Do you own a business, or at least have thought about running one? There are lots of steps involved in setting up a business, but for this article series, we will take a look at employee taxes. As part of the duties of managing a business, employers are also responsible for their employees and the taxes that are connected with retaining them.
Employees
Put briefly, employees are defined as workers that an employer has the right to control over the kind of work to be done and how that work will be done. All employees are subject to payroll taxes (Social Security, FICA, etc.) with some exceptions. For example, children under the age of 18 who do minor domestic work for their parent’s business, such as cleaning, may not be subject to payroll taxes if the business is a sole proprietorship or partnership.
New employees have to submit to their employers a IRS Form W-4 to indicate their tax filing status (single, married, etc.), and any allowances and exemptions to determine the amount of wages an employer will have to withhold for federal income taxes.
Wages and Other Compensation
Wages paid to employees are subject to the federal income tax. This includes bonuses, salaries, vacation pay, allowances, tips, and other forms of supplementary payments that are not necessarily cash. These supplemental wages and other compensation to employees will need to be reported on Form 941.
Form 941
Form 941 is filed quarterly with the IRS to report wages and other types of compensation paid to employees along with reporting the amounts of tax withholding an employer makes towards federal income tax, FUTA, and other payroll taxes.
Payroll Period
This is the general period of time set for paying wages. Biweekly is the probably the most common example of a payroll period, but employers may have monthly, weekly, or even quarterly payroll periods. The kind of payroll period will also determine how withholdings are calculated. Taxes for employees are withheld for that period regardless if the employee worked the entire period or not. For employees who do not have a regular pay period, such as employees paid on sales commissions, withhold the tax as if wages were paid on a regular pay period by counting back the days (including weekends and holidays) back to their last wage payment in the same calendar year.
In the next part of this series, we will go over some of the finer details in calculating the amounts of tax withholding from employee’s gross pay. Follow us on our social media pages to be up to date when we post the next article in this series, and for future tax tip articles!
Employee taxes can get complicated and time consuming for businesses to take care of on their own, so that is where we come in. MiklosCPA provides accounting and tax advising services for small business owners so we can take care of your accounting while you grow the business.
We’ve got it covered, so you can charge on ahead! If you’d like to learn more about our services, contact us!