What You Need To Know About Payroll Tax Obligations
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What is Payroll?
Payroll is part of the accounting, not bookkeeping. Payroll is the ability for the business to summarize the details of the money paid to the employees, it is an obligation to do payroll for every single company in the US. Many people say that no, because they are the only shareholder and they don’t have to payroll, that’s not correct. Companies in the US, even if there is one person who is the owner, are obligated to do payroll and if there’s no payroll the IRS can go and audit you and then you are obligated to pay penalty with interests and taxes.
So many people believe that just because they are the only one doing the business, they don’t need payroll, they are not right. You must have payroll because you are an employee of the company even if you are the owner. This is the basic principle, a company cannot make money by itself unless for example that it is a company for real estate that you have a property and you collect money for the rental of the property and you receive that for as income, that perhaps is an exception but if you have an active business that could be anything and your presence either physical or online presence is providing you money you are supposed to make payroll, and this payroll is just the summary of what you are paying yourself and to your employees and the taxes that those salaries are supposed to pay to the IRS in the form of payroll taxes and to the state in the form of unemployment taxes, and this is an obligation not an option.
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What are the benefits of payroll services?
The first benefit is that the IRS is not going to audit you. So, if you’re in an active business from the beginning it will not be audited by the IRS. In addition to that, you must pay taxes for unemployment or re-employment. That is also an obligation to the state and that happens in every state in the US, you must pay your employment taxes because of your employees, even if it is yourself.
Many times business don’t want to have payroll and they have every employee as a contractor, when that happens and you don’t want to do payroll and you don’t want to play taxes to the IRS, you are exposing your business to a liability and a lawsuit because the contractor can go to an attorney and say we are in reality we are employees and this employer has not paid our taxes to the IRS but we are the ones that have to full amount of payroll taxes.
According to the law, the company must pay half of the payroll taxes and the other comes from the employee, but because you don’t have payroll the employees and you pay your employees as contractors, the employees can go to an attorney and say this employer has not complied with the regulations and sue you and after the litigation you will be obligated to pay the taxes to the IRS, the penalties and whatever has been owed for each employee. So, another advantage to having payroll is saving your company from any litigation that employees who are classified as contractors might present against you. Finally, for you is a benefit because you have the real picture of what is the cost of having a payroll compared to the industry, and this is where the payroll comes handy because you will not be surprised if an employee comes to say I want to get paid this amount. In addition, if there is an ability for the expansion, you have a plan for expansion you will be able to account for the cost of the future employees that you are going to need. If there is a problem in the economy, it will give you the reference to fire employees to keep the business functioning.
Lately because of the pandemic, here in the US they grant money to businesses that have payroll, so you need payrolls for all these reasons. Better to have payroll even for yourself because if you are the only employee and you have payroll you will be contributing for Social Security for yourself, Medicare, that is health insurance for the elderly and for yourself. If you don’t do this, you will not be contributing to Social Security or when you file your taxes at the end of the year you will be paying taxes all at one time. That is difficult, imagine you didn’t have the money to pay on a quarterly basis, you’re not going to have the money on a yearly basis. Better to have payroll because you will accumulate social security credit and you will be able to receive your retirement now you retire.
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What are the payroll reporting obligations for a business?
The payroll reporting obligations are quarterly and yearly and monthly. In a monthly basis, businesses must pay to the IRS the money they withhold from the employees. Typically, in payroll businesses withhold federal income tax, social security, and Medicare. Those 3 taxes are supposed to be paid in a monthly basis to the IRS, in a quarterly basis you are supposed to pay unemployment tax and report to the IRS and to the State report all the money you have paid in a monthly basis for the Social Security, Medicare and federal income tax. In a yearly basis you are supposed to report the unemployment tax at the federal level so there is unemployment tax at the state level.
The w2 form is the summary of all the salaries that employees received here in the US, the taxes that they were withheld and any other benefit that an employee might have, or the employer might offer like a retirement plan or medical plan. There are obligations to pay taxes on the monthly basis to the IRS, there are obligations on a quarterly basis to pay unemployment taxes to the state and report of the monthly tax payments that you have withheld from the employees and those taxes paid in a quarterly basis need to be reported to the IRS and in a yearly basis you have to pay unemployment tax to the IRS and need to provide the w2 form that is the summary of all the income taxes paid by the employer to the employee and with that employees will file the tax return at the end of the year.
What is payroll report to the IRS and what is report to the states?
To the IRS is reported in a yearly basis the form w2 the one that is the summary of all the income taxes paid by the employer and that form is once a year. The employer has the obligation to file that with the IRS and give a copy to the employee to file the tax return. On a yearly basis to the IRS, you must file form 9040 is the form for the unemployment federal tax and that is to the IRS. In a quarterly basis, form 941 that summarizes the income, the payroll and taxes paid to the employees. At that point you are not supposed to pay anything because the payments of the taxes are made monthly, so you pay first to the IRS and then report those payments.
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