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Payroll tax compliance, part 1: depositing and reporting

Payroll taxes can cause lots of problems for employers. Even when things are going well, the administrative burden of calculating, withholding and paying over employment taxes is considerable. This is especially true for small businesses that don’t have a big accounting department to take of these functions.

In part one of this two-part post, we will review the different types of taxes that are lumped together under the term payroll taxes and the obligations they involve for employers. In part two, we will discuss options available employers who are struggling to meet their obligations.

We have noted before that the term payroll taxes encompasses several different types of employment taxes. Two of these are Social Security and Medicare taxes, which are sometimes called FICA taxes because the law authorizing the federal government to collect them is called the Federal Insurance Contributions Act.

FICA taxes are not the only employment taxes either. As we noted in our October 13 post last year, employers also face workers’ compensation taxes (at the state level) and unemployment insurance taxes.

The IRS offers instructions for complying with the depositing and reporting requirements for employment taxes. The general rule is that, as an employer, you are supposed to set aside (i.e., withhold) amounts for federal income tax payments, as well as Social Security and Medicare contributions by both the employer and the employee.

Setting the money aside, however, is only the first step. You are also required to deposit the money with the IRS at regular intervals and report to the agency on payments you make to employees and taxes you have deposited.

Schedules for these deposits are of two types. One is monthly and the other is every other week. Before each calendar year begins, you will need to be clear on which of these schedules you are supposed to use.

The potential penalties for failing to make a required deposit in a timely manner are hefty. But employers can still fall out of compliance for various reasons. In part two of this post, we will discuss options available to you when things get off track.

Source: IRS.gov, “Depositing and Reporting Employment Taxes

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