Running a small business involves keeping up with many legal obligations. Deducting payroll taxes from the salaries and wages of employees is one of these obligations. An employer that fails to collect or pay payroll taxes properly may be subject to significant penalties and fines.
Different Types of Employment Taxes
Payroll taxes are the taxes that employers and employees owe tax authorities on salaries and wages earned. These taxes include federal, state, and local income taxes, federal Social Security and Medicare taxes, and federal and state unemployment taxes. The responsibility for paying payroll taxes is split between employees and employers. Employers pay some of the tax owed and deduct (withhold) the rest from an employee's paycheck.
Employers Collect Payroll Taxes from Employees
Employers are only responsible for collecting payroll taxes from workers who are classified as employees by the Internal Revenue Service (IRS). Independent contractors and self-employed persons may work for your company, but they are responsible for paying their own taxes on the money they earn. It is important to correctly classify workers if they work exclusively for your company. The IRS can re-classify a worker as an employee and penalize a business for not withholding payroll taxes if the agency thinks a business is paying workers incorrectly.
Payroll Taxes Must Be Submitted Regularly
Employers are responsible for collecting payroll taxes and submitting the taxes to the appropriate tax agency on time. Federal and state tax agencies can require payment monthly or quarterly, depending upon the amount of payroll taxes owed. The IRS requires employers to file four different payroll tax reports annually, detailing information such as the number of employees on staff, number of hours worked, and amounts paid in salary and wages.
Business Owners Can Be Held Personally Responsible
When they run into financial trouble, some businesses are tempted to use the money collected for payroll taxes for other purposes, such as paying overdue bills. If the IRS cannot collect its payroll taxes from your business, federal law allows the agency to take 100 percent of the taxes owed from the personal assets of the business owner. Filing business or personal bankruptcy will not get rid of a business owner's obligation to pay payroll taxes that are owed to the IRS.
A Tax Lawyer Can Help
The law surrounding payment of payroll taxes by a small business is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a tax lawyer.