Payroll Tax

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, 2020.

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.

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. In order to be sure, Victory Tax Lawyers can help you determine your state’s situation in our “Which States Do Not Have Income Tax” section.

As of today, there are only 9 states in the United States that do not require an income tax on earned income:

*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).

By January

By February 28

By March 31

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

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.”

Make sure to deposit the Employer’s Annual Federal Unemployment (FUTA) tax (read carefully if applicable) by the last day of the first month that follows the end of the quarter. If by any chance the due date for making your deposit falls on a legal holiday or weekend (Saturday, Sunday), 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.

Federal Tax Credits

Navigating federal tax credits requires a comprehension of numerous government-initiated programs designed to encourage particular business activities, especially those that boost economic expansion and job creation.

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.

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. In navigating through the complex web of pandemic-induced challenges, businesses leveraging the ERC find a supportive buffer that not only aids in retaining their workforce but also indirectly stimulates economic activity by preserving jobs and stabilizing incomes.

Various states propose their unique set of tax credits and incentives aimed to attract, retain, and stimulate businesses and employment within their jurisdictions. Examples include credits for hiring individuals from certain demographics, investing in specific industries, or adopting eco-friendly practices. These tax incentives not only function to catalyze economic growth but also foster a competitive environment among states, each vying to establish themselves as lucrative locales for burgeoning and established enterprises alike. Moreover, by targeting particular industries or demographic groups, states can strategically address and potentially ameliorate localized issues, such as unemployment in economically distressed areas or incentivizing the adoption of sustainable business operations.

Employers often have the opportunity to benefit from certain payroll tax deferrals and assistance programs, easing immediate financial burdens and facilitating smoother operational flow.

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. Furthermore, the deferment options, typically implemented by governmental bodies, aim to mitigate the financial burden on enterprises, thereby preserving jobs and stabilizing the economy during turbulent times. It’s paramount that businesses scrutinize the eligibility criteria and comply with subsequent repayment schedules to ensure they adhere to regulatory guidelines and safeguard their operational sustainability.

Navigating this complex network, small businesses can leverage these resources to maintain compliance with tax laws, manage employee compensation efficiently, and optimize their financial planning. Furthermore, the availability of such programs provides a vital support framework, enabling entrepreneurs to focus on operational and strategic aspects of their enterprises, ensuring sustainable growth and development in the competitive market landscape.

Embarking on the journey of freelance or self-employment unveils the realm of self-employment tax, which encompasses Social Security and Medicare taxes and poses a crucial component of payroll tax responsibilities.

Social Security Tax: A specific percentage of net earnings capped at a certain threshold.
Medicare Tax: A specific percentage of net earnings with no upper limit.

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.

In the absence of tax withholding, freelancers are required to adopt a proactive approach to tax payment through quarterly estimated taxes.

Calculating estimated taxes involves projecting expected annual income, deductions, and credits and dividing the anticipated tax liability by four.

Understanding and adhering to the specific timelines for quarterly tax payments is paramount to avoid potential penalties for late payments.

Maintaining meticulous and accurate financial records facilitates smooth tax filing and can safeguard freelancers in instances of audits or financial discrepancies.

Ensuring all income, including cash payments, is accurately logged and documented.

Maintaining records of potential deductions, including home office expenses, travel, and equipment purchases.

Technology has innovatively simplified the perplexing domain of payroll tax management. The augmentation of automation in calculations has surged accuracy assurance by meticulously minimizing human errors that potentially loom in tax calculations. Moreover, dynamic adaptation features auto-updating tax tables, thereby invariably ensuring the applicability of the most current and relevant tax rates. Furthermore, the facet of compliance management has been streamlined. Automated filings diminish the administrative burden by assuring that all necessary forms and filings are diligently submitted according to the prescribed schedule, mitigating the risk of penalties and discrepancies. Additionally, the technology fortifies its efficacy through the instantaneous adaptation to regulatory updates, thereby maintaining an adept alignment with the updated tax laws and rates and ensuring businesses remain compliant amidst the perpetually shifting legal landscapes. This technological intervention in the realm of payroll tax thereby manifests not only as a facilitator but as a vital entity, ensuring precision, compliance, and effortless management within the intricate world of tax administration.

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.