|
Small Biz Adviser: Payroll tax
deductions can be tricky
Dear
Small Biz Adviser:
I have a small
business -- four employees, plus myself. Only one works full time
other than me. I take checks two times a month, since business is
down. I pay weekly every Friday. My accountant had me set up on
a weekly tax payment to make it easy for me.
So my question is, I just
pay taxes that week for the previous week, correct? My payroll runs
on average $735 -- sometimes less, sometimes more when I receive
a check.
I am confused because the
last set of Form 941s were for $750. I just want to shed some light
because I don't understand it that well. Any help is appreciated.
Chris
Dear
Chris:
Typically, payroll
check decuctions can be categorized five ways:
- Garnishment of
wages due to back taxes due by the individual to the IRS or indebtedness
from other legal proceedings,
- Indebtedness to
the employer typically due to loans or damage to company property,
- Benefits like health,
dental and/or optical insurance coverage for which the employer
pays only part of the premium expense,
- Income taxes, and
- Federally mandated
benefits deductions for Social Security and Medicare.
Depending on the state and
municipality in which the business is located, there may also be
additional income taxes. For example, in New York City income taxes
are also collected on behalf of the State of New York and New York
City.
Additionally, many employers
deduct 401(k) benefits for themselves as an additional benefit for
retirement.
Judging from the content
of your inquiry, I suspect your confusion relates specifically to
the issue of payroll taxes. The payroll tax deductions for your
employees are as follows:
- The employee pays the
equivalent of 6.2 percent of the gross amount of the payroll check
for Social Security. When the compensation and corresponding 6.2
percent deduction for that employee reaches $76,200 in one year,
no more Social Security will be deducted. In other words, a maximum
of $4,724 is deducted from an employee's check for Social Security
in any one year.
- The employee pays the
equivalent of 1.45 percent of the gross amount of the payroll
check to Medicare. There is no maximum contribution. So the employee
will pay 1.45 percent of all compensation earned during the year
to Medicare.
- If the 401(k) is offered
to the employee it can be deducted from the gross payroll before
income taxes are calculated. However, employees are allowed a
maximum of $10,500 to be deducted in one year before payroll taxes
are then calculated.
For the benefit of all our
readers who are self-employed, operating as proprietors or within
partnerships, and having no other employees, it is important to
know that you are liable for coverage of the total Social Security
and Medicare deductions (employer and employee) from the net income
of your self-employment. In other words you must pay:
- 12.4 percent for Social
Security on net income up to $76,200.
- 2.4 percent for Medicare
on the total net income.
I would like to suggest the
following hyperlinks to further help you understand these payroll
tax deductions:
- Read Bankrate.com's Lesson
1, Lesson
2 and Lesson
3 on taming IRS Form
941. It provides a step-by-step description of each section
in the form.
- Also on Bankrate, read
the tax tip Self-Employment
Offers Numerous Tax Savings. The article was dated January
1999, but pass it on to your accountant. It may give him/her some
ideas on reducing your tax liabilities.
- Read my column from July
25, 2000. It does repeat some of the content in this column,
but adds graphics that may serve to help you better understand
payroll taxes. I don't want to be responsible for someone losing
a job, but if this matter of payroll taxes is endangering the
existence of your business you may want to consider contracting
as opposed to employing the work force.
Frankly, explaining taxes
is not always an easy task. That's why so many small business owners
like you hire the accountants to prepare financial statements and
taxes. But do try to understand this matter of payroll taxes to
the best of your ability. It insures you have better understanding
and control over the finances of the business.
Bankrate.com writers base their answers on our editorial
content and advice of financial professionals. We make no claims
or representations about the accuracy, timeliness or completeness
of such content, advice or the answers provided to you. Our content,
advice and answers are intended only to assist you with your financial
decisions. However, by its nature such information is broad in scope.
Your financial situation is unique, and our content, advice and
answers may not be appropriate for your situation. Accordingly,
we recommend that you get different opinions and seek the advice
of your accountant and other financial advisers before making any
final decisions or implementing any financial or investment strategy.
|
