Paychecks, payroll tax calculations, tax deposits, and reporting for small businesses
The latest business census from SBA for 2014 showed that about 90% of all US companies have less than 20 employees. More than 60% of companies have less than 5 employees. However, the responsibility of an employer to withhold employee payroll taxes, deposit taxes to the government, and filing employee payroll reports are essentially the same for businesses of all sizes. A small one-employee company is required to file quarterly 941s, annual 940, and W-2 forms just the same as is required for a billion dollar company.
With even just a few employees, a small business often needs to pay hundreds or thousands of dollars per year to use an online payroll service or to hire a payroll professional. Do it yourself payroll management services could result in employee payroll taxes, deposit taxes errors, penalties, and headaches.
Small business payroll is not difficult but the process is very tedious.
Whether you use a do-it-yourself online payroll service or use a payroll management service, it is most beneficial to understand how business payroll works.
If a company has no employee, there is no employee payroll requirement. With even just one employee, you have employee payroll and you are required to:
- Calculate and withhold the proper amount of taxes on each paycheck
- Deposit the withheld taxes to the government as required
- File payroll reports to the government as required.
The small business is essentially working for the government to collect employee payroll taxes, pay taxes, and then file reports on the taxes. Here, we can examine the types of payroll taxes that an employee and the company need to pay. Typically employee payroll taxes consists of both Federal & State taxes
- Federal – (1) income tax (2) social security & (3) medicare taxes
- State – taxes vary for different States, which can include income tax, disability, unemployment insurance, etc., You should check with the State and know the type of applicable taxes.
In addition to withhholding taxes from the paycheck, the employer is required to match certain taxes and pay some additional payroll taxes.
- Federal – Matching payment for (1) social security, (2) medicare & (3) Federal Unemployment Tax (FUTA)
- State – Employers typically pay for Unemployment Insurance, Employee Trainning, and other application taxes. Different States have different requirements.
Generally, businesses pay for unemployment insurance (UI) to protect employees upon losing their jobs. However, a few States (NJ, PA, e.g.) require the employee to pay a small portion of the UI. In addition to UI, some States require the company to pay an Employee Training Tax (0.1%, CA) and others require employees to pay for family leave (NJ, e.g.). There are also specific tax limit for certain types of taxes so the company or the employee does not need to pay beyond the limit for a calendar year.
The most important data for a company is to confirm the UI rate for the company. Based on prior claim record (employee claims unemployment insurance), the State determines a specific UI rate for each company and the correct amount is required.
The requirements for Federal taxes and forms are the same for all businesses, but each State may require different taxes and forms. The following table is a very general summary of the types of Federal and state payroll taxes and who is responsible for paying it.
For tax year 2017, Federal tax requirements are the same for all businesses. The only possible variation is “Credit Reduction”, an additional FUTA tax that may be accessed to a small number of States.
|Type of taxes||Deduct from employee paycheck||Company to pay|
|Federal income tax||W-4, paycycle, gross earning|
|Social security tax||6.20%||6.20%|
|Federal Unemployment tax||0.60%|
|State income tax||State tax tables||N/A|
|State Unemployment Insurance||Company-specific %|
We will examine the process for making payroll tax deposits, when and whom and how in later posts. Keep an eye out for our Part II blog post.