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Come tax season, the nice thing about small business income taxes (yes, there’s a nice thing) is that they’re generally fairly predictable. From an accountant’s perspective, a small business owner’s taxes follow a pattern of calculating, reporting, and paying that repeats on a set schedule. In the case of business income taxes, the schedule is most often a series of quarterly estimated payments in combination with an annual business income tax return.
Similarly, small businesses with employees also follow a specific payroll tax schedule. And that affects the business’s income and income tax returns. So, everything you do as a small business owner financially is really interconnected—and that means small business payroll and its related payroll taxes are an important subset of small business income taxes as a whole.
With this in mind, there are some important things to know about your payroll to make your life easier during tax season. But you can also use these tips before and after tax time, too. (And if we’re calculating that correctly, that means always.)
Here’s what’s important to know:
If you’re a small business with W-2 employees, you’re responsible for the proper administration, calculation, and payment of payroll taxes (otherwise known as employment taxes) every time you run payroll.
Basically, this involves federal income tax, Medicare, Social Security, and unemployment. On a state level, it includes state unemployment, income, and other taxes. Certain cities and jurisdictions might also have local income and related taxes.
A key component of payroll year-end is summarizing and reporting all the payroll taxes withheld from employees and paid by the employer throughout the year.
Each year by January 31st (or the first business day after) employers must:
More things to note on how this all fits together:
If you haven’t done your payroll by January 31st…
If your payroll year-end isn’t wrapped up and you’re not ready for filing your business income taxes either, most experts recommend that you meet the W-2 deadline first. (Always check with your own accountant for the advice that’s best for your business, though!) Although you can file an extension for your income taxes, the deadline for W-2s is set in stone.
If your W-2s are late, you’re immediately penalized with fines for each delinquent W-2—to the tune of $50 per form that’s up to 30 days late; $100 per form that’s more than 30 days late; and $260 per form that’s more than six months late or not filed at all. If it’s proven that you intentionally disregarded the filing requirement altogether, the fine is $530 per form. Ouch!
However, filing an extension for your business income taxes gives you a few extra months to put your financial house in order. (You’d still have to pay estimated taxes, but it’s better than rushing and making costly mistakes.)
Once you know how much you’ve paid in wages and payroll taxes for the year, you can then use these numbers to qualify for several small business tax deductions. As an employer, you can generally write off the following payroll-related expenses:
According to its own statistics, the IRS collects three times as much taxes in payroll taxes as it does in business taxes. But, regardless of the type of taxes, it’s easy for a small business to make a mistake or be subject to an audit.
The best way to prevent mistakes is to be prepared. Keep good records of your payroll and your tax filings each year. And keep these records for a minimum of four years.
The IRS rule for employment records is four years and three years for taxes. But, if you’re using employment records to claim tax deductions, it makes sense to keep all of these documents for the full four years. It’s also not a bad idea to have both electronic and paper copies.
The good news is that if you’re using cloud-based accounting and payroll software, your key financial information is recorded within these apps. If there are any questions, all you have to do is go back and check your records.
Disclaimer: This article is intended to be informational. It does not replace the expertise of accredited business professionals.