ax season is quickly approaching here in the US and, if you own a company, that likely means dreadful paperwork and confusing payroll tax issues that can leave you frustrated and broke. Having an accounting service you can count on is a great way to go.
Complicated tax laws mean that one wrong move can cost you time and money, and that is not something most can afford. In an effort to help you keep more money in your business, the following paragraphs will outline a few of the most important things that you should keep in mind concerning small business payroll taxes.
#1. Classifying Employees Correctly Many small businesses use independent contractors, freelancers, temp workers, etc., to help defray costs, but owners are responsible for ensuring that these workers are classified appropriately. Any person performing services for your small business must be labeled under one of four titles:
a. an employee
b. a statutory employee
c. a statutory non-employee
d. an independent contractor
Mislabeling an employee can cause you to lose valuable time and money if the IRS audits you. Classifying an employee as an independent contractor erroneously, for example, can leave you subject to IRS penalties and fines, as well as the balance of the employment taxes due for that employee.
#2. Exempt v. Non-Exempt Status Understanding the difference between exempt and non-exempt employees is essential for every small business owner. An exempt employee is one that is paid on salary, and is therefore 'exempt' from the wage and hour law protections defined in the Fair Labor Standards Act (FLSA). Conversely, a non-exempt employee is protected by the requirements outlined in FLSA and is guaranteed the protected wages and hours. The US Department of Labor enforces complaints submitted to the FLSA and can sue small business owners who violate the policies, so ensuring compliance and properly justifying exempt employees is critical.
#3. Hiring Family Members Approximately one-in-five small business owners hire one or more family members to work for them. While you will still have to withhold income taxes from their pay, there are many situations that allow you to save money on unemployment taxes by hiring relatives. Hiring children under 21, a spouse, or parents can limit or eliminate the amount of unemployment taxes that you will owe for that employee. Hiring a child under the age of 18 allows you to save of Social Security and Medicare taxes as well. Siblings and other relatives, however, will not earn you any tax breaks and you will have the same obligations to them as any other employee.
#4. Record Keeping Efficiency in record keeping is the most important thing that small business owners must do to ensure proper payroll protocols are followed and documented, and to ensure that all decisions can be justified to the IRS. Failure to pay payroll taxes on time or at all can result in hefty fines and sanctions from the IRS, so to limit issues, follow these simple steps:
a. Hire a bookkeeper or outsource your payroll. Bad bookkeeping can lead to the painful demise of a small business, so if you can afford to hire a full-time record keeper, do so. Otherwise, outsourcing payroll to a company like Paychex takes the payroll burden out of your hands.
b. Separate business and personal finances. One of the biggest mistakes small business owners make is mixing personal and business finances. If the IRS audits your small business, which they love to do, co-mingling these funds can open up your business to lawsuits. Payroll taxes are complicated, so small business owners should consult a tax professional with specific questions. In the meantime, use the four tips above to make sure that you classify your employees correctly, understand exempt versus non-exempt classifications, understand the benefits and requirements of hiring family members, and develop effective record-keeping practices.