Payroll taxes, income taxes, federal income taxes, and business expenses. That's a lot of balls to juggle, on top of running and growing your business and the million other things you've got on your plate.
You're not alone. Many business owners just like you are trying to navigate the taxes minefield. And the last thing you want to do is get it wrong and fall out of payroll tax compliance. Can someone say, "PENALTIES"?
But to put it simply, individuals have to pay taxes; businesses have to pay more taxes.
So, who can blame you for wanting to know if certain taxes are deductible? Good news! In many cases, payroll taxes are deductible. But there are three things you need to know to ensure you're compliant and don't end up with nasty surprises. Let's take a deeper look.
Are Payroll Taxes Deductible?
Payroll taxes are a percentage withheld from an employee's paycheck by you, the employer. You then pay it to the government on the employee's behalf. The amount of tax is based on wages and salaries (for service workers, also include tips).
The four basic types of payroll taxes are federal income, Social Security, Medicare, and federal unemployment (FUTA). In the current year, all employees pay 15.3 percent of their earnings in FICA taxes. Employers pay federal unemployment tax and cannot deduct it from their employees.
There is sometimes confusion about the differences between payroll tax and income tax. Let's briefly clear up the confusion:
- Federal Income tax goes into a general government fund, but Federal payroll taxes pay for specific programs, such as Social Security and Medicare.
The income tax deduction depends on the employee's withholding status. Most states and some cities also impose income tax to bolster their budgets.
As you can see, you are responsible as an employer for ensuring taxes are withheld, reported, and paid correctly. Going alone is risky, but support is just a phone call away.
ConnectPay's model connects you with payroll tax professionals who are experts in your business's state and local requirements and can help ensure your business is compliant.
1. Deductible Business Taxes
There are exceptions, but generally, you can deduct federal, state, and local taxes attributable to your business. Bear in mind that you cannot deduct federal income taxes. It's essential to make that distinction in case you think deductions apply to all federal taxes.
However, depending on your state, you might be eligible to deduct state income taxes. You can see why it can be confusing! Corporations, S corporations, and partnerships can deduct state income taxes on their business return.
The tax deduction section of returns is different for each business. If your file your return on Schedule C with your personal tax return, it's on line 23.
2. How do You Deduct Payroll Taxes?
Again, this is different for each business type:
If you have employees, you can deduct the business portion of payroll taxes, but this doesn't include taxes you withhold from employee pay for federal income taxes or social security and medicare tax.
For example, if you withhold $1000 from employees for FICA tax, you pay $1000 as your employer portion. Your employer portion is deductible on your business tax return.
If you're a corporation, you can use Form 1120, which is your corporate income tax return. The payroll taxes paid are deducted on line 17 of form 1120.
If you're an S corporation, earnings pass through a shareholder who pays income taxes based on corporation ownership. The shareholder can use form 1120S to deduct the total amount of payroll tax expense.
Related Read: 6 Tips for New Entrepreneurs
Pro tip: Some state taxes are deductible. Either on your personal income tax return or if you're a corporation, the business can deduct state and local taxes as a business expense.
While LLCs can deduct the employer portion of payroll taxes, personal payroll taxes as self-employed individuals are not deductible.
3. Are Other Taxes Deductible?
If your business pays taxes, they count as a cost of doing business and are deductible following IRS rules. Such as
- Gross receipts tax
- State income tax
- Property tax on your business property
- Gasoline taxes
- Sales taxes on business purchases
Expenses are also deductible if they are ordinary expenses for the type of business you own. Examples include:
- Office Supplies
- Bank charges
- Home office
- Professional service fees
Remember, deductible expenses must be directly related to the cost of doing business. For example, you can deduct gas, toll, and parking expenses if you use a vehicle to perform your job.
Payroll Software Takes the Hassle out of Taxes
It can feel overwhelming and anxiety-inducing to manage payroll and the taxes minefield.
With personalized support, automated pay, and compliance updates, ConnectPay guarantees that federal, state, and local payroll taxes are always filed on time. Doesn't that feel like a weight lifted?
There's a better way to do payroll. For all things tax processing, as well as compliance, insurance, and benefits, schedule a call with your personalized payroll expert and discover how we help you take care of your people and your business.
To arm yourself with the information you need to manage your payroll taxes, Workers' Comp, and more like a pro, check out our free resource, the Connected Guide to Small Business Payroll, today!