Cash Advances

Hi again,

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. 

Truth about Payroll Service Providers

Hi,

Have you ever wonder how payroll service providers make their money?  The truth is they don’t make money charging you the service fees, the revenue is generated when you process a payroll and make the tax payments through their service.  Whenever you make a tax payment, the payroll service provider will keep those funds in their account until the actual due date.  They get the interest from their bank using other people’s money (OPM) and it’s a common approach in this industry.  Some of these taxes such as the Social Security (FICA) and Medicare are not due until the 15th of the following month if you’re a monthly depositor.  Other taxes such as State Unemployment Insurance (SUI)  are not even due until one month after the quarter ends, so the payroll service provider would have your funds in their bank account for a month to several months before they actually pay it to the appropriate federal or state agency. 

I guess this method is great if you want the payroll service provider to pay your taxes on time and as long as you paid it, it’s a done deal.  The truth is most of you are probably small business owners and need the extra cash flow to keep your business running.  If you are like me and would like to keep all your cash until the due date; my suggestion is to find a service provider that will not debit your taxes until the actual day or couple of days before.  I’m pretty sure you can use that extra hundred or thousand dollars for other bills.

Paying Taxes (Part II)

Let’s continue with the second segment of paying taxes, last time I explained what the taxes are in payroll.  As the employer, you need to send the taxes to the appropriate Federal and State agencies.  You can send in the payments electronically or send it by mail with a coupon.  The federal coupon is known as Form 8109 (Federal Tax Deposit Coupon).  Please contact your state and local government on how to send the taxes to them. 

You become liable for payroll taxes on the date you pay your employees regardless of when they did the work for that paycheck.  This is known as constructive receipt.  For example, if you paid an employee on the first of each month and it covers the pay period of the previous month.  All the IRS cares about is the actual paydate and that determines when your liability is.

These are the Federal Tax Deposit Schedules for Federal Withholding, Social Security (FICA,OASDI), and Medicare:

Monthly Depositors: If your company’s federal tax liability during the lookback period (7/1/05-6/30/06) was less than $50,000, then you’re a monthly depositor.  Taxes are due by the 15th of the following month.  For example, January taxes are due by February 15th; however, if the 15th falls on a bank holiday, it will be due the next banking day.

Semi-weekly Depositors: If your lookback period was more that $50,000, then you are a semi-weekly depostior.  Taxes are normally due three banking days after the end of the period.  The IRS determines the due dates as follow:  1)  If the pay date falls on Wednesday, Thursday, Friday, then taxes are due on the following Wednesday.  2)  If the pay date falls on Saturday, Sunday, Monday, and Tuesday, then taxes are due on the following Friday.

Next Day Deposit Rule: If you accrue $100,000 or more in federal tax liability at any point during a deposit period.  The taxes must be sent the next banking day within regardless if you were a monthly depositor or a sem-weekly depositor.  This may happen if you issue bonuses at year end to your employees and the tax liability amounts are greater than $100,000.

Quarterly Depositors: If you know your company will owe less than $2500 in federal taxes for a quarter, you can choose to pay the taxes at the end of the quarter. 

Annual Depositors: The IRS will sent you a written confirmation informing you that you are an annual filer Form 944 and your total annual federal tax liability is less than $2500 for the entire year.

Now let’s approach the other taxes of when Federal Unemployment Taxes (FUTA) and State Unemployment Insurance (SUI) Taxes are due.  The due dates for these taxes are different compared to the regular federal taxes. 

FUTA – These taxes are due at the end of the quarter April 30 for Quarter 1, July 31 for Quarter 2, October 31 for Quarter 3, and January 31 for Quarter 4.  If the FUTA tax hasn’t reach the $500 threshold, then taxes do not need to be sent in until the following quarter.  (Note: if the $500 FUTA threshold is not met for the entire year, then it’s not due until January 31 of the following year).  Payments can be made electronically or using the 8109 Federal Tax Deposit Coupon.

SUI- These taxes are due at the end of the quarter.  April 30 for Quarter 1, July 31 for Quarter 2, October 31 for Quarter 3, and January 31 for Quarter 4.  Please verify with your state of how these payments can be sent?

Paying Taxes (Part I)

Let’s continue the second segment of the payroll process, which involves paying taxes.  I guess the question on your mind is why do employers go through the process of paying employees and paying taxes for them?  The answer is simple, it’s because you are doing the right thing for both the employee and yourself (the employer).  I seen many employers that bypass this entire step and simply pay the employee cash without deducting any taxes.  This may be a simple way to pay your employees, but if I’m the employee I would not work for an employer that’s only paying me cash.  Here are my reasoning:

1. If the employer doesn’t deduct any of the taxes, the employee will be responsilble to pay for all his or her own taxes in April which means that taxes will be owed and you may have to cough up a larger amount during that time.  I prefer to pay my taxes throughout the year, so that way I know it will reduce my tax liability during April.

2. If the employee is unemployed for whatever reason, the employee can not collect unemployment benefits because the employer has not paid any of the Federal Unemployment Tax (FUTA) or State Unemployment Tax (SUI).  These are actually employer taxes, so it doesn’t get deducted from the employees checks in most states.  It’s one of the best benefits for working for a company that gives you a paycheck with the tax deductions.

3. If the employee retires and assuming the Social Security Funds will still be available, he or she can not claim any of it because the Employer hasn’t been paying any of those funds while the employee was employed.  Remember Social Security and Medicare are paid by the employees and the employers. 

The next time you want to pay the employee cash only without deducting taxes, you may want to reconsider because the employee really ends up losing in the long run.  All these taxes deducted are really to benefit them and it’s also a way of thanking your employees for their service while they’ve been employed with you. 

Let’s get back on track here and let me explain to you what are payroll taxes?  The following taxes will be covered here:

• Federal Withholding
• Social Security (FICA, OASDI)
• Medicare
• State Withholding
• Other State Taxes
• Federal Unemployment
• State Unemployment

Federal Withholding – This amount shown on the paystub reflects what the individual employee claims on the W-4 form which includes the marital status, number of allowances, income, and pay frequency.  There are no fix rates here, so all the employees that have different allowances will have a different amount deducted on their paychecks.

Social Security – It’s also known as FICA or OASDI, this tax is taken out at a 6.2% rate, the employee pays this portion and the employer matches that rate.

 Medicare – It’s also a fixed rate required by the federal government, which is tax at a 1.45% rate.  The employee and employer pays that amount.

State Withholding – Similar to the Federal taxes.  It varies based on the marital status and number of exemptions from each employee and projected annual income.  Only nine states do not have a state withholding tax, which includes AK, FL, NH, NV, TN, TX, SD, WA, and WY. 

Federal Unemployment Tax Act (FUTA) – This benefit provides payments of unemployment of compensation to workers who lost their jobs.  The FUTA tax rate is usually 0.8% and is based on the first $7000 in wages per employee; therefore, the maximum tax liability for each empployee would be $56.00. 

State Unemployment Insurance (SUI) – This is similar to the FUTA, but the state controls this portion of it.  The state funds unemployment through this tax and is usually paid by the employer; however, some states such as Pennsylvania and New Jersey also require the employees contribute to this tax.

There may also be other state taxes or local taxes within your county, city, or jurisdication, so please check with local government to determine if there are any other taxes that needs to be paid. 

I’ll cover the second segment on paying taxes next time.  Thank you for reading.