Not Knowing How To Manage the Pieces will Cost You Money

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1 Not Knowing How To Manage the Pieces will Cost You Money 1

2 Table of Content Section Page Executive Summary 3 Your Responsibilities 4 Employee Taxes 5 Employer Taxes 6 Social Security Tax 7 Medicare Tax 8 Federal Unemployment Tax Act (FUTA) 9 State Unemployment Tax Act (SUTA) 10 Federal Withholding Tax 11 State Withholding Tax 12 Summary 13 Legal Disclaimer 14 Our Commitment 15 2

3 Executive Summary This guide briefly explains how payroll taxes are calculated and breaks down what taxes the employee pays and what taxes the employer is responsible for The responsibility for making tax deposits on behalf of the employees and the company is the responsibility of the employer The responsibility for payroll compliance, filing payroll reports on due dates and sending out informational returns (W2s) to employees is the responsibility of the employer Failure to make deposits correctly, or file reports on time, will result in severe penalties. Did you know that sending out W2s with incorrect information can cost a company up to a maximum penalty of $1.5 million? If a company chooses to hire a payroll company, which is always recommended, the officers or owners of the company are still responsible and liable for any payroll non-compliance, therefore it is important to find and hire a reputable payroll company Not making payroll deposits, filing payroll reports and chronically ignoring letters from revenue agencies can cause a lien to be placed on your bank account. It can also lead to criminal charges against the owner and officers of the company 3

4 Your Responsibilities A business is responsible for: Understanding and knowing the payroll tax laws, including any changes made during the year Withholding your employees payroll taxes Making payroll tax deposits on behalf of your employees Making payments for the employer s payroll taxes owed Sending in payroll reports to each federal, state and local revenue agency as required by law Sending out year-end informational returns to employees (W2s) and independent contractors (1099s) as required by law Responding to all inquiries from the IRS and other revenue agencies in a timely manner 4

5 What Taxes Does an Employee Owe? Social Security tax Medicare tax Federal tax In most states there is a state income tax employees will have to pay Some cities and counties may have a local payroll tax that will have to be deducted from an employee s pay check Employee Social Security 6.2% on the first $118,500 of wages per employee Medicare Federal Withholding State Withholding 1.45% of all wages no wage limit; plus 0.9% surtax on all income over $200,000 Depends on filing status and number of allowances claimed by employee Depends on filing status and number of allowances claimed by employee Local or City Taxes Depends on local payroll tax requirements 5

6 What Taxes Does an Employer Owe? Social Security tax Medicare tax Federal unemployment tax (FUTA) State Unemployment tax (SUTA) Employer Social Security 6.2% on the first $118,500 of wages per employee Medicare Federal Unemployment Tax (FUTA) 1.45% of all wages no wage limit Depends on state tax credit. Can range from a low of 0.6% to 1.8% (in some states) on the first $7,000 of wages for each employee. State Unemployment Tax (SUTA) Rate varies from state to state and will also depend on employment history of the company 6

7 Social Security Tax Total tax required for 2015 is 12.4% Tax is split between employee who pays 6.2% and the employer who pays 6.2% When an employee s check is calculated the amount of the check is reduced by 6.2% to pay for the employee s portions of Social Security tax The employee s portion of the Social Security tax is held by the employer until it is time to make the tax payment. The employer pays the additional 6.2% of the Social Security tax The Social Security tax is deposited according to the deposit schedule for that business New businesses start off on a monthly deposit schedule 7

8 Medicare Tax There is no maximum wage limit for Medicare tax The tax required for Medicare tax from the employer is 1.45% The tax required from the employee is 1.45% on all wages below $200,000 When an employee s wage exceeds $200,000 the income above $200,000 is taxed at an additional 0.9% The total Medicare tax on income above $200,00 is 3.35%. The money is held by the employer until it is time to make the deposit Both the employees portion and employer s portion is deposited The Social Security tax is deposited according to the deposit schedule for that business New businesses start off on a monthly deposit schedule 8

9 Federal Unemployment Tax Act (FUTA) Provides for unemployment compensation to workers who have lost their jobs FUTA rate is set at 6.0% on the first $7,000 of wages per employee There is an off-setting tax that starts at 5.4% and is decreased by 0.3% for each year your state is behind in its repayment of its loan obligation to the Federal government. The different rates between states is based on how much each state had to borrow to cover its unemployment obligations. States that experienced extremely high unemployment rates had to borrow more money. Those states now have to pay it back, thus the higher FUTA rates for businesses in those states. Employers in one state may only have to pay 0.6% (6% minus the 5.4% standard state credit) while employers in other states that have failed to meet its loan payment obligations to the Federal government will have to pay a much higher FUTA rate of 0.9% to, in some states, 1.8% on the first $7,000 of each employees wage. FUTA taxes are paid quarterly 9

10 State Unemployment Tax Act (SUTA) Provides for unemployment compensation to workers who have lost their jobs SUTA rates vary from state to state The taxable wage base that SUTA taxes are based on also varies from state to state For example for new businesses in NC for 2015 the first $21,700 of wages per employee is subject to a SUTA rate of 1.2% In SC new businesses will pay 1.55% on the first $14,000 of wages A company s SUTA rate can increase or decrease over time. If the company has a history of laying off workers the SUTA rate will increase Conversely, if a company has an excellent employment history and has not had any unemployment claims filed against it the SUTA rate will decrease In NC the SUTA rate can be as low as 0.0% and as high as 6.84% SUTA taxes are paid quarterly SUTA and FUTA taxes can be minimized by eliminating unemployment claims against the company and minimizing employee turnover 10

11 Federal Withholding Tax Federal withholding tax is based on the filing status selected (single, married, head of household) by the employee and number of dependents claimed The gross wages of the employee s check is reduced by the amount of federal taxes withheld The employer holds the employees money until it is time to make the tax deposit A new business will typically start off making their tax deposit monthly It is the employers responsibility to deposit all of this money on behalf of its employees 11

12 State Withholding Tax Not every state has income tax States that do have a state income tax, the amount of the withholding is based on the filing status (single, married, head of household) selected by the employee and number of dependents claimed The gross wages of the employee s check is reduced by the amount of state taxes withheld The employer holds the employees money until it is time to make the tax deposit Deposit schedules will vary from state but many will have new business making monthly deposits It is the employers responsibility to deposit all of this money on behalf of its employees 12

13 Summary Employers should prioritize the payroll step and payroll compliance Federal and state agencies have placed an increased emphasis on payroll compliance Failure to comply with payroll tax laws constitutes payroll tax fraud and is punishable by severe penalties and interest charges costing your company money Ignoring payroll compliance will result in a lien being placed on bank accounts and can result in criminal charges against the owner or officers of the company To facilitate the payroll process and insure compliance work with a reputable payroll processing company 13

14 Legal Disclaimer This document is intended for informational purposes only and by no means should replace or substitute other legal documents (governmental or non-governmental) reflecting similar content or advice. If you have any questions concerning your situation or the information provided, please consult with an attorney, HR professional or CPA. In addition Payroll tax requirements and laws are expected to have on-going updates. Contact us for assistance with processing your payroll or any other financial administrative business support requirements you may be in need of such as accounting, bookkeeping payroll processing, taxes, employee time tracking or HR. 14

15 Our Commitment Richard A. Beauchemin, CPA/Carolina Accounting & Tax Service, PLLC has been assisting small and medium size businesses for over 20 years. We take a holistic approach to assisting you with your business. We understand that for you to be successful you need access to tools, resources and knowledge beyond just accounting, payroll and tax services. We provide you access to a cloud based technology platform that allows you to operate more efficiently and have access to accounting and payroll data without the hassle of having to learn and setup new software and worry about data loss or accessibility to accounting and bookkeeping data. Our systems help you operate more efficiently so you can focus on growing your business. We help you with employee cost management and compliance to employee and labor laws by providing you with access to HR support services and tools for tracking and managing employee attendance and labor hours. We assist you with cash management by not impounding payroll wages and taxes and allowing you to participate in a Pay-As-You-Go Workers Compensation plan We strive to process all work on-time with the highest level of accuracy possible. Our employees are committed to promoting and fostering customer loyalty and long term relationships. We will continuously evaluate new service offerings that will add value and resources to you, our client. 15

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