You are a new business owner and you hire an employee immediately, unfortunately, you don’t have an accountant or a payroll service provider. Employee A works for you for a month and he needs to get pay, what do most of the business owners do? They pay their employees by cash or a check without any tax deductions. What are your obligations as an employer?
One of the most common mistake that employers make are giving out cash advances with no tax deductions taken out. If Employee A was paid on January and February and your company didn’t hire an accountant or a payroll service provider until March, you are still obligated to report those wages for those months and pay those taxes. Before you start paying these back wages and taxes, you need to understand that the pay date determines your tax liability. If wages were paid out in January and you are a monthly depositor, the taxes would have been due by February 15 or earlier if you’re on a semi-weekly depositor. You must be wondering what can you do to avoid the penalties and interests, according to the IRS the check dates determines the tax liability. If you hire a payroll service provider or an accountant in March, you have the following options:
Option 1: Report the cash amount that you paid your employee on top of the next paycheck. For example, Employee A received $500 in January and $500.00 in February. You are paying him $500.00 for March, here is what it would look like:
Gross: $500.00 + Other Pay: $500.00 (Jan Pay) + Other Pay: $500.00 (Feb Pay) =$1500.00 – Taxes (FIT: $400.00 – FICA: $93.00 – MED: $21.75 – SIT: $100.00) – Cash Advances: $1000.00 (You already gave this employee his net check for Jan and Feb, there is no need to pay him again) = NET: $385.25 (his take home check)
Option 2: Have your service provider calculate the taxes for January’s paycheck and backdate it January (Gross: $500.00 – Taxes $200.00 = NET: $300.00). You will collect the funds back from the employee by having the employee write you a check for $200.00 or do a deduction on his/her future paychecks. The Employer will be responsible for paying the late penaltiies and interests for the back dated checks.
Please contact your tax advisor or contact the IRS for the best advice. The next time you hand your employee a check with no tax deductions, please consider the consequences and how it may affect your tax liability.