How to Calculate Your Payroll Tax and 5 Strategies for Simplifying Things

It is important to know how to calculate the proper payroll tax when paying your employees. If you fail to calculate Social Security or Medicare taxes, your employees may suffer the consequences. These consequences include problems filing for Social Security, Medicare, or unemployment benefits at a later date. As an employer, you may face fines or even criminal charges.

This article will discuss payroll taxes and how to calculate them. You will read why it is recommended to simplify this calculation as well as methods of performing this. You can also read tips and communicate with other employers as well.

payroll tax concept

What Is a Payroll Tax?

Payroll taxes are the taxes withheld from your employees’ paychecks in order to pay taxes. These taxes include income, Social Security, and Medicare taxes. The employee is responsible for paying their share of all three taxes. The employer is responsible for matching the amount of the Social Security and Medicare taxes. They are also responsible for paying the federal and state unemployment taxes. In New Jersey, Pennsylvania, and Alaska, employees will also pay an unemployment tax.

The employer and employee are also responsible for payroll taxes at the state level. While some states do not have income taxes, all states will charge employers taxes. These amounts will vary by each state, so it is important that you keep up-to-date with your state’s requirements.

Who Uses a Payroll Tax?

Any employer with at least one employee will pay payroll taxes. The amount of the Social Security and Medicare taxes will vary based on how much income the employee makes. The unemployment tax you pay at the state level varies based on number of employees claiming unemployment. The unemployment tax you pay at the federal level depends on how many employees earn over $7,000 in wages per year. Once your employee(s) earn $7,000, you will no longer pay a federal unemployment tax for them.

There are very few exceptions to these requirements. If your company is a non-profit 501(c)(3) organization, you will not be required to pay federal unemployment taxes. However, you will still pay federal income, Social Security, and Medicare taxes. Some states allow exemptions for unemployment taxes for these organizations, but this varies by state.

How Can Simplifying Your Payroll Tax Help Your Business?

Simplifying your payroll taxes will help increase your business’s productivity levels. By allowing you to spend more time running your business and less time on payroll, you can focus on actions that will produce results. At the same time you are focusing on improving your company’s productivity, you can also know that your company is saving money. This is a result of payments being made on time and being able to claim proper payroll tax deductions.

Another benefit of simplifying your payroll taxes is the peace of mind you’ll receive by knowing that is one less thing to worry about. Receiving a call from the IRS or a state taxing agency is a stressful event. Your business can avoid this event by keeping your tax situation simple.

5 Tips for Simplifying Your Payroll Tax

Avoid Paying in Cash

While you can pay your employees in cash, you are setting yourself up for problems by doing so. Whether you pay by check or cash, you must pay payroll taxes. If you do not withhold taxes and pay your employee in cash, you face the risk of penalties if you are audited and discrepancies are found. Paying in cash can also lead to complications if an employee claims workers compensation or needs to file for unemployment. If you decide to pay in cash, you will need to spend extra time keeping extremely detailed records above and beyond what you would normally do.

Keep Accurate and Detailed Records

Whether paying by cash or withholding taxes and paying by check, you need to keep accurate records. In addition to keeping the records, store these records in a safe place for later reference if required. Records you need to keep include date and amount paid, amounts withheld for taxes, proof you paid the taxes, and copies of W-2 tax forms provided to employees.

Research Tax Information Every Year

Tax amounts are subject to change every year. As a result, you will want to ensure that you keep up-to-date on the proper withholding amounts for Social Security, Medicare, and unemployment. You will also want to stay informed about cut-off amounts for Social Security taxes, as both you and the employee do not have to pay them after a set amount is reached every year.

Hire a Professional Payroll Company

While hiring a professional payroll company will cost your company some extra money, this step will take payroll taxes out of your hands. Depending on the number of employees and the state you are located in, this expense may save you money in the long run. This is also a good idea for companies with complicated payroll tax situations, such as those applying for non-profit status or laying off a significant number of employees. Both of these situations will cause unemployment taxes to change suddenly, requiring a strong knowledge of these situations.

Use Independent Contractors

This method is not for every company. Independent contractor laws vary by state, and some states make it very difficult for a company to claim a worker is not an employee. If you are able to use independent contractors, they will be responsible for their own income and payroll taxes. You will be free from all payroll tax obligations. However, if you want to claim your workers are independent contractors, they must be able to set their own hours and perform the job independently, as well as use their own tools and equipment. This is not an ideal set-up for every company.

illustration of accounting concept

Summing Up

It is essential that you handle payroll taxes with the respect they deserve if you want to avoid legal complications later. What are some methods you have used to simplify your payroll tax handling? Leave a message below or visit us on our Facebook page in order to learn from and share tips with other employers.

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