Managing the Payroll – Payroll Tax Reporting and Filing
The rules for reporting, ﬁling, and paying payroll taxes are written in a lengthy and somewhat convoluted way. Just thumbing through the various federal tax instruction guides, not to mention the state versions, could turn off even the most enthusiastic numbers cruncher. What they really say, though, when you cut through all the long-winded language, is basic: ﬁll out this form by this date and mail a check to this address.
Because they are tax forms, there is some math to deal with, but most of it has been done throughout the year as you’ve been processing payroll. Some of these numbers will come straight out of your payroll journal, but you may have to perform simple calculations to arrive at others. The forms may look intimidating at ﬁrst, but once you see what they are really asking for—a number you already know—you can relax and start ﬁlling in the blanks.
These are the two most important things to remember: ﬁle the forms on time, and make all your payments in full and on time. To make that even easier for you, you can now use credit cards to pay virtually all your payroll taxes (state and local payment requirements vary). Filing late, paying late, or paying the wrong amount can lead to ﬁnes, fees, and penalties that quickly add up. Sometimes, in fact, the penalties can add up to more than the original tax bill!
Report Withholding Taxes on Form 941
All the federal income, Social Security, and Medicare taxes you with- hold from your employees’ paychecks are reported together on IRS Form 941. In addition, the company portion of employment taxes shows up on this form. Form 941 is a quarterly tax return, so at the end of each three- month period you ﬁle it with the IRS. Payments, however, typically are due every month; if you pay a lot in wages, though, you may have to make tax deposits every other week.
The form itself is very straightforward. It starts with the total salaries and wages paid during the period, then moves on to the amount of federal income taxes withheld. Next comes the total Social Security and Medicare calculation; since you’ll deposit both sides of this together, it’s calculated in a lump sum. Add that total to the federal income tax total to get your total taxes due. Subtract all the payments you’ve already made to arrive at the remaining balance.
Federal Unemployment Tax
Right now, the FUT rate is 6.2 percent on the ﬁrst $7,000 of gross wages for each employee you have; once each hits that $7,000 limit, you can stop paying in on his behalf. If your company also has to pay state unemployment taxes, you can use that to offset some of your FUT responsibility. This credit comes with a little hurdle to jump over: your state unemployment taxes must be paid in full, on time, and before the due date of your FUT return. Then you can take a credit that effectively knocks your FUT rate down to 0.8 per- cent, no matter what your state unemployment tax rate is.
If for some reason you can’t pay your state unemployment taxes before your federal due date, don’t worry. You can still grab the credit by sim- ply filing for an extension for your FUT return. When that extension is granted (and it usually is), just make sure to pay the state amount by the new due date. That way, you’ll still be entitled to the full federal credit.
Your FUT information is reported on IRS Form 940, and many small businesses can use the EZ version. This return has to be ﬁled only annually (usually by January 31, with the prior year’s information). Depending on how much you owe, though, you may have to make payments more frequently. If your FUT payable amount hits $500, you have to make a deposit right after that calendar quarter is done. For example, if your FUT has grown to $550 by June 30, you have to pay it by July 31. Otherwise, you can just pay when you ﬁle your Form 940.
Special Year-End Procedures
Even though you have to report, ﬁle, and pay payroll taxes throughout the year, there are a bunch of extra procedures to deal with at the end of the year. Some of these are additional informational returns to be ﬁled with the IRS; some are special forms to be sent to employees and independent con- tractors who’ve worked for you during the year.
If you neglect to create or send Form W-2 to your employees, or if you purposely file incorrect forms, be prepared to face financial consequences. For each missing or erroneous W-2, your company is subject to a $50 fine. When you’ve got a whole bunch of employees, that fine can grow big very fast.
For each employee, you must complete and send out a Form W-2. That form reports his annual salary, taxes withheld, and other crucial information for his personal tax return (such as any retirement plan contributions he made). Form W-2 must be sent to your employees by January 31 of the following year. For each independent contractor you paid more than $600 during the year, you must send a Form 1099. These forms state the amount you paid and the reason; here the reason is usually nonemployee compensation.
To the federal government, you’ll send a copy of each employee’s W-2 along with a summary report, Form W-3. The procedure is similar for the 1099s you’ve sent out; a copy of each goes to the federal government along with a summary report, Form 1096. All of these reports are due on the last day of February.