One important thing to remember is that you must deduct payroll taxes from your employees’ salaries and wages. If you fail to do this properly, you could be forced to pay major fines—the last thing any business owner wants. How can you ensure you remain in compliance?
Business owner responsibility
You are only responsible for collecting payroll taxes from any workers who are classified as employees by the Internal Revenue Service. Although independent contractors do work for your company, they are responsible for filing their own taxes through form 1099. Therefore, you should keep up-to-date records of who works exclusively for your company and whether or not they are W2 employees. The IRS does have the ability to re-classify workers as employees and penalize business owners for not withholding those payroll taxes if the agency believes you are incorrectly paying your workers.
Some businesses may use the money they collect from payroll taxes to pay overdue bills or for use toward other purposes. However, doing this could land you in some personal financial trouble. The IRS has the right to take 100 percent of the taxes owed from a business owner’s personal assets if the agency is unable to collect payroll taxes. If this happens to you, you will not be able to get rid of your tax obligations through filing personal or business bankruptcy.
Collecting and submitting payroll taxes
The taxes collected from employees’ pay include federal, state and local income taxes, federal Medicare and Social Security taxes and state and federal unemployment taxes. The responsibility for paying these taxes is on both the employee and employer. Employers pay some of the taxes themselves, while deducting the rest from workers’ paychecks.
Employers must collect and submit these payroll taxes to the correct agency in a timely manner. Depending on the amount of payroll taxes you owe, you could be responsible for paying these taxes quarterly or monthly. You are required by the IRS to file several reports on your payroll taxes every year, including information on the amount of employees you have, the hours they work and the total amount they are getting paid.
All of this information can seem tough to understand, especially if you are a new business owner looking to bring on more employees. An experienced business and tax attorney can help you better understand payroll taxes and how you can meet your obligations, while still growing your business in a healthy, sustainable way.
Ravinder S. Nagi is Chair of the BoltNagi Labor & Employment Practice Group. BoltNagi is a widely respected and well-established labor and employment law firm serving clients throughout the U.S. Virgin Islands.