Ready for a two-word horror story? Compliance Audit.
If that sent shivers down your spine, you’re not alone. Maintaining employment tax compliance is a source of stress for many small businesses.
Employment taxes are complex, and maintaining compliance with all the rules and regulations can feel overwhelming at best and impossible at worst. So, how can you maintain compliance this year and into the future?
This post will walk you through the top five things you need to understand and act on to maintain employment tax compliance in the coming year.
Employment Tax Compliance: The Basics
As an employer, you must deposit and report employment taxes, usually quarterly. It’s a pretty simple process once you know how. What you need to know:
- You need to withhold from employees’ paychecks to cover income taxes, including federal and sometimes state and local taxes.
- Withhold the employee’s share of Social Security and Medicare (FICA) taxes.
- Employment taxes also include your share of FICA and federal and state taxes.
If you don’t withhold and deposit taxes, prepare for penalties!
As we highlight in the next few paragraphs, there are five actions you need to take as an employer to ensure you're compliant. Of course, you don't have to do it alone.
ConnectPay can take the stress out of compliance by handling payroll for you and taking on the risk ourselves. When you work with us, you'll be able to rely on the expert advice of a full team of professionals and focus on growing your business instead of worrying about compliance.
1. Anticipate Annual Changes
Paying employment taxes and remaining compliant isn’t as simple as “set it and forget it.” You’ve always got to be on the lookout for annual changes. Conducting an internal payroll audit at least once a quarter can help you stay compliant.
Many elements of employment taxes change each year, such as employer and employee contributions for Social Security and Medicare, wage bases, contribution limits, and more. The IRS updates federal tax rates every year based on inflation.
Changes for 2022:
- Social Security wage base: $147,000
- Health flexible spending arrangement (FSA) contribution limit: $2,850
- Pre-tax contribution level for 401(k): $20,500
2. Understand Deadlines
Payroll tax penalties are an avoidable expense. Deadlines for filing come around quicker than you think, and if you don’t remind yourself, you’ll probably forget. Your best bet is to set automated reminders for various deadlines.
Missed deadlines can result in hefty fines or other penalties depending on the severity of your infraction and by how much you’ve missed the deadline. To avoid missing deadlines, work with a payroll provider and ensure you’re compliant.
Deadlines to look out for:
- Quarterly filing deadlines (April 30, July 31, October 31, and January 31)
- Extended tax deadlines (If applicable)
- Annual deadlines (Around April 15)
3. Understand Payroll Regulations
What payroll taxes are you required to pay?
You must withhold FICA taxes (Social Security and Medicare) from employee wages and pay a portion yourself. Use Form 941 to report FICA taxes quarterly and pay taxes either monthly or bi-weekly.
Social Security and Medicare taxes have different rates; only the Social Security tax has a wage base limit.
Employees: Pay 1.45% of gross income to Medicare and 6.2% to Social Security.
Employers: Match both, and pay a total of 7.65%.
Federal and state income taxes are also reported on Form 941 and are due monthly or bi-weekly. Due dates vary by location for state and local taxes.
Related: Employment Records Retention: What Are the Federal Laws?
Most employers pay Federal Unemployment Tax. You must file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, if you pay wages of $1,500 or more to employees per quarter or have one or more employees for 20 or more weeks in a calendar year.
You can make payments quarterly or annually, depending on how much you owe. Employers, not employees, fund unemployment.
Employers: Pay 6% of the FUTA wage base. However, if the business also pays state unemployment tax, it may be eligible for up to 5.4% credit, lowering the FUTA tax rate to 0.6%.
Other Regulations to Consider
The Davis-Bacon Act: For businesses engaged in public works project, the Department of Labor requires you to compensate mechanics and laborers with prevailing wages.
The Fair Labor Standards Act (FLSA): Sets the national minimum wage and overtime rates alongside payroll record-keeping requirements.
The Equal Pay Act (EPA): Employers must provide equal pay to men and women who perform similar roles in the same workplace.
How to Comply With Regulations
To comply with payroll regulations, ensure that you follow local, state, and federal payroll tax guidelines. You must collect taxes from employee paychecks on time and report tax withholdings to the IRS. To ensure you collect taxes correctly, you’ll need to calculate wages accurately.
4. Identify State-Specific Requirements
The IRS requires most employers to withhold federal taxes, but several states and cities require additional withholding. Other states don’t, but they might require tax income from dividends and interest, so it’s crucial to check your local guidelines.
If your business expands to other jurisdictions, you might have to pay state unemployment taxes in every state you have employees. When income taxes need to be filed, and any penalties for noncompliance vary from state to state.
Your best bet is to review the requirements for your state and any states where you do business.
Related: Local Payroll Services: The Best Options for Small Businesses
5. Avoid Compliance Missteps
Compliance missteps happen, but they’re avoidable. Start by classifying your employees correctly. Tax requirements differ for employees and independent contractors. Independent contractors (1099s) file their own tax forms, and you don’t need to pay payroll taxes or offer benefits like vacation time and health insurance.
W-2 employees work according to your schedule and needs and are eligible for health benefits, retirement contributions, and other benefits. You need to file Form W2 on behalf of these employees.
Workers’ Comp compliance depends on the laws of your state. Each state sets premiums based on the economy and the types of business. The state also dictates who sells and handles workers’ comp policies. To understand the rules and regulations for your local area, you can hire a local agent to walk you through any issues.
Lastly, you will violate the EPA if you fail to comply with the Equal Pay Act, which requires you to pay your employees equal pay for equal work. Consider skill, effort, responsibility, working conditions, and employee locations. There are a lot of grey areas, and a pay discrimination lawyer would be helpful to ensure you remain compliant.
Maintaining Employment Tax Compliance in 2023 and Beyond
Armed with an understanding of the five things listed in this post, you will be able to set your organization up for success regarding employment tax compliance in 2023 and beyond.
However, there is more to successful payroll management than employment tax compliance. To operate your payroll successfully, you will need to maintain processes related to time and attendance, Workers’ Compensation, and more.
We’ve created an easy reference guide specifically to help small businesses run their payroll processes more efficiently… without the headaches. To see where the holes in your processes might be, check out our free resource, the Connected Guide to Small Business Payroll, today!