Every time tax season comes around, accountants are flooded with questions for advice on taxes, and in particular, payroll advice, tips, and tricks. Luckily, small business income taxes are fairly predictable from year to year.
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. With business income taxes, the schedule is often a series of quarterly estimated payments in combination with an annual business income tax return.
Similarly, small businesses with employees follow a specific payroll tax schedule, which affects the business’s income and income tax returns. Everything you do as a small business owner financially is 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 easy-to-use payroll tips for small businesses that will make every business owner’s life easier during tax season. And after reading through them, you should know you can also use these tricks before and after tax time, too. (And if we’re calculating that correctly, that means always.)
Payroll Advice for Small Business Owners
These are the best payroll tips small business owners should know for tax season:
1. Verify Payroll Is Compliant With the IRS
Before you begin filing any documents, always make sure your payroll documents are within the IRS’s compliance standards. This means guaranteeing our workers are classified properly, guaranteeing your business has an employer identification number (EIN), and knowing your labor laws, to name a few.
It’s also important to maintain an organized payroll system to ensure your business is protected from penalties handed out by the IRS. If you’re unfamiliar with the compliance laws and how to check whether your payroll, make sure to check in with your accountant or on the IRS’s online site for more information.
2. Review Documents and Data Entry for Accuracy
Each year, data entry mistakes cost small business owners hundreds of dollars. And despite automated services completing the work for you, data entry mistakes can be as simple as including the wrong number, filling out the incorrect box, or misspelling a name. Make sure to review all numbers and reports, with an accountant if possible, to ensure accuracy of any and all required documents.
For example, be especially mindful to follow up with your employees after they fill out their W-2 forms to guarantee all information is correct before submitting it to the IRS. By reviewing all of the data and information well before tax season, you could save your business hundreds of dollars.
3. Prepare All Payroll Tax Documents
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.
4. Complete Your Payroll Year End Before Your Business Taxes
Each year by January 31 (or the first business day after) employers must:
- File copies of W-2s (Wage and Tax Statements) with the Social Security Administration (SSA) for each employee.
- File Form 941 stating the quarterly amounts of federal payroll taxes and Form 940 with the Internal Revenue Service.
- If you paid any contractors more than $600, file Form 1099 with the IRS. (The only exception is if you paid the contractor by credit, debit, or gift card, in which case the card provider files the 1099.)
W-2s show the amount of income and payroll taxes that the employee paid or had withheld by the employer. In turn, a W-2 is used by the employee to file personal income taxes. (Also be sure to send paper copies in the mail or have electronic copies available online for employees.)
Form 941 (Employer’s Quarterly Federal Tax Return) shows the amount the employer contributed to Social Security and Medicare along with the amounts withheld from the employees. Form 940 (Employer’s Annual Federal Unemployment Return) shows the amount the employer paid for federal unemployment (a wholey employer paid expense). It’s also used to correlate how much the employer pays in state unemployment.
Keep in mind the following payroll tax tips:
- Any 1099s filed will only show labor costs as employers don’t oversee payroll taxes for contractors.
- Your W-2s and Form 941 should reconcile with each other.
- The amounts in all of these forms are used to create reports that give an overview of the total amounts paid in wages, taxes, and other employee costs.
- These amounts are also used by the IRS to determine a business’ payroll tax schedule for the following year.
5. Know Your Payroll Tax Deadlines
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.)
6. Know Your Payroll Write-Offs
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:
- Wages, as long as they qualify as an ordinary and necessary business expense. If it’s your first year of business, wages can be deducted as part of your startup costs.
- Employer contributions (aka the amounts paid by the employer) to Social Security, Medicare, and unemployment. On a state level, you can also deduct employer contributions to state unemployment and/or disability benefit funds.
- Bonuses and commissions, if they’re qualified as additional wages.
- Cash awards:
- Up to $400 for non-qualified plan awards
- $1,600 for all awards (whether or not they’re part of qualified plans)
- Achievement awards may be subject to limitations.
- Benefit programs, like life insurance, accident, and health plans, cafeteria plans, education reimbursements, etc. It’s important to note that you can’t deduct life insurance premiums for anyone with a financial interest in the business.
- Paid vacation and sick days.
- Travel expense reimbursements.
- Employment credits for employing veterans or people with disabilities.
- Contract labor valued at $600 more.
7. Know Which Records to Keep (and How Long to Keep Them)
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.