Payroll taxes include a number of different taxes that must be withheld from wages by all businesses that have employees. Small businesses are required to withhold Federal payroll taxes from the wages paid to employees and remit these taxes to the Internal Revenue Service (IRS), and make regularly scheduled reports to the IRS about the amount of payroll taxes owed and paid. Businesses may also be responsible for withholding, remitting and reporting state taxes on their employee wages.
Employers are not required to withhold taxes on independent contractor pay. It is important to be aware of the distinctions between independent contractors and employees, because the penalties for misclassification can be severe.
Many small businesses fall behind in paying payroll taxes or filing the associated payroll reports at some time during their existence. This is a very bad practice, however, because significant interest and penalties apply for late payment or nonpayment of payroll taxes. In fact, the Trust Fund Recovery Penalty allows the IRS to hold a small business owner personally liable for 100 percent of the amount owed, even in cases where the business has gone bankrupt.
There are five common methods for calculating and reporting your payroll taxes, used by many small business owners. The following is a comparison of these methods and the advantages/disadvantages of each:
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Payroll Software, such as QuickBooks
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Traditional Payroll Service,
such as ADP
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Gina's
Payroll Service
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| Access to reports | You must use the computer where your software is installed. | They will send you reports in the mail. | I will email you the standard reports with each payroll and you can go online 24 hours a day, 7 days a week to view and download these or any other report. |
| Initial Setup and New Employee Setup | You will need to enter all the information into the software program as well as remember to check for software and tax table updates throughout the year. No help with new hire reporting. | Paper intensive manual process. | Simply complete the employer and employee information sheet and I do the rest. |
| Email Reminders | Online reminders exist, but they are not automated. | No reminders available. | Timely email reminders remind you of all important deadlines. |
| Paycheck calculations | Instand and guaranteed to be accurate if you remembered to keep your tax software and tax tables up to date. | Paycheck calculations are delayed from the time you report hours. | Instant and guaranteed accurate. |
| Direct Deposit | Extra charges apply | Extra charges apply | Included in service fee. |
| Tax Impounding | Depends on service selected | Taxes are withdrawn on each payday, typically several weeks before they are due. | No tax impounding. Funds stay in your bank account until the payment is due. |
| Electronic Tax Payments and Filing | Depends on the service selected. Electronic functionality available for 941s, and very few states. | The services takes care of taxes for you, for an extra fee. | Electronic 940s, 941s, 944s, W-2s, and e-file for most states (or I provide signature-ready forms). |
| Export | Works only with the accounting software you use. | Downloads data to accounting software, but as journal lump-sum. There are no split level details available. | I will email you a file to import directly into QuickBooks, QuickBooks Onloine, QuickBooks for Mac, Microsoft Money, Peachtree or Quicken. |
| Customer Support | Extra charges apply | Included. | As your trusted advisor, I'm here to help you whenever you have a question. |
