Tax Advice for Payroll
Payroll taxes apply to the employer and the employee. As an employer, you have the dual role of withholding the appropriate taxes from employee paychecks and paying your own share of taxes. The Internal Revenue Service is the sole agency that handles the collection of federal payroll taxes; different agencies usually oversee state payroll taxes. To ensure compliance, some general rules must be followed.
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Withholding
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The federal government requires you to withhold Medicare tax, Social Security tax and federal income tax from employee wages. Most state governments require state income tax withholding; some cities and local governments require city and local income tax withholding. Furthermore, in rare cases, state disability withholding is required. To obtain your federal withholding obligations, consult IRS Circular E, The Employer's Tax Guide; it has the withholding, payment and reporting guidelines for federal payroll taxes. Consult your state revenue/taxation agency for state withholding, payment and reporting guidelines. If a different agency handles city, local and disability withholding your state revenue agency can give you the agency's name.
Employer Taxes
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As an employer, you pay Medicare and Social Security tax and, in most cases, federal and state unemployment tax. In some cases, the state requires you to pay an employment/job training tax. The Circular E has your Medicare, Social Security and federal unemployment tax rates along with payment and reporting guidelines. Most states have an unemployment division, which handles state unemployment tax; in other cases, the state revenue agency oversees it. A separate division might administer job-training tax. For example, the Michigan Unemployment Insurance Agency and the Florida Department of Revenue regulates each state's unemployment tax; and the Arizona Department of Economic Security administers job-training tax.
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Warnings
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Failure to withhold, pay and report payroll taxes can result in penalties from the respective agency. The IRS, for example, considers the withholding and nonpayment of federal employee taxes as stealing from the employee. Late payment can result in deposit penalties, which depends on the lateness of the deposit plus interest. Failure to file appropriate tax returns can result in a failure-to-file penalty. Under-withholding taxes can result in the agency holding the employer responsible for the taxes that should have been withheld. Noncompliance can also result in audits, criminal investigation and prosecution.
Considerations
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Call the IRS or the state revenue service's dedicated phone line for businesses if you are unsure of your payroll tax responsibilities. If you do not want to be bothered with payroll taxes, consider outsourcing your tax duties to a service provider that specializes in such matters.
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