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Payroll
Basics
This introduction is intended to help answer your payroll questions and give you basic information about your obligations. Additionally, we have provided common forms (W-4, I-9, W-9), as well as, useful links on our website for public use as needed. Every business and situation may have different rules depending on the size and type of the business and the state in which the business is conducted. If you need additional assistance, please contact the agency to which you pay taxes or a professional payroll service. .
The goal of Cedar Park Payroll is to provide small business owners/managers the tools they need to meet these obligations at an affordable price.
There are three main things to do to process payroll:
1. Pay your employees, including calculating gross pay and taxes withheld each pay period.
2. Pay your taxes, including paying the taxes you have already withheld from employees’ paychecks AND the tax liabilities you incur as the employer. These payments, made to the IRS and your state’s department of revenue, must be timely or you will be assessed penalties.
3. File your tax forms even if you do not owe anything. You must do this every quarter whether you owe money or not. Failure to file the forms results in penalties.
Frequently Used Payroll Terms
Constructive Receipt
You become liable for payroll taxes on the date you pay your employees, not when they did the work. This rule is known as constructive receipt. If you only pay employees on Fridays, you only report a tax liability on Fridays, even if employees earn wages other days.
A common area of confusion is when work is performed in one tax period, but employees are paid in a different tax period. The IRS only tracks when employees are paid, when the money is earned.
Lookback Period
This is a reference period used by the IRS to determine your federal tax payment due dates. The IRS “looks at” your tax liability during this twelve-month period and determines whether you are a monthly or a semi-weekly depositor (see below) for the coming year. Most new employers are monthly depositors.
Payment Coupon
The form you submit with your payroll deposit. For federal tax deposits, the payment coupon is Form 8109. If you pay electronically, you do not need a payment coupon.
Payroll taxes are both the taxes withheld from employees’ paychecks, as well as, the taxes you pay as an employer. They are based on the employees’ wages and include:
Social Security and Medicare
Federal and State Unemployment
Personal Income Tax – (federal and state, depending on the state)
Miscellaneous other state taxes
Most payroll taxes, like income taxes, apply to all earnings. However, some
taxes have a wage cap (the maximum annual earnings per employee that are
subject to that tax). Wage caps are adjusted by the governing agency
(usually annually).
Social Security and Medicare
Both employers and employees pay Social Security and Medicare taxes. As an employer, you withhold the employee’s part of the taxes and pay a matching amount.
This is a tax with a wage cap, which means that the tax is calculated only up to a maximum dollar amount of wages per employee each year.
There is no wage cap for Medicare tax, which means the tax is paid on all of the employee’s wages. (The exception is exempt wages–see “Special Tax Exemptions” below.)
The amount of federal income tax withheld from employees’ paychecks depends on their marital status, the number of withholding allowances (exemptions) they claim on Form W-4, and their projected annual income.
In addition, all but nine states (AK, FL, NV, NH, TN, TX, SD, WY, and WA) have a personal income tax. In some states, employees also pay local tax (to cities, school districts, or counties) through their paycheck.
Form W-4. An employee reports several items on Form W-4:
Filing Status. This is the marital status that dictates which tax table will be used to calculate income tax withholding.
Withholding Allowances. Also called exemptions, withholding allowances reduce taxable income by a designated amount per allowance. Factors such as number of dependents influence how many allowances an employee will claim.
Additional Amount to be Withheld. This amount is added to the income tax calculated for each paycheck. An employee working multiple jobs might choose to have an additional amount withheld to compensate for understatement of his or her wages (and therefore understatement of his real tax rate) by each employer.
Federal Unemployment (FUTA)
The Federal Unemployment Tax Act (FUTA), along with the state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs. For 2006, the effective FUTA tax rate is 0.8%. The tax applies to the first $7,000 employers pay to each employee as wages during the year, so your maximum FUTA liability per employee is $56.00 per year.
However, if any of your employees are exempt from State Unemployment Insurance (for example, they are Directors or Officers); your FUTA tax may be higher.
State Unemployment Insurance (SUI)
All states maintain a reserve for unemployment that is funded through an unemployment insurance tax. In most cases, only the employer pays SUI. Employees in some states also contribute to SUI through their paychecks.
Most states have established a starting SUI rate for new employers. After a designated period of time, employers are assigned an experience rate, which may be higher or lower depending on the employer’s reserve account balance. You will receive a notice from the state if your rate changes.
Some states administer disability insurance (SDI) or workers compensation as a tax collected through payroll. Many states also have a tax paid jointly with SUI that is used to fund job-training programs. Where applicable, Cedar Park Payroll calculates these taxes for you.
Some types of employees are exempt from one or more payroll taxes, which means that they do not pay those taxes. For example, a minor working for a parent who is a sole proprietor does not have to pay social security, Medicare, or FUTA.
In addition, certain portions of regular employees’ wages may be exempt from one or more payroll taxes. For example, tax-sheltered or pretax insurance plans save both the employer and the employee money by exempting premium amounts from all federal taxes and some state taxes. Some fringe benefits, like S-Corporation owners’ health insurance, are also taxed differently from regular wages.
If your company is a not-for-profit 501(c) 3 corporation, you do not pay FUTA at all–regardless of who your employees are.
Federal Tax Deposit Schedules
The following deposit schedules apply to all federal taxes other than FUTA.
Monthly depositors: You are a federal monthly depositor in 2006 if your company's federal tax liability during the lookback period (7/1/04–6/30/05) was less than $50,000. Monthly depositors pay taxes for a given month by the 15th of the next month.
Semi-weekly depositors: If your tax liability is greater than $50,000 during the lookback period, you are a semi-weekly depositor. You pay taxes three banking days after the end of any semi-weekly period in which you accrued a liability. The IRS divides the week into two semi-weekly periods: (1) Wednesday, Thursday, and Friday, and (2) Saturday, Sunday, Monday and Tuesday. Taxes accrued during the Wednesday–Friday period are due on the following Wednesday, and taxes accrued during the Saturday–Tuesday period are due on the following Friday.
Exceptions to the Deposit Schedule Rules
There are three main exceptions to the monthly and semi-weekly tax deposit requirements, as follows.
Next-Day Deposit Rule: If you accrue $100,000 or more in federal tax liability at any point during a deposit period, you must remit taxes on the next banking day. This could result from a payroll or from multiple payrolls within a single deposit period (month or semi-week). For example, if you pay payroll and/or bonuses to employees that result in more than $100,000 in liability on a single day, you must pay the amount due on the next banking day. You also become a semi-weekly depositor until your lookback liability falls below $50,000 again.
Quarterly exemption: If your federal tax liability is less than $2,500 for a quarter, there is an option of paying taxes due with your tax filing at the end of the quarter, instead of making deposits during the quarter.
Annual exemption: If the IRS has notified you in writing that you are a 944 filer, and your total annual federal tax liability is less than $2500, you can make your federal tax deposits annually. The 944 filing status is for very small employers who typically pay $4000 or less in annual wages.
Unlike other federal taxes, FUTA (federal unemployment tax) is paid on the last day of the month following the end of each quarter:
• April 30 (for Q1)
• July 31 (for Q2)
• October 31 (for Q3)
• January 31 (for Q4)
If you accrue less than $500 of FUTA liability in a quarter, you do not need to make a deposit until the following quarter.
Like FUTA, SUI is also paid once per quarter to your state.
State Withholding Schedules
Like the IRS, states (except AK, FL, NV, NH, TN, TX, SD, WY, and WA) have established deposit schedules for paying income tax you have withheld from your employees’ paychecks. When you register with the state revenue agency, they notify you of your state deposit schedule.
State Unemployment Insurance
State unemployment insurance (SUI) taxes are also paid once a quarter, regardless of the employer’s size. In states like Texas, where there are no state taxes withheld from employees’ wages, SUI is the only payroll tax employers pay, so all employers pay taxes quarterly.
Payroll Tax Reporting and Forms
Form 941 - Typically, employers file this tax form every quarter with the IRS. It compares federal payroll taxes owed with what you paid (on time) during the quarter to determine your balance.
Form 944 - Employers who have received written notice from the IRS may file Form 944 annually instead of Form 941 each quarter. Most also pay taxes once a year.
Form 940 - All employers who pay FUTA file this tax form at year end with the IRS. It compares FUTA tax liability with your FUTA tax payments to determine your balance.
Form W-2 - All employers provide Form W-2 to each employee at year-end as an earnings record for income tax filing purposes. You are also responsible for filing Form W-2 with the Social Security Administration. If you use Cedar Park Payroll ‘s services, these calculations are provided for you at year-end and are easily printed from your computer at no additional charge. (Users of the Premium or Premium Plus services will have them mailed from our offices.)
Wage Reports do just that. They report wages paid to each employee for each quarter. They are sometimes combined with a quarterly contribution report that calculates SUI tax owed and is typically accompanied by the SUI payment at quarter end. Most states require both a wage report and a contribution report each quarter, either as separate forms or as a combined form.
Annual Reconciliations - Some states require filing an annual reconciliation for income tax at the end of the year. Cities, counties, or school districts that assess tax may also require quarterly or annual forms and may require copies of W-2’s. Check with each agency to which you pay tax.
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