What Your Need To Know About Payroll Tax Obligations For Your Business
What are the accounting reporting obligations of a business?
In the US, businesses are obligated to report once a year their balance sheet and their profit and loss. For that purpose, to comply with that obligation from the IRS businesses need to provide at least once a year their books. They need to do their books at least once a year. With those books, specifically the balance sheet and the income statement will allow the business to complete the tax return to the IRS.
This is an obligation once a year and if the preparation of the financial statements is not done in a monthly basis creates a heavy obligation in the accountant, because imagine all the business who don’t do accounting through the year are taking their books to the accountant in that particular month, let’s say in February – March, March 15th is the deadline, so accountants are overloaded in doing financial statements and also in doing the tax returns. That is on the side of the accountant but in addition to that, through the year the owner business has not seen the financial statements, has not seen any picture of the business through the year, so instead of being proactive taking decisions is always just going with balance in the bank statements.
That’s how small business function, they prefer to do accounting at the end of the year and they comply with the obligation but the problem is that they don’t have the ability to take decision through the year, they don’t have a picture. They don’t have a reflection of what they’ve done through the year with the numbers, other business prefer to do it in a monthly, and they see it every month and every quarter and with that they have an idea of what’s going on.
Once this information has been processed the information is transferred to the tax return and that information on the tax return is the one given to the IRS. In addition to that, business are also required to, for example, at the state level, they need to provide the summary of the salary they paid to the employees, that also part of the accounting in the form of payroll, in a quarterly basis they have to report to the state and to the IRS. In a yearly basis the business need to report the finances, their balance sheets and income statements to the IRS.
Is a business obligated to do accounting monthly or yearly?
There is no obligation to do it a monthly basis. There’s an obligation to do it yearly to the IRS. In addition to that, many times why is better to have the books in a monthly basis or at least in a quarterly basis, because in the US there is credit, there is money that is offered every time, if you have a business and you have good credit and you go to the bank, the bank will say don’t forget if you need a line of credit we can give it to you and they will give you probably 15 o 20% of your sales as a line of credit. When you go to the bank, and they say if you want a loan or are you interested in buying equipment to expand your business, or do you have plan to have an expansion of the business, here is unbelievable you go to the bank and instead of you asking for money if you have a good credit and they know you’re a good client for many years, they offer it to you, you don’t have to ask, and they qualify you.
But to qualify for a loan and this is very important and why accounting is very important, you need to have your books, you need to have your accounting, at that point is not an obligation but if you plan to expand to apply for a line of credit or have an existing line of credit and the bank requires them to do not only the accounting they also require a review by a CPA.
So even though there is not an obligation to have monthly accounting, there is an advantage to have monthly accounting that is you are ready that line of credit that your business needs for an expansion, ready for applying for that loan to buy better equipment or you are ready for giving to the banks your application for a program for expansion.
This will be the financial statements and your business plan how are you going to use the money that you’re applying for, for example you have a business and you are selling school products and now you want to go one step ahead, one more step you want to sell to the school themselves, you want to sell not only to the kids and for that you’re going to need a business plan and for the business plan you’re going to need financing but to go to the bank with that will not be enough because they will need the financial statements to provide what is called the financial reasons, the KPIs, the numbers, the ratios that are consistent with the loan that you are asking for. This is the nature of the accounting that even though is not required to do in a monthly basis it is all up to you if you have a plan.
What is payroll?
Payroll is part of the accounting, is 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 that no, because they the only shareholder and they don’t have to a 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 have to have payroll because you are an employee of the company even if you are the owner. This is the basic principle, a company can not 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.
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 have to 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 have to pay your employment taxes because 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 being any litigation that employees who are classified as contractor might present that 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 business that have payroll, so you need payroll for all these reasons. Better to have a payroll even if 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 elder 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 in one time. That is difficult, imagine you didn’t have the money to pay in a quarterly basis you’re not going to have the money in a yearly basis. Better to have payroll because you will accumulate social security credit and you will be able to receive your retirement at the moment 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. At the yearly basis to the IRS you have to 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 done monthly, so you pay first to the IRS and then report those payments.
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