UNDERSTANDING PAYROLL TAXES

Small business owners can easily get overwhelmed with local, state, and federal taxes. Even with an accountant or tax professional handling tax issues, it’s important for business owners to understand their tax obligations, especially payroll taxes. 

Payroll Tax
Calculating payroll taxes properly and paying them on time is important to avoid fines and penalties. Every business owner with employees must withhold payroll taxes from paychecks and pay federal, state, and local taxes. Payroll tax withholding obligations include FICA (Medicare and Social Security), federal, state, local income taxes, FUTA (Federal Unemployment Tax Act), and in some states, employers must also withhold disability insurance taxes.

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Taxable Workers
Employee classification is important to comply with IRS regulations. People who work for you are either employees or independent contractors for purposes of payroll tax compliance. Employees are taxable workers for whom employers are required to deduct and pay payroll taxes. Independent contractors must pay their own taxes. It’s not always easy for business owners to determine the difference between the two, but generally when employers direct and control how the work is performed, those workers are considered employees.

IRS Employee Classification Rules
The IRS has three common law rules, or tests, to determine which workers are taxable employees:

Behavioral Test – When the employer has the right to direct and control the worker, the worker is an employee.  

Financial Test – The financial test looks at how much control each has over the financial aspects of the job, such as who controls supplies used to perform the work, employer or worker, and availability of services. Independent contractors are generally not tied to one company and can advertise their services, while employees cannot.

Relationship Test – The relationship test looks at the nature of the working relationship between worker and employer. If the working relationship has a specific end date, the worker is an independent contractor, but if the work has no end date, the worker is an employee.

Simplicity Consulting can help you understand payroll tax issues and offer solutions that will save you money and keep your business in compliance.