5 Payroll Essentials Every Employer Should Know

Once you’ve hired your first employee, then you must make sure they get paid right? Well, we’ve seen some of the mistakes that employers typically make when they first start running payroll. This post will talk about the most important elements of processing payroll so that you don’t wind up in trouble.

Understand the labor laws.

As an employer, you must adhere to the federal, state, and local labor and employment laws. The federal Fair Labor Standards Act (FLSA) establishes rules for the minimum wage, premium pay for overtime, and protections for children who work. All employers should be aware of FLSA requirements as well as state and local wage and hour laws. One thing to be aware of is that they sometimes appear to contradict one another. For example, the federal minimum wage is $7.25, it’s $8.25 in Illinois and starting July 1, 2019 it will be $13.00 in Chicago. As such, you must always follow the provisions that are most favorable to your employees (i.e., pay $13 per hour if you’re located in Chicago). Most states have informative websites to help you figure out which laws apply. It’s a good idea to start there and then talk with a professional to make sure you’re following the right set of laws.

Establish your pay schedule.

Once your pay rates are determined to be in accordance with the laws, you then have to figure out how often to pay your employees. The beginning and ending dates of this schedule is referred to as your pay period, which represents the period in which your staff logged work time or earned wages. Pay periods typically include weekly, biweekly, semi-monthly and monthly. The “payday” is the actual date on which employees are paid. It’s usually a fixed number of days after the end of the pay period.

Withholding payroll taxes.

When it comes to payroll taxes, there are two parties, who are required to pay taxes on wages. This would be the employee and employer. These taxes are usually owed to both the federal government and the state, and in some cases to cities and municipalities as well. This post discusses in detail what some of those taxes are and your responsibilities. However, an employer is generally responsible for collecting federal income tax, Social Security, and Medicare tax from employees’ paychecks based on what employees marked in their Form W-4. The employer must then also pay a matching amount of Social Security and Medicare tax as well as Federal Unemployment Tax (FUTA).

Remitting taxes collected and filing the appropriate tax returns.

As an employer, it is your responsibility to deposit federal income tax withheld for your employees pay as well as both the employer and employee portions of social security and Medicare taxes.  However when are you to make the deposits and how do you make them?  Also, what are the penalties for making deposits late?  This post will give you all the pertinent details.

Now for filings. Paying the taxes is one thing, but you must also file the corresponding returns. If you don’t, then the taxing authorities can’t properly match the deposits with other needed information. Federal Form 941 (quarterly federal tax return) must be filed each quarter, and Form 940 (FUTA tax return) must be filed yearly. You may also have to file similar forms for your state. Employers are also required to send Forms W-2 and W-3 to the Social Security Administration (SSA) each year. Most payroll services will handle these filings for you. If you do them yourself, read more about these forms here.

Keep good records.

As an employer, you must keep track of hours worked for hourly, nonexempt employees. Most workers are classified as either exempt or nonexempt depending on their salary and the type of work they do. You can read about these and other classifications in the FLSA and your state’s wage and hour laws. You can learn more about the timekeeping requirements by reviewing this fact sheet from the Department of Labor .

Depositing Payroll Taxes

As an employer, it is your responsibility to deposit federal income tax withheld for your employees pay as well as both the employer and employee portions of social security and Medicare taxes.  However when are you to make the deposits and how do you make them?  Also, what are the penalties for making deposits late?  Well, read on my friend to learn the answers to your questions.

When To Deposit
There are two schedules for determining when you deposit payroll taxes.  These schedules (monthly and semi-weekly) tell you when a deposit is due after a tax liability arises (for example, when you have a payday).  The deposit schedule you must use is based on the total tax liability you reported on IRS Form 941 during what is known as the  lookback period.  Your deposit schedule isn’t determined by how often you pay your employees.

So what is the lookback period?  If you’re a Form 941 filer, your deposit schedule for a calendar year is determined from the total taxes reported on Forms 941, line 10 (line 12 for quarters beginning after December 31, 2016), in a 4-quarter lookback period. The lookback period begins July 1st and ends June 30th.  If you reported $50,000 or less of taxes for the lookback period, you’re a monthly schedule depositor; if you reported more than $50,000, you’re a semiweekly schedule depositor.

For example, the following would be the lookback period for calendar year 2019:

  • July 1, 2017 – September 30, 2017
  • October 1, 2017 – December 31, 2017
  • January 1, 2018 – March 31, 2018
  • April 1, 2018 – June 30, 2018

Now what if you are a new employer?  Your tax liability for any quarter in the lookback period before you started or acquired your business is considered to be zero.  Therefore, you’re a monthly schedule depositor for the first calendar year of your business.

Monthly Deposit Schedule
Under the monthly deposit schedule, an employer deposits employment taxes for payroll made during a month by the 15th day of the following month.  So for example, the payroll taxes for you August payroll would need to be deposited by September 15th.

Semiweekly Deposit Schedule
Under the semiweekly deposit schedule, deposit employment taxes for payrolls processed on Wednesday, Thursday, and/or Friday by the following Wednesday. Deposit taxes for payments made on Saturday, Sunday, Monday, and/or Tuesday by the following Friday.

How To Deposit
You must use the Electronic Federal Tax Payment System (EFTPS) to make your deposits.  If you don’t want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make the deposits on your behalf.  FTPS is a free service provided by the Department of Treasury.  To get more information about EFTPS or to enroll, you can visit the EFTPS website or call 1-800-555-4477.

If you’re a new employer that indicated you might have payroll tax liabilities when you requested an EIN, you’ll be pre-enrolled in EFTPS.  You’ll receive information about Express Enrollment in your Employer Identification Number (EIN) Package and an additional mailing containing your EFTPS personal identification number (PIN) and instructions for activating your PIN. Call the toll-free number located in your “How to Activate Your Enrollment” brochure to activate your enrollment and begin making your payroll tax deposits. If you outsource any of your payroll and related tax duties to a third party payer, such as a PSP or reporting agent, be sure to tell them about your EFTPS enrollment.

Deposit Penalties
If you don’t make required deposits on time or if you make deposits for less than the required amount, you might be subject to penalties. The penalties don’t apply if any failure to make a proper and timely deposit was due to  reasonable cause and not to willful neglect.  If you receive a penalty notice, you can provide an explanation of why you believe reasonable cause exists.

For amounts not properly or timely deposited, the following penalty rates apply:

  • 2% – Deposits made 1 to 5 days late.
  • 5% – Deposits made 6 to 15 days late.
  • 10% – Deposits made 16 or more days late, but before 10 days from the date of the first notice the IRS sent asking for the tax due.
  • 10% – Amounts that should have been deposited, but instead were paid directly to the IRS, or paid with your tax return.
  • 15% – Amounts still unpaid more than 10 days after the date of the first notice the IRS sent asking for the tax due or the day on which you received notice and demand for immediate payment, whichever is earlier.

Do You Have Payroll Tax Issues?
Have you failed to file payroll tax returns, make payroll tax deposits or received an IRS notice that you don’t know how (or want) to deal with?  Give us a call at 844-829-3788 NOW to put us to work for you.  We can help you resolve your payroll tax matters so you can get back to running your business.

Understanding Estimated Taxes

When you work for yourself you generally have your employer withhold federal and state (if applicable) income taxes from your wages.  Then at the end of the year it becomes a calculation of if you had enough withheld (i.e. you get a refund) or have to make a balance due payment.

But what if you work for yourself (i.e. self employed) and no one is “withholding” anything from your check?  Then this post will clue you in on how you make your payments and keep Uncle Sam happy.

What is estimated tax?
Estimated tax is how you pay your taxes when you have income that isn’t subject to withholding.  Just think of it as what your employer does for you when you don’t have an employer ( so to speak).

Who has to pay it?
If you are filing as a sole proprietor (Schedule C), or receive income as a partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments.  Fortunately, you only have to make payments if you expect to owe tax of $1,000 or more when you file your return.

If you own a  corporation, be advised that  you generally have to make estimated tax payments if you expect it to owe tax of $500 or more when you file its return.

When are payments due?
For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return.

For the period:              Due date:

Jan. 11 – March 31           April 15
April 1 – May 31                June 15
June 1 – August 31          September 15
Sept. 1 – Dec. 31               January 15  of the following year

How do you pay it?
To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.  The worksheet in Form 1040-ES will help you figure the amount.  You can then make your payment(s) using the voucher contained within or electronically via the EFTPS system.

Each state will have a similar form or electronic platform for you to pay the corresponding state taxes.  In our home and surrounding states you would use:

Illinois Form 1040 ES
Indiana Form ES-40
Wisconsin Form 1-ES
Missouri Form 1040ES
Iowa Form 1040ES
Kentucky Form 740ES

What happens if you don’t pay it?
If you didn’t pay enough tax throughout the year (either through withholding or estimated tax payments),  you may have to pay a penalty for underpayment of estimated tax.  You can avoid this penalty if you owe less than $1,000 in tax after subtracting withholdings and credits, or if you pay at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.

Need help estimating your tax liability?
Give us a call at 1-844-829-3788 or shoot us an email via the link below and we’ll be happy to assist you with your quarterly projections, filling out your forms or just coaching you through the process.

How To Pay Taxes Owed

If you find yourself in the undesirable predicament of owing the IRS, here are some things for you to keep in mind so that the situation doesn’t go from bad to worse:

Payment Methods & Tips

  • You can pay taxes electronically 24/7 on www.IRS.gov. Just click on the “Payments” tab near the top left of the home page for details.
  • Check out IRS Direct Pay to pay directly from your bank account. It’s secure and free and you’ll get instant confirmation that you have submitted your payment.
  • Pay in a single step by using your tax software when you e-file. If you use a tax preparer, ask them if they can make your payment electronically.
  • Whether you e-file your tax return or file on paper, you can choose to pay with a credit or debit card. One service that our clients often use is www.1040paytax.com.
  • If you enroll in the Electronic Federal Tax Payment System (EFTPS) you can pay your federal taxes electronically and directly to the government. You have a choice to pay using the Internet, or by phone using the EFTPS Voice Response System.
  • If you can’t pay electronically, you can still pay by a personal or cashier’s check or money order. Just make you check payable to the “U.S. Treasury” and be sure to write your name, address and daytime phone number on the front of your payment. Also, write the tax year, form number you are filing and your Social Security number. Use the SSN shown first if it’s a joint return.
  • If you pay by paper check, complete Form 1040-V, Payment Voucher. Mail it to the address listed in the instructions based on where you live.

Balance Owed On Prior Year Taxes

  • If you filed your return late, just know that the amount owed reflected on the return is incorrect. This is due to interest and penalties. Thus, once you file your return, the IRS will send you a notice indicating the correct amount to satisfy your liability.
  • If you have moved since you last filed a return with the IRS, make sure that you submit Form 8822 so that you can receive all future communications. The last thing you want is for the IRS to think you are ignoring you and then begin aggressive collection actions (e.g. liens, levies, wage garnishments, etc).

Inability To Pay Balance Off With One Payment

  • If you can’t pay off the balance with a single payment, it’s in your best interest to send in as much as you can to minimize the penalties and interest that will be assessed.
  • The IRS has many options for you to pay your balance off, including payment plans. This post on our sister site talks about setting up a guaranteed installment agreement and is well worth the read. 

Need assistance with your tax balance? Give us a call at 844-TAXES88 (844-829-3788) and we’d be happy to discuss you situation and tell you how we can be of service.