Employee Payroll and Taxes: What Business Owners Need To Know
Small business owners are the engine that makes America run. Real entrepreneurs understand both the stress and joy of employing people, and feeling responsible for their livelihood. Bayou Bookkeeping & Tax Services knows the feeling that comes with handing a new employee their first check. We also understand the importance of employee payroll and taxes, which go hand-in-hand. This article explains the importance of payroll taxes and what business owners need to know.
Payroll Taxes 101
Let’s start at the beginning. Payroll taxes consist of all the tax withholdings deducted from employee payroll checks. Sounds obvious, right? But did you know there are other types of employment taxes? For instance, FICA and self-employment taxes include two other types of employment tax. These taxes cover Social Security and Medicare taxes.
As you probably know, someone must calculate and deduct payroll taxes from each employee’s gross taxable wages. Notice we keep using the term “employee.” If you hire contractors, you don’t have to worry about payroll taxes for them. However, you do have to issue them a Form-1099 at the end of the year. For that matter, most employers must pay their own self-employment taxes if they don’t take a salary.
Gross Taxable Wages
Gross taxable wages may seem obvious to seasoned employers. For newer business owners, however, this information may help. Gross taxable wages are the total amount of money earned in a given pay- or tax period. This is the amount subject to taxation and withholdings.
Employers don’t include pre-tax deductions, such as certain health insurance deductions, 529 contributions, and similar items. Non-taxable income, such as expense or mileage reimbursement, should not calculate into gross taxable wages either. Instead, reimbursement gets added back into the net pay after calculating and withholding taxes.
Now that we’ve covered payroll taxes, in general, and spent a moment on pre-tax deductions and non-taxable income, we’ll address actual income taxes. Some people may be exempt from income taxes, but most are not. Taxation typically occurs at the federal, state, and local levels for those subject to income taxes.
Some states don’t have income taxes. However, Louisiana is not one of them. Therefore, each employee should prepare a W-4 form at the beginning of their employment. How each employee fills out the form determines the amount to deduct per paycheck per employee. Local taxes vary, so you’ll need to understand the difference in each locality.
In addition to the other payroll taxes we’ve covered, there is also unemployment tax. Like income taxes, unemployment taxes occur at the federal and state level. However, whereas employees incur withholdings to cover income taxes, employers generally pay unemployment taxes. Again, calculate these taxes based on the amount of gross taxable wages.
We’re Here To Help
Bayou Bookkeeping helps business owners, individuals, and others with a variety of financial services, including bookkeeping and accounting, financial reporting, and even human resources management. If you’re a Baton Rouge business that could use help in any of these areas, call (225) 442-1137 to speak to a professional.