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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.)
These are the best payroll tips small business owners should know for tax season:
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.
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.
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 31 (or the first business day after) employers must:
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:
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.