Business owners want to both do the right thing and save as much cash as possible during tax season. Some of the most common questions surrounding business taxes have to do with payroll issues. Take these steps with your payroll now to make sure you are well prepared for next year’s tax season.
From an accounting perspective, business taxes are calculated and paid at regular intervals, usually quarterly. In a similar fashion, there is also a payroll tax schedule that must be followed. Since your company is paying these costs, it’s all interconnected.
Keeping this in mind, your business can benefit from these seven simple-to-use payroll tips that will make your life easier during tax season. Even better, these tips will work for you year-round.
1. Verify You Are IRS-Compliant
Before you file anything with anyone, the first thing you should do is ensure that your documents are compliant with IRS standards. Part of this is verifying that you have employees properly classified, have an employer identification number (EIN) assigned, and understand various labor laws.
2. Review Data Entry and Documents for Accuracy
One thing that costs businesses extra cash each year is avoidable payroll data entry mistakes. Mistakes are often made even though there are automation and professional payroll services available – forgoing these options can be costly.
Some simple mistakes in data entry include misspelling names, checking wrong boxes, and transposing numbers. One of our top payroll tips is to thoroughly review all data before official documents are submitted.
3. Prepare Your Payroll Tax Documents
If your business has W-2 employees, you’ll be responsible to properly administer, calculate, and pay payroll taxes each time you run payroll. This involves making a calculation for federal and state (where applicable) income tax, Social Security, Medicare, and unemployment. Part of your year-end process is to report a summary of all of these taxes paid in the prior year.
4. Complete Your Year-End Payroll Before Your Business Taxes
By the end of January each year, every employer is required to do several things:
- File copies of each employee’s W-2 with the Social Security Administration
- File a Form 941 indicating quarterly federal tax payments and a Form 940 that summarizes the year with the IRS.
- File a Form 1099 with the IRS if you paid any contractor over $600 during the prior year.
This should all be accomplished before you touch your year-end business taxes.
5. Understand All Payroll Tax Deadlines
The beginning of the year is packed with deadlines for businesses, many of which are also trying to close out their financial records for the prior year and work on strategic plans for the new one. If you’re crunched for time, most experts that provide payroll tax tips recommend focusing on the deadline for W-2s first. This is one deadline that doesn’t allow extensions, and you’ll get immediate penalties if you miss it.
6. Know Your Payroll Write-Offs
Once you have your annual totals for wages and payroll taxes, you can use this information to see about qualifying for any small business tax deductions. Some of the payroll-related expenses you can write off include:
- Wages if they qualify as an ordinary and necessary business expense. You can deduct these as startup expenses in your first year.
- Employer contributions to Medicare, Social Security, unemployment, and some state payroll taxes.
- Commissions and bonuses if they qualify as additional wages.
- Cash awards subject to certain limits.
- Benefit programs such as health plans, life and accident insurance, and education reimbursement. (Note: you can’t deduct life insurance premiums for anyone that has a financial interest in the company.)
- Sick days and paid vacation.
- Reimbursement for travel expenses.
- Contract labor over $600.
7. Know Which Records You Need to Keep
The last thing you want is to find out that the IRS or your state wants to subject you to an audit. It would be even worse if you didn’t have the records and other documentation on hand to back up your filings. According to IRS guidelines, you should keep tax records for three years and employment records for four. It’s also a good idea to have both paper and electronic copies (on the cloud) as part of your system.
While it’s helpful to become efficient with payroll, there is another incentive. When payroll taxes aren’t paid on time or are paid improperly, your company could face some stiff penalties.
It can be a challenge for any small business to achieve its goals while also keeping a close eye on payroll and tax issues. At Nolan Accounting Center, our CPAs and accountants specialize in helping small businesses throughout Southeast Wisconsin with payroll, accounting, bookkeeping, and tax preparation services. Contact us for more information about how we can help your business.