part II we are going to delve into deducting and processing payroll withholding taxes. While the responsibility of filling out the various forms falls to the new employee, it is the employer’s responsibility to withhold and remit the various withholding taxes to the proper taxation authorities.

The key phrase for handling these taxes is ‘attention-to-detail’ – you need to get it right to prevent interest and penalties being assessed.

Withholding Taxes for Small Business Payroll

There are basically five types of employee withholding taxes that the small business owner must be concerned with. In some cases, there are employer taxes to be paid in conjunction with the employee portion which we will cover further on. The five types of withholding taxes include:

1. Federal Income Tax
2. FICA Tax – Social Security and Medicare
3. Federal Unemployment Tax Act (FUTA)
4. State Unemployment Insurance (SUI)
5. State Income and Other Local Tax

Each pay period will have you deducting taxes from each employee at the federal, state, and local levels. These amounts will be cumulatively accrued or recorded into payroll tax accounts until it comes time to pay them. In addition, the employer must also calculate and record the company portion of employee taxes such as Social Security, Medicare as and Unemployment Insurance. Worker’s Compensation is calculated for each employee and is a burden to the employer as opposed to a payroll deduction. Be aware that some of these taxes are payable at both the state and federal levels. Other deductions such as healthcare insurance, 401(k) plans, and life/accident insurance are also deducted, recorded, and paid where applicable.

Remitting/Paying Taxes to the Government

How often you have to remit taxes to the government is based on the amount of your company payroll. Federal, State, and Local taxing authorities will determine the frequency of payment although, in most cases, it will be semi-weekly at the federal level. Many states require you to deposit taxes on the same schedule as at the federal level but be sure to check with state tax authorities.

Late payments will result in an automatic penalty of up to 10% of the amount due and non-payment can result in a penalty up to 100%. Be sure to keep these funds separate from your general cash accounts so that payment can always be made when they become due. A separate bank account for withholding taxes is always a good idea.

Federal taxes are the easiest to handle when it comes to recording and remitting amounts due. Local and state taxes can be a little more complicated even if you operate in only one locality. If you operate in several states and localities then the record-keeping and payments become a much more complicated process. The good news is that the whole process can be outsourced at an affordable rate allowing the small business owner to concentrate on doing what they do best…growing their business.

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