Keeping Your Business Compliant With Payroll Tax Requirements

By hrlineup | 02.01.2020

The Federal government, and sometimes the state, requires employers to withhold taxes, make payroll tax payments, and provide proper reporting of the tax returns. To actualize this, the employers must serve employees and contractors with forms w-2 and 1099, respectively, declaring the amount paid and that withheld.

Withholding state income taxes from an employee’s paycheck is one of your payroll responsibilities. Once you’ve gathered all the necessary information on your state income taxes, you must factor them in your payroll, based on your employees’ gross pay.

Calculate the amount withheld for all the relevant taxes, including federal and state income taxes, and FICA taxes against the gross pay. Once you’ve factored all the tariffs, the resulting amount is the employee’s net pay amount.

Then, you must indicate the withheld amounts for each withholding for every employee. There are guiding rules on this, but they vary from state to state.

State Income Tax Withholding Rules

Is your business located in any of the following states? If yes, you are lucky as you don’t have to deal with the trouble of withholding state taxes as it has none. These states include:

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Texas
  • Washington
  • Wyoming

Else, it is your responsibility as an employer to withhold income taxes from your employees and submit the deductions to your respective state revenue agency.

For starters, you need to your state income tax withholding requirements. Without meeting them, you can not do any transactions with employees or other businesses. They include:

  • The federal Employer ID Number (EIN)
  • The employer tax permit – the state equivalent of EIN

On wages subject to state income tax withholding, you need to visit your state’s revenue agency website as they are different from federal regulations. Learn about filing and depositing procedures, and obtain the state withholding tables or calculators.

Plus, learn about existing agreements on income tax withholding between different regions. Some states have a memorandum of understanding that guides payment for those who work in one but live in another.

With all the information at your disposal, deposit the amount you withheld from employees and file the periodic reports, it could be annually, or quarterly on amounts withheld, owed, and paid.

In addition to state taxes, you must report and deposit taxes for the federal payroll tax purposes. And even though tax returns and tax deposits are closely related, you do each duty independently.

While you can file the federal tax returns yearly or quarterly, whichever works for you, you must do federal deposits periodically.

Other deductions and taxes also apply. Besides the income tax withholding, you also handle the FICA (social security) and FUTA (federal unemployment) taxes, among other federal and state taxes. You need to familiarize yourself with all the state’s business taxes. You can find such information on your state’s department of revenue, business tax division. Each duty has its specific depositing rules.

Even though the process of filing the withholding taxes is entirely the same as you do the IRS Form 941 filing, it can be multifaceted and puzzling.

Seek the Help of Professionals to Be Compliant

Keeping your business compliant with the payroll tax responsibilities can be very complex and challenging. Further, noncompliance may lead to severe penalties, which is why you need to involve CPAs and Finance professionals, especially if you are a small business.

These professionals keep your business compliant by ensuring the following:

  1. Your company pays both the federal and state taxes.
  2. You accurately report all the taxes, income, amounts withheld, and those matched for employees and contractors.
  3. You have an accurate record of the taxes and payroll data shared to the federal and state.

Your business is accurate and timely compliance.