Understanding Employment Taxes for Small Businesses

Whether you have one employee or a hundred, you will be way ahead of the game if you get an outside firm to handle your payroll tax reporting and payment.

So, before you do anything else, get yourself a payroll service to take all of the time, hassle, anxiety, and risk out of the payroll process. As much as I hate to spend money on anything, I highly recommend you don’t try to do this yourself. Can you do it? I did it for years. But it isn’t worth it.

Employment tax rules are extremely complex. If you try to handle them yourself, you are bound to make a costly mistake, and you’ll pay interest and penalties. If a payroll service makes the mistake, typically, it will pay.

As an employer, you have a tremendous fiduciary responsibility to collect and withhold taxes from employees on virtually every paycheck you issue. Throughout the U.S., you must withhold an appropriate amount for federal income and other earnings-related taxes. Many states and some municipalities also require the payment of an income or other tax on earnings.

Your employees must fill out a federal W-4 form and a Form I-9 from the Immigration and Naturalization Service. States that do not use the same income basis for determining tax liability as the federal government may require that employees fill out state filing forms.

You, or your payroll service, must determine the appropriate amount to be withheld for each individual. If you withhold too little from your employees’ incomes, you will be penalized by the governments involved. The federal government also requires that you withhold your employees’ share of federal Social Security and Medicare taxes. Tables for calculating federal withholding taxes are available from the Internal Revenue Service website. State withholding tables may be obtained from your state income tax department.

Budget for Your Share of the Payroll Taxes

The employer is also responsible for a share of their employees’ unemployment, Social Security, and Medicare taxes. The amount that you pay will depend on many factors: salaries, your firm’s balance, if any, in your state’s unemployment insurance account, dates of hire, and a host of other considerations. As a quick and dirty rule of thumb, in the U.S. allowing 15 percent on top of your gross payroll should cover your share of the payroll taxes.

Timing of Employment Tax Payments

If you are a growing company, paying employment taxes yourself can be very frustrating. Employment tax rules change, as the size of the company increases both your liability and the time frame in which the taxes must be paid. Following are two general guidelines:

  • New employers in the U.S. pay federal withholding taxes on a monthly basis. As the business grows, the frequency increases to semi-weekly. For the largest businesses, taxes are due within 24 hours of each payroll. Funds must be transferred electronically.
  • Each state has its own rules for frequency of payment. Generally, payments are not required more frequently than are federal taxes, but be sure to check with your state tax office.

About Bob Adams

Bob Adams is a Harvard MBA serial entrepreneur. He has started over a dozen businesses including one that he launched with $1500 and sold for $40 million. He has written 17 books and created 52 online courses for entrepreneurs. Bob also founded BusinessTown, the go-to learning platform for starting and running a business.