Taxes are a “fact of life” for individuals and businesses. Whether you operate a small business with only a few employees or a large enterprise with hundreds of employees, you are responsible for collecting and paying employment taxes to various federal and state agencies. Payroll taxes can be confusing and even overwhelming for small business owners, but understanding payroll taxes and how to stay compliant is a responsibility that every business owner must get right.
Why Are Payroll Taxes Important?
Payroll taxes fund critical government programs, most notably Social Security and Medicare, along with federal and state unemployment programs. According to the latest data, about 36.6% of federal revenues in 2023 came from payroll taxes.
What Are Payroll Taxes?
Payroll taxes are comprised of the following: FICA (Federal Insurance Contributions Act) taxes are Social Security and Medicare taxes. Both employers and employees split these taxes at the same percentages based on each individual’s wages. FUTA (Federal Unemployment Tax Act) taxes help fund employment benefits for employees who lose their jobs through no fault of their own. These taxes are paid only by employers. Federal income taxes are withheld by employers from employee pay based on their taxable wages and information on their W-4 forms. State income taxes are paid like federal income taxes, and some states do not collect these taxes. SUTA (State Unemployment Tax) taxes are paid to the state’s unemployment benefits fund. Local payroll taxes are levied by some counties and cities and are withheld from employee pay.
How to Stay Compliant with Payroll Taxes
Compliance simply means that businesses follow all laws related to payroll and payroll taxes. Any enterprise that fails to follow all applicable laws is subject to audits, fines, lawsuits, and other penalties. In severe cases, non-compliance can result in criminal prosecution or jail time. Employers are legally liable for unpaid taxes, interest, and penalties if mistakes are not corrected in a reasonable time frame.
Here’s how to stay compliant with payroll taxes:
- Register your business with the correct agency or agencies in each state in which your business operates.
- Have each new hire complete paperwork, including a federal W-4 form, a state W-4 form (if the state requires it), Form I-9 (Employment Eligibility Verification), and, in most cases, a direct deposit authorization form.
- Submit all the required information, ensuring it is complete and accurate.
- Ensure that all workers are correctly designated as either employees or contract workers. Employees must have payroll taxes deducted, while contract workers pay their own taxes.
- Be fully aware of wage and tax rates and apply them properly.
- Submit taxes and required paperwork on time. Ensure that you are aware of the deadlines for making deposits, filing returns, and filing other paperwork. Correctly report all forms of compensation.
- Keep records of your payroll registration and activities to provide proof of your compliance with payroll tax regulations.
One of the best ways to stay compliant is to partner with a payroll tax professional.
Choose an Expert Payroll Service
Choose an expert payroll service, Palmetto Payroll, to assist you with your payroll system and assist you in your understanding of payroll taxes and how to stay compliant. We have offices in Columbia and Charleston, serving over 300 business owners statewide and growing. We offer tailored solutions to save you time and money so you can thrive and grow, including payroll, tax depositing and filing, management reporting, Human Resource Services, and timekeeping services.
