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Updated: March 27th, 2020
Think back to your first real job. Perhaps you were in high school or college, and you’d already multiplied your hourly rate by how many hours you worked. But when you got your check, you were shocked to see a lot of money was missing.
Your employer likely withheld payroll and income taxes from your pay and passed the money on to the government. It was the company’s responsibility to withhold that money and pay those taxes. Now, as the owner of a business, it could be your responsibility as well. (Give your young employees a heads up.)
There are several types of federal employment taxes that your business may be responsible for paying:
It’s up to you as an employer to determine how much money you need to withhold from each paycheck. Fortunately, payroll software will generally do the number-crunching for you, but here’s what goes into the calculations:
In addition to federal payroll tax responsibilities, businesses may need to withhold and submit local or state taxes, such as income, unemployment, or disability taxes. As with federal taxes, the employees pay for their state income taxes, while the other employment taxes might be a shared or employer responsibility.
Income and FICA taxes should be withheld and paid on either a semi-weekly or monthly basis. You’ll need to figure out how often you have to deposit the taxes before the start of each year and stick with that schedule for the rest of the year.
Whether you have to use the semi-weekly or monthly payment schedule will depend on how much your business owed in taxes during previous years. Review Publication 15 and look for the section on “when to deposit” to determine your schedule. The monthly schedule, which may be more common for small businesses, requires you to make payments by the 15th day of the next month (e.g., pay February’s payments by March 15).
If you owe at least $500 in FUTA taxes during a quarter, you must pay the tax by the end of the month after the quarter ends. However, if you don’t owe $500 or more, your tax liability rolls over to the following quarter. The rollover can continue all year, especially if you don’t have many employees and are eligible for a credit reduction. If this happens, you’ll have to pay however much you owe by January 31 of the following year.
Withholding and paying employment taxes is an important part of the payroll process. Your payroll software may have built-in tools that can calculate and electronically send your payroll tax payments. Alternatively, you can use the Electronic Federal Tax Payment System (EFTPS) to submit payments on your own.
Missing payroll tax payments is a serious offense. You may have to pay a large penalty based on how much you underpaid and how late your payment is. The failure to deposit penalty amounts are:
If you also don’t file associated tax forms and pay any taxes you owe, you may have to pay additional penalties and interest.
Small business owners who manage their company’s payroll should be extra careful to withhold and submit payroll tax payments. When you’re withholding money from an employee’s paycheck, you’re holding the money “in trust” until you send it on to the IRS.
Special rules apply to these trust funds. The Employment Taxes and the Trust Fund Recovery Penalty (TFRP) allows the IRS to hold a responsible person (which could be you) personally responsible for the money. In other words, even if you’ve registered an LLC or incorporated, the IRS may be able to “pierce the corporate veil” and take your personal assets. The IRS may even be able to bring criminal charges against you, which could result in jail time.
If you can’t afford to make pay your portion of the business tax payments, you should still file your business tax returns and forms on time to avoid additional penalties. You might also be able to work with the IRS to set up a payment plan, defer your payments without getting penalized, or settle for less than you owe. The options may vary based on your circumstances, and you may want to hire a professional tax attorney if you need guidance.
Funding Circle believes informed consumers are better consumers. We strive to provide informative and educational content useful for you and your business. However, please note that tax laws and regulations are complex and subject to change. We strongly recommend consulting your financial or tax professional regarding your specific circumstances.