Payroll Tax Attorney

Payroll Tax (Employment Taxes)

What Are Payroll Taxes?

Based on paystubs, you should probably be aware of payroll taxes. Let’s quickly review the essentials regarding payroll taxes, and what exactly they are. It’s true, employers impose a tax on their employees. This is commonly known as payroll taxes or employment taxes. Payroll taxes are typically calculated as a portion of the salaries that the employers compensate their staff members. Based on the employee’s salary, the financial total in which employees receive their tax refund can vary. It is up to the employer to impose these taxes, in order for taxpayer employees to file their taxes before April 15.

What Do Payroll Taxes Pay For?

Taxes pay for various federal projects and organizations. For instance, defense and security; public transportation; corrections and state police; education and health care; and national parks. Federally, the government imposes payroll taxes on wages and allocates the majority of the revenue to fund Social Security, Medicare, and other social programs.

These taxes are usually filed with a Form W-4, otherwise known as an Employee’s Withholding Allowance Certificate. When it comes to payroll taxes, the IRS can give notice and visit business owners, officers, and even staff in person to clarify some key points regarding the tax year. The IRS has the power to do this because the income tax withheld from employees is being held in trust for the government. The trust relationship between the company and its employees creates a link that allows the IRS to assess individuals associated with the company’s personal responsibility for the payment of the tax.

This is one of the most complicated and difficult tax issues to organize. There are many options to consider when dealing with payroll taxes. Since the IRS is typically aggressive in its pursuit of these funds, it is important to address this immediately. Otherwise, the IRS may levy your bank accounts leaving you unable to make payroll or pay vendors with a credit card. IRS agents will show up at your place of business, which can be both invasive and severely affect your reputation. In some instances, they will seize assets and pursue criminal charges if necessary. It can also result in the government imposing tax liens on a business’s property, thus creating a legally enforceable claim to secure the payment of outstanding tax liabilities.

How Can I Pay Payroll Taxes Online?

Upon collecting federal withholding tax from employees, the employee can then do the Electronic Federal Tax Payment System (EFTPS). In the case of state-related questions, state agencies typically utilize their own electronic or manual processes.

Technically, there are four types of taxes that your pay stub should show. Those are federal income tax, Social Security tax, Medicare tax, and a state-level income tax.

It is imperative to add that some states may alleviate additional taxes. As of today, there are only 9 states in the United States that do not require an income tax on earned income:

• Alaska
• Florida
• Nevada
• South Dakota
• Washington
• Wyoming
• New Hampshire*
• Tennessee*

*The two states with asterisks do not have earned income tax, but do tax on dividends, and some interest.

Both the IRS and state tax agencies publish annual tables to determine the amount of tax to be withheld from each paycheck depending on the employee’s gross wages, filing status, number of withholding allowances (exemptions) and pay frequency. Social Security and Medicare taxes put together are called FICA (Federal Insurance Contributions Act) taxes and have specific rates and thresholds.

For 2019, the Social Security tax rate is 6.2% on the first $132,900 of wages paid, up to $4,500 from 2018. The Medicare tax rate is 1.45% on the first $200,000 of wages (plus an additional 0.9% for wages above $200,000).

Key Filing Deadlines

By January

• File Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return
• File Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees
• File Form 945, Annual Return of Withheld Federal Income Tax
• File Copy A of all paper Forms W-2, Wage and Tax Statement, with Form W-3, Transmittal of Wage and Tax Statements, or file electronic Forms W-2 with the Social Security Administration (SSA)
• File Copy A of paper, Form 1099, Miscellaneous Income, with Form 1096, Annual Summary and Transmittal of U.S. Information Returns

By February 28

• File Copy A of paper Form 1099
• File paper Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips

By March 31

• File electronic Form 1099
• Electronic Form 8027

By April 30, July 31, October 31, and January 31

• File Form 941, Employer’s QUARTERLY Federal Tax Return

Deposit Due Dates

Typically, it is required to deposit federal income tax withheld, as well as both the employer and employee social security and Medicare taxes. Regarding the frequency of these deposits, there are two scheduling options: Monthly and semi-weekly before the start of every calendar year. It is up to the taxpayer to configure the deposit schedule that best fits their needs. According to the IRS, the deposit schedule you must use is based on the total tax liability you reported on Form 941.

FUTA Deposits

Make sure to deposit the Employer’s Annual Federal Unemployment (FUTA) tax by the last day of the first month that follows the end of the quarter. If the due date for making your deposit falls on a legal holiday or weekend, you must deposit on the next business day without penalty.

If your liability for the 4th quarter is higher than $500, deposit the total by the due date of January 31 (Form 940’s date). If it happens to be $500 or less, you are eligible to make a deposit. Pay the tax with your card of choice (credit or debit). Or simply pay the tax via Form 940 by the last day of the first month.

Are There Any Tax Credits or Incentives Available for Businesses Related to Payroll Taxes?

Work Opportunity Tax Credit (WOTC)

The WOTC is a federal tax credit available to employers who hire individuals from specific target groups facing significant barriers to employment. This includes veterans, SNAP recipients, and ex-felons, among others.

Employee Retention Credit (ERC)

The Employee Retention Credit (ERC) serves as a vital financial relief mechanism, providing eligible employers with a tax credit for a percentage of the wages paid to employees, thereby assisting in the mitigation of employment losses.

Payroll Tax Deferral

Under specific circumstances, businesses might be eligible to defer the deposit and payment of their employer’s share of Social Security taxes. These deferral programs might arise during economic downturns or crises, providing financial breathing room for businesses.

Traditional Employees Vs. Freelancers

Traditional Employees

• Withholding of Taxes: Employers withhold federal and often state income tax, along with Social Security and Medicare taxes.
• Employer Contributions: Employers contribute to Social Security and Medicare taxes.

Freelancers/Self-Employed

• Self-employment Tax: Responsible for both the employer and employee portions of Social Security and Medicare taxes.
• Quarterly Estimated Taxes: Anticipated to pay estimated taxes quarterly rather than having taxes withheld from paychecks.

Decoding Self-Employment Tax

Embarking on the journey of freelance or self-employment unveils the realm of self-employment tax, which encompasses Social Security and Medicare taxes. Freelancers can subtract the portion of the self-employment tax equivalent to what an employer would pay when figuring their adjusted gross income, which is equal to half of the self-employment tax. This adjustment impacts only your income tax and does not alter your net earnings or your overall tax liability.

Trust Fund Recovery Penalty

The Trust Fund Recovery Penalty (TFRP) is the assessment of unpaid employee federal income tax to those responsible (in charge) for ensuring that it was paid to the Internal Revenue Service (IRS).

The IRS will send important notice to those responsible for unpaid employment/payroll taxes. Those responsible can range from the President of the company to an HR employee.

A common mistake many owners make is assuming that if someone else is in charge, they won’t be accountable. Unfortunately, the IRS generally feels that an owner or anyone running a company should be educated on payroll tax issues.

The IRS usually sends a letter inviting you to an interview to uncover your level of responsibility. The Revenue Officer will be very intimidating and aim to make you feel guilty. We highly recommend NOT attending these interviews alone. You can also do the interview over the phone, which helps with both travel and nerves.

Our team at Victory Tax Lawyers in Los Angeles offers clients their adept experience. Allow us to help prepare and protect you from incriminating yourself. Call today to arrange a free consultation at 866.640.0640.