Running a business is a complicated process, and the payroll and tax compliance tasks associated with it can be especially challenging. Fortunately, there are several best practices that business owners can use to make the payroll and tax processes easier and more efficient. With some planning and preparation, managing these tasks can be much simpler. In this article, we will discuss some of the best practices to make your business payroll and taxes easier while staying compliant with regulations.
Payroll and Taxes: Key Components to Your Business Operations
Aside from payroll as a necessity for your business continuity, there are several compliance and legal reasons to keep your payroll and taxes in order. And because your payroll affects your employee payroll tax as well as employer payroll tax and returns, you want to have things in order every time you run payroll, not just during tax prep season. This also helps keep you from missing quarterly tax payments for wages and other business items.
There are several different types of payroll and payroll-related taxes, and we wanted to go through those here as we kick off this list of best practices.
First and foremost, your business is responsible for preparing and filing Form W-2 for any and all wages, tips, and other compensation you’ve paid your employees in the last tax year.
You’ll also need to withhold social security and Medicare taxes (including the 0.9% Additional Medicare Tax for wages and compensation that exceeds $200,000 in a calendar year) from those wages. It’s important to note that any freelancers or independent contractors you work with will not have these things withheld from the payments you send them – they are responsible for that withholding as they are self-employed. However, you will have to send them the correct 1099 forms (most often a 1099-NEC) so that any income you pay them totaling more than $600 can be reported. Then each contractor will pay the self-employment tax on their own.
FUTA (federal unemployment tax) is a tax that is for your employees but comes from your own funds, it doesn’t get deducted from employee wages.
State and local taxes will vary – some states don’t allow for double taxation (meaning you won’t withhold taxes for the state your business is located in and the state your employee resides in, should these not be the same state).
These taxes and the process by which you withhold and file them can be lengthy and confusing. We’d always recommend consulting with a CPA or another trusted tax expert if you’re unsure how to file.
Best Practices for a Successful Payroll Program
Payroll is the lifeblood of your business. Your employees are likely loyal and helpful, and if you’re lucky, they’re also leaders. But they are not volunteers. And that means you should be paying them on time, based on the schedule and expectations you (and they) agreed to.
Here are some small ways to make a big impact on the consistency of your payroll processes.
Hit Your Payroll Deadlines
Understanding payroll tax responsibilities can be difficult. First, you should implement a payroll system and policy guide – payroll must go out, even if the person responsible for it is out of the office.
Another best practice: keep track of deadlines and make sure to hit them. If you or your team struggle with this, set reminders and notifications. There are hundreds of ways to do this – you can install apps, timers, and use your phone or computer to set up email and alarm notifications. Whatever works best for your team should be the solution you choose. Many people work remotely now, and it’s easy to outsource and/or automate payroll procedures, it’s important that you have a system in place to catch any errors and to do routine audits.
And speaking of automation – use it to your advantage. Automating payroll and being able to use services like eFile360 to import your payroll, income, expenses, and data files into a secure format you can go back and reference later is a great asset.
Data storage for things like information returns can also help save you a ton of time year after year. If you work with the same contractors and employees for multiple tax years, eFile360 saves your previous forms, so you can just update and resend them whenever you need to, without having to redo the form manually each year.
Collect Attendance Data Early and Often
Attendance data should not be left until the end of the month. You can’t process payroll at the end of the month if that’s also the deadline for your employees to turn in their timesheets.
Classify Your Workers Correctly
We mentioned above that you will be responsible for different tax items and information returns based on how you classify those who have done work for you in the current tax year. And choosing whether to hire full-time and part-time W-2 employees versus freelancers and contractors can affect your employer tax returns.
The withholding process is easier if you are hiring independent contractors (because there aren’t any), but the filing process is slightly different because you won’t be issuing that typical W-2.
Most non-employee compensation is reported on the 1099-NEC, which is a very versatile and relatively new re-addition to the tax code.
E-File: The Best Way to Report Payroll Taxes
Accuracy, speed, convenience – what more could you want from your small business’s process for payroll and taxes?
There are several benefits to using an IRS-authorized e-filing service like eFile360:
- Save time and money on administrative and IT costs.
- File one return or hundreds without compromising quality or security with our user-friendly database that saves your information year after year.
- No expensive software to buy.
- E-filing is more accurate and easier to correct errors than paper filing (though eFile360 does have paper filing options based on your needs and/or preferences).
- Free, helpful customer service when you need it.
Sign up for a free eFile360 account today to take advantage of the ease of e-filing.