Managing payroll seems straightforward until you realize the web of federal, state, and local requirements involved. Small mistakes can lead to significant penalties, making payroll compliance crucial for business owners.
Federal Requirements
Tax Withholdings: You must withhold federal income tax, Social Security (6.2%), and Medicare (1.45%) from employee wages. Employees earning over $200,000 annually are subject to an additional 0.9% Medicare tax.
Employer Contributions: Match the Social Security and Medicare contributions, plus pay federal unemployment tax (FUTA) of 6% on the first $7,000 of each employee's wages annually.
Form 941: File quarterly to report income taxes and FICA taxes withheld from employee paychecks.
State and Local Compliance
Requirements vary significantly by location:
- State income tax withholding (if applicable)
- State unemployment insurance (SUTA)
- Workers' compensation insurance
- Local taxes or fees
Common Payroll Mistakes
Misclassifying Employees as Contractors: This is expensive. The IRS uses a 20-factor test to determine worker classification. When in doubt, treat them as employees.
Late or Incorrect Filings: Payroll taxes are due on strict schedules. Late deposits can result in penalties ranging from 2% to 15% of the unpaid tax.
Inadequate Record Keeping: Maintain payroll records for at least four years, including time cards, wage computations, and tax withholding records.
Streamlining Payroll
Consider payroll software or services that:
- Automatically calculate withholdings
- File required forms electronically
- Send reminders for due dates
- Maintain compliant records
New Hire Reporting
Don't forget to report new hires to your state's new hire reporting program within 20 days of their start date. This helps prevent improper unemployment and workers' compensation claims.
Disclaimer: Payroll laws are complex and vary by jurisdiction. The Department of Labor and state agencies regularly update requirements. Consult with your accountant or payroll professional to ensure full compliance.
Struggling with payroll compliance? Let our team handle your payroll processing, tax filings, and compliance requirements so you can focus on growing your business. Click the button below and schedule a free 15-minute meeting.
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