One of the most important responsibilities business owners assume when they hire employees is to properly calculate employee withholding taxes and remit them to the Internal Revenue Service in a timely manner. Here’s what you need to know.
The IRS calls withholding taxes “trust taxes,” because an employer is obligated to hold the taxes in trust until they are remitted to the IRS. In jargon, trust taxes are often referred to as 941 taxes because the quarterly report all employers are required to submit to the IRS each quarter is called the IRS form 941. The IRS offers a comprehensive list of employee tax topics all new businesses and managers should read and fully understand.
Depending on the number of people your company employs, you are obligated to remit all taxes withheld within a certain number of days of the payroll deduction. Taxes may be deposited by check, money order, or cash to a bank authorized to accept employment tax deposits or through the Electronic Federal Tax Payment System.
You must stay current with IRS regulations regarding employee taxes. Some bookkeeping programs, such as QuickBooks and QuickBooks Pro, keep your calculations correct, make direct deposits, and handle the remittance of taxes to the U.S. Treasury.
The U.S. employee tax system requires employees to pay some of their taxes, with the employer matching certain portions. For example, employees and employers must each pay the same percentage of the employee’s compensation subject to Social Security taxes and Medicare tax.
Employers must follow many rules and regulations to be in compliance with collecting and remitting employee withholding taxes. The rules are complex and change frequently. Recognizing this, many companies use a third-party payroll service or professional employer organization to take care of the recordkeeping and IRS report and funds transmittals.
Payroll services handle your company’s payroll and then make federal tax deposits on your behalf under your federal taxpayer identification number. They also maintain records and provide your employees’ W-2 statements at the end of the year.
Professional employer organizations, sometimes called staff leasing companies, operate slightly differently. They handle all the same functions of a payroll service, but they have a “co-employment” agreement with your employees and use a unique taxpayer identification number. They also provide benefits and handle all human resources issues. They can often save a company on the cost of workers’ compensation insurance because the PEO can pool many companies together to get a good rate.
If you outsource your payroll and collection of employee taxes, make sure the service you decide to use is registered with each state in which you have employees. All of the major payroll services and PEOs do business legally in all 50 states, but you may find a small payroll service that isn’t registered with the unemployment insurance commission in a particular state. This can present problems for you with both the state and the IRS.
Even if you do use a large payroll service or PEO, you are still technically responsible for any mistakes they make. Ensuring the service you choose has an error and omissions insurance policy to cover you is an important consideration.
Sam Thacker is a partner in Austin Texasbased Business Finance Solutions.