The busiest months of payroll are gone, I can dedicate some time back to this blog, I’ll try to update it regularly. 

I’ve created a summary page for you and I hope you find this useful.   2008 TAX SUMMARY RATES AND LIMITS 

Notes***State Unemployment Insurance (SUI)- In a few states, the employees are required to pay the SUI tax.  Please check your state for more details.  If you need more information about a specific state, you may want to check with your state  .

If you are a business owner and you have one employee that handles all the payroll duties, you may want to reconsider it?  If you are like many other business owners that give the entire payroll duties to one employee in your company, you are asking for trouble.  One person payroll department have ripped off many small business owners who don’t know much about payroll.  

One of my client’s payroll administrator had 100% control in processing payroll with determining how often the employees are paid,  printing checks, signing checks, and delivering checks.  This employee had created a phantom employee (also known as a dummy employee), since this was a construction company, it was common to have employees on payroll for a day or two and that would be it.  The payroll administrator would create a phantom employee on the payroll and pay that employee once or twice a month.  The employee has a fictitous social security number, address, martials status, withholdings, etc, but he would keep a name that is legitimate from a person he knows.  Since this was a pre-printed check stock with the signature on it, the employee just had to print it with the dollar amount.  The employee will have his acquintance with the legitimate name bring it to a convenince store to cash the check, when the cash is received.  The payroll administrator would terminate the employee and delete the employee from the system as it never existed.  The payroll administrator did this for 8 months before getting terminated and prosecuted.  Since the owner isn’t handling any of the payroll function and nobody else was cross referencing the data and payroll information this person was entering, it’s tough for anybody to monitor the cash flow within payroll. 

It’s very important to separate all the tasks, such as having the owner/manager to sign or verify the checks.   Please limit access to the payroll administrator to processing checks and enter hours and make somebody in charge of printing checks only.  You must make an effort to confirm the payroll data at least once a month.  Payroll is probably the largest expense a business owner would have, why wouldn’t you protect it.

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. 

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.

Here is a breakdown of the number of hours per pay period:

Weekly (Paid 52 times a year) is 2080 hrs / 52 times  = 40 hours per pay period

Bi-Weekly (Paid 26 times a year) is 2080 hrs / 26 times = 80 hours per pay period

Semi-Monthly (Paid 24 times a year) is 2080 hrs/ 24 times = 86.67 hours per pay period

Monthly (Paid 12 times a year) is 2080 hrs / 12 times =  173.33 hours per pay period

In the future when an employee asks you how the number of hours are determined especially for salary employees, you may use this calculation as an explanation. 

Sorry about my absence, I just had a newborn and had been busy in the past couple of months.  It’s actually an exhausting job being a new parent and the irregular sleep that I get.  I am getting use to my 4-5 hours a sleep per day, anyway, enough about me.  I will try to write a post often as time permits.  Thank you all and continue checking back. 

At my work place, many small employers just fired their CPA’s or Payroll Service Provider and they would like to know how they can create a payroll for their employees.  You actually have a few options:

1. Continue writing a net check amount based on the previous paystubs from your CPA or Service Provider.  The downside is that there are some limits on certain tax categories such Social Security (FICA) or State Disability Insurance (SDI) and you would have to calculate it manually.

2. Use the paycheck calculator at www.paycheckcity.com.  The website has many payroll calcualators that I found useful and you can even print out a generic paystub for your employee if they requested it.  The downside to this is that it will not give the employee a Year-to-date (YTD) figure on the paystub.

3. Hire a local CPA or Payroll Service Provider immediately and have them calculate the taxes for you.  Unfortunately, many CPA and Payroll Service Providers request payroll reports from your previous service before they can set up your company on time for payroll. 

In my opinion, before you fire your CPA or Payroll Service Provider, make sure you have all the payroll records before you leave them because your number one priority is get your employees paid on time. 

Hi All, I wanted to complete the Final step in payroll which is filing forms.  There are several forms that you need to be aware that includes 941, 940, W-2s and W-3s.

Form 941 (Employer’s Quarterly Federal Tax Return) – This is a summary what you paid in wages and taxes for each quarter.  This form is due on a quarterly basis and you must file this form if you’re an employer that report wages, have tips from employees that needs to be reported, withheld federal income tax withheld, Social Security, and Medicare taxes, and have Earned Income Credit (EIC) Payments:

For more information, click on this link:

http://www.irs.gov/pub/irs-pdf/i941.pdf

Form 940 (Employer’s Annual Federal Unemployment Tax) (FUTA) Return – This form is due on an Annual basis and it’s an employer tax, so remember not to deduct any taxes from your employees.  This program is to provide funds for paying unemployment compensation to employees that have lost their jobs.  It’s only applied to the first $7000 in wages each calendar year. 

Due Date is January 31 of the following year. 

For more information, please click on this link:

http://www.irs.gov/pub/irs-pdf/i940.pdf

Form  943 (Employer’s Annual Federal Tax Return for Agricultural Employees) – This form is specifically designed for reporting wages and income taxes for workers that work in the farm.  This is similar to the small businesses in filing form 944, they only need to file this form once a year. 

Due date is January 31 of the following year. For more information, please click on the following link:

http://www.irs.gov/pub/irs-pdf/i943.pdf

Form 944 (Employer’s Annual Federal Tax Return) – Starting with 2006, this form was introduced to the small employers to reduce the burden on them.  The IRS has simplified the rules for filing employment tax returns for small businesses.  As an employer, you either file form 941 or 944 for a specific year.  If you file the wrong form, the IRS will notify you in writing to change it.

Due date is January 31 of the following year 

For more information, please click on the following link:

http://www.irs.gov/instructions/i944/index.html

W-2 Copies (Wage and Tax Statement) – These forms (Copies B, C, and 2) are given to the employees by January 31 of each year; it summarizes all the wages from the prior year and tax deductions.  This is what the employee used to file their own personal tax return (1040, 1040A, 1040EZ) by April.  Employer files copy A by February 28 (if filing by paper) or by March 31 (if filing electronically) and keeps copy D for their own records.

W-3 Copies (Transmittal and Wage Tax Statements) – These forms are only filed along with the W-2 if you are filing the forms by paper only; if you are filing the W-2s electronically, then the W-3s are not required.

Due Date is February 28 if filing by paperDue Date is March 31 if filing electronically 

For more information, please click on the following link:  

http://www.irs.gov/pub/irs-pdf/iw2w3.pdf

***Note: There are some state forms also that are filed on a quarterly basis or an annual basis, so please check with your state agency regarding specific forms and due dates. 

2007 TAX SUMMARY RATES AND LIMITS 

Notes

***State Unemployment Insurance (SUI)- In a few states, the employees are required to pay the SUI tax.  Please check your state for more details. 

If you need more information about a specific state, you may want to check the Automatic Data Processing (ADP) Resources page. You will find a lot of useful information for employers, but you may still want to confirm the rates and wage limits every year since this is not an official government website. 

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?