Regardless of how many employees you have, payroll tax responsibilities are part of your business duties. Loaded with complexity and coupled with constant fluctuation, it takes considerable effort to stay on top of payroll laws. Though employers have an aptitude for growing their business, they often lack the necessary knowledge to understand, interpret, and take action to stay compliant.
Basic payroll laws
Payroll tax responsibilities include withholdings in each pay period. These are:
- Federal and state income taxes: Employers must withhold federal income taxes, which are based on an employee's claim for withholding allowances reported on Form W-4. State and local income taxes are withheld according to individual state and/or municipality rules.
- FICA (Social Security and Medicare): As an employer, you must withhold FICA tax from an employee's taxable compensation, which varies depending on earnings and marital status. You are also responsible for paying the same amount as each employee minus any excess taxes that are required of the employee when a salary exceeds $200,000 per year.
- FUTA (federal unemployment tax): This tax is solely an employer tax and cannot be deducted from wages. The amount is based on each employee's wage or salary.
- Workers' compensation and state disability insurance: Check your state's laws on insurance requirements.
Depending on your filing frequency you're required to make tax liability payments, file quarterly returns, and prepare forms W-2, 1099, and 940. Calculations depend on how much an employee earns and start compounding in complexity when you factor in fringe benefits, bonuses, and garnishments.
Growing business, growing complexity
As revenues grow and business needs expand, so do the demands of payroll laws. Increased number of employees, new technologies, and expansion into out-of-state or other offices come with additional layers of employer responsibilities.
Remote workers, for example, are a reality for many businesses. It's up to you, as the employer, to understand and comply with various states' payroll laws and requirements. Healthcare plans, minimum wage laws, overtime laws, and other benefits should be assessed on a state-by-state basis. Additionally, some states have reciprocal agreements with one another.
Employers must also take care to correctly classify a worker as an employee or independent contractor. With independent contractors, employers are not responsible for withholding taxes on paid wages; instead, that responsibility lies with the contractor. Take heed because misclassification can result in fines, penalties, and payment of back taxes along with owed wages for individuals determined to be employees.
You also have the responsibility of ensuring that your workers are correctly classified as exempt or non-exempt. Incorrectly classifying an employee may lead to a business failure of paying the full FICA and FUTA obligations resulting in payroll tax penalties, fines, and associated headaches.
Count on change
The recent tax overhaul has made the regulatory environment for businesses even more challenging. As an additional layer of complexity, individual states have implemented their own withholding measures in response to the federal tax laws, and more states could follow suit.
A reliable strategy to keep up with payroll laws
You could spend time looking up the many requirements that apply to your business, in hopes that you can detect and then implement applicable regulations. However, this can be a risky move. It would mean forgoing revenue-producing activities in lieu of compliance – and even then, it's not guaranteed you'll interpret payroll laws correctly.
Payroll mistakes are more common than you may think: approximately 33 percent of employers make payroll errors, and the IRS reports that 40 percent of small businesses incur an average of $845 each year in penalties for late or incorrect filings or payments.
You may choose to work with a trusted advisor, but this can be challenging. CPAs, for example, are not always versed in the nuances of laws impacting every aspect of payroll, benefits, and human resources. That's why CPAs often recommend that employers outsource payroll responsibilities to a trusted provider. Instead of shouldering the burden on your own to keep up with payroll tax rates, calculate liabilities, file with appropriate agencies, and make timely payments, a payroll provider can offer expert assistance on some or all of these tasks.