There is a lot of romance around startups right now. They conjure up images of a group of casually dressed creative types, in a loft somewhere, tossing around a stress ball and creating the next billion-dollar idea.
This does happen and there’s a great deal of excitement, risk and optimism for anyone starting a new business.
However, before you get caught up in the dream, you have to take care of the basics. And nothing is more essential to a business than the ability to pay its employees in a timely, accurate and legally compliant fashion.
If you don’t believe it, just ask the business owners who, according to the IRS, had to pay $4.5 billion in payroll tax penalties last year.
As Forbes recently pointed out, failure to properly pay your payroll taxes could mean fines or even jail. The money you’re supposed to withhold from wages is owed to the government, and if you don’t follow through, they will come knocking.
Figuring Out Payroll Taxes
Many small business owners, of course, do not have a dedicated payroll person handling all this or a payroll service that automates the process. They’re often doing it themselves.
This includes completing a federal tax withholding form – the W-4, as well as any state tax withholding. It’s important to note that state tax laws vary quite a bit and you have to be up to date on your state’s requirements.
Then you figure out an employee’s gross pay and any overtime owed. Overtime, of course, has been getting even big businesses into some hot water lately.
What to Withhold
The W-4 will help you determine what to withhold from employees. You’ll need to calculate Social security and Medicare taxes, which are taken out at 6.2 percent and 1.45 percent respectively. Then there are additional deductions including disability, FSAs, 401(k), etc.
You will also have to contribute your end of Social Security and Medicare taxes at the same rate.
The federal unemployment tax act (FUTA) and state unemployment insurance (SUI), meanwhile, are paid solely by you, the employer, in most states. The FUTA rate is 6.0 percent and the SUI rate varies based on your state and number of years in business.
Sound like a lot to keep up with? The bad news is there are even more intricacies based on state and local laws, and how much a given employee makes in salary.
The good news? We’ve created a handy infographic for you to follow that will take you step-by-step through the payroll tax business. Remember that while it may seem complicated and less than fun, it’s the bedrock of a trusted, reputable business from startups to blue chips.