If you are a business owner, you must withhold taxes from every employee’s paychecks each pay period. These taxes are for federal (and possibly state) income tax and FICA contributions (Social Security and Medicare). The amount of income tax withheld is determined by the number of exemptions each individual employee claimed when he/she started working for you. FICA is a percentage of the employee’s gross earnings. Your business must match the FICA amount partially or fully. This money is turned over to a bank that is qualified as a depository for federal taxes. A federal deposit form must accompany your payment.
Business owners must pay these taxes to the IRS either monthly or quarterly depending on the size of your payroll. What is actually happening here is that your business is a collecting agent for the government. Your employee’s taxes are held in trust until you make your payment to the IRS.
The IRS also requires business owners to submit:
1. Form 941(Employer’s Quarterly Federal Tax Return) every three months. This form reports the amount of your employee’s federal income tax and FICA that was withheld for the previous quarter.
2. Form 940(Employer’s Annual Federal Unemployment Tax Return) once a year. This form reports your total quarterly payroll tax deposit. This deposit amount is used to determine the federal unemployment tax. This tax is then paid by the business. This tax does not come out of the employee’s paychecks.
The IRS states that most businesses are delinquent in filing and in paying their employment taxes at one time or another. The IRS considers any business that has not paid its taxes as illegally borrowing money from the U.S. Keep in mind that revenue officers can actually seize your assets and close your business because you owe back taxes.
To help your business minimize payroll tax problems, make it a priority to pay your taxes on time, i.e., pay Uncle Sam first! You might want to consider using a bonded payroll tax service. They will file and make all your payroll tax deposits. Then if there is a late payment or a late form, the tax service pays the late payment penalty.