How vital is payroll tax compliance? Let’s put it in terms of dollars. Annually, US-based organizations spend an estimated $5.47 million on compliance.
And annually, businesses spend an estimated $14.82 million on non-compliance.
The moral of the story, compliance efforts can feel stressful, time-consuming, and expensive, but maintaining payroll tax compliance will save you money in the long run. But how can you maintain payroll tax compliance for your business?
This post will cover our top three tips for managing payroll processes and achieving compliance in the coming tax year.
Payroll Tax Compliance: Consequences of Noncompliance
Maintaining compliance is essential in multiple areas of your business. Payroll tax compliance is no different. To remain payroll tax compliant, you must be prepared to pay regular payroll taxes like social security, Medicare, and state and federal unemployment.
Social security and medicare taxes are split between the employer and the employee. For the current tax year, each party will pay 6.2% of the employee’s wages toward Social Security and 1.45% of those wages toward Medicare. These numbers change each year.
Federal and state unemployment taxes are shouldered entirely by the employer. The rates on these taxes vary based on the type of business entity you operate and the state where you do business. These calculations can become more complicated if you operate in multiple states.
You'll be subjected to unexpected payroll costs if you fall out of compliance with payroll taxes. The most common fee you may encounter is the IRS’s Late Payment Penalty fee. If your payment is up to five days late, you will pay an additional two percent on your taxes. Up to fifteen days late, that figure goes up to five percent. You’ll pay ten to fifteen percent additional fees if your payment is sixteen or more days late.
Managing payroll tax compliance can feel like juggling one too many balls. Let’s look at our top three tips for helping you stay compliant this tax year.
1. Keep Your Paperwork in Order
The first tip you need to follow to maintain payroll tax compliance is to take steps designed to keep your paperwork in order. Payroll processes can be complex. Due to the amount of sensitive and essential data you’ll process throughout your payroll practices, you will need several forms on file to maintain compliance.
Let’s take a closer look at some of the paperwork you may need on file for your business.
- Employer Identification Number (EIN): Your EIN serves as something similar to a social security number for your business. You will file all taxes under this number, and your employees need access to this number to file their taxes appropriately. You will need to fill out a Form SS-4 to apply for an EIN if your business does not already have one.
- Form I-9: If you employ any workers, you must file a Form I-9. The Form I-9 checks to ensure that every employee at your business is eligible to work in the United States.
- Form W-2: You will need to distribute Form W-2 to your employees at the end of each year. This form, also called a wage and tax statement, provides all the data your employees need to file their taxes.
- Form W-4: Your employees will fill out Form W-4 upon hiring. They can also fill out an updated form whenever they need to adjust their deductions. This form gives the employer the information you need to calculate the employee’s federal income tax deductions each pay period.
- Form 941: This quarterly federal tax return form requires employers to report income taxes, social security taxes, and medicare taxes from employees’ paychecks.
- Form 940: You must file this form to report your annual Federal Unemployment Tax Act (FUTA) return. Any business with employees must fill out this form.
- State/Local Tax Forms: Lastly, depending on your state or locality, you may be required to file additional forms specific to your location. Check with a local tax expert to ensure you’ve filed all the forms needed for the area in which you do business.
Once your paperwork is in order, your next step is looking at specific, payroll-related guidelines to ensure compliance.
2. Follow Specific Payroll Compliance Guidelines
There are four specific payroll compliance guidelines you need to follow.
Firstly, you’ll need to comply with FICA. FICA, or the Federal Insurance Contributions Act, requires both employer and employee contributions to help fund Social Security and Medicare. The percentage contribution changes annually, so ensure you are checking IRS guidelines before budgeting for your FICA payments.
Next, you will need to prepare for FUTA taxes. Also known as federal unemployment taxes, the employer shoulders this requirement entirely. Depending on your state, you may also be required to comply with state-specific unemployment taxes, referred to as SUTA. If this is the case, you may apply for a credit to reduce your FUTA rate.
Thirdly, ensure you’re taking steps to withhold Federal Income Tax. This tax sits somewhere between ten and thirty-seven percent. The amount withheld for each employee is calculated depending on the employee’s tax bracket and the information included on their Form W-4.
Lastly, consider FLSA. FLSA stands for the Fair Labor Standards Act. This act ensures that employers comply with minimum wage and overtime pay requirements for all non-exempt employees in their organization.
3. Take Note of Changes to IRS Regulations
Our final tip for maintaining payroll tax compliance is to avoid complacency. Don’t assume that you can learn your applicable state and federal tax regulations once and that they will remain set in stone. IRS regulations can change every year.
Keep an eye on all applicable regulations to ensure they haven’t changed since the last tax season. You can follow along with www.irs.gov to keep track of any updates.
Alternatively, you can work with a tax specialist to ensure you’re always working off of the most up-to-date information and regulations. When you partner with a payroll provider like ConnectPay, we connect you with tax experts experienced in your state and local requirements to ensure you don’t miss a single regulation change or update.
The Easiest Way to Maintain Payroll Tax Compliance: Partner with a Payroll Provider
Following these three tips will set you on the right path for maintaining payroll tax compliance in the coming year. However, as a business owner, you may not have the time to constantly stay on top of changing regulations.
This is why the easiest way to maintain payroll tax compliance is to partner with a payroll provider. When you work with a payroll provider, you gain access to the experience and resources of industry experts. Instead of spending time tracking down changing rates and regulations yourself, you’ll be able to rely on the know-how of a full team of professionals while using your energy to grow your business.
To learn more about payroll requirements, tips, and tricks, check out our free resource, the Connected Guide to Small Business Payroll, today.