Those new to processing payroll in-house might be a little overwhelmed at the prospect of calculating taxes. After all, miscalculating deductions can result in having to reissue paychecks and can even lead to fees and penalties from the IRS. That is why it’s important to have the right training and tools at your disposal to ensure you’re calculating your taxes correctly every time. Make sure the resources you’re referencing are from a reliable source, and more importantly, up-to-date. Below are a few tips I’ve compiled to help make your tax calculations a little less daunting.
State and Local Withholdings
When it comes to tax withholdings, it’s important to consider both the state and local tax authority, keeping in mind your employees might not live in the same tax authority as your business. Let’s take a look at Michigan income tax withholding. When processing payroll In the state of Michigan, you are required to withhold Michigan income tax in addition to federal income tax from your employees’ paychecks. Even if your organization is a nonprofit, thus making you exempt from paying income tax, you are still responsible for withholding tax from your employees’ compensation. Currently, the Michigan withholding tax rate for 2018 is 4.25%. Your local tax authority will have an additional rate, so you have to make sure you’re aware of what that is. In Grand Rapids, for example, there is a tax rate of 1.5% for residents and .75% for nonresidents. Your city website will give you all the information you need about your local tax withholdings.
When processing payroll, remember that all federal tax withholdings such as income tax, federal unemployment tax, social security, and Medicare must be included. However, some of these taxes are paid on behalf of the employer, while others are deducted from the employee’s pay. One example of this is the federal unemployment tax -- this isn’t withheld from the employee’s paycheck, but rather paid for by the employer. Federal income tax, on the other hand, is deducted from the employee’s pay and will vary from employee to employee. In order to calculate this income tax withholding, refer to the employee's W-4 and the withholding tables in Publication 15, Circular E, of the Employer’s Tax Guide. Similarly, social security and Medicare tax will require the same process, though you will also have to refer to Publication 15A, the Employer’s Supplemental Tax Guide. When in doubt, utilize the resources on the IRS’ website for further assistance with calculating these tax rates.
Making Your Deposits
So your tax withholdings are calculated and you’re (relatively) confident they’ve been done correctly. What’s next? It’s your responsibility to deposit the taxes on behalf of both the employee and employer. Prior to the start of the calendar year, you must determine your deposit frequency by using Publication 15 or Publication 51. Failure to make your deposits on time could incite penalties of up to 15%. Keep in mind that you’re only required to deposit your federal unemployment tax when the total amount exceeds $500, at which time the deposit must be made by the end of the month following the quarter in which the tax amount exceeded that threshold. To make this process even more arduous, you should note that federal tax deposits must be made using an EFT method, or Electronic Funds Transfer.
The final thing you have to do is report your wages, tips, and any other compensation you’ve paid to your employees, in addition to the taxes you deposited. There are a number of forms required to do this, all of which can be found on the IRS’s website. Once that has been completed, you’re done! At least until your next pay period...
Did you know you can save yourself time and money by using an online payroll software company to process payroll? All your taxes are taken care of automatically, so you can effectively forget everything you’ve learned here and rest easy knowing you’re staying compliant. Click here to learn how Dominion’s cloud-based payroll and tax filing can give you peace of mind when it comes to calculating your taxes, or request a demo of our software below!