Payroll Basics for Small Businesses
As a small business owner, you may find payroll and payroll tax administration more complex than you first thought. Have you caught errors in your payroll or tax administration processes? Those errors can have substantial consequences for your business: employees suffering, poor employee retention, and even fees and fines.
The Basics of Business Tax Laws
Every business is responsible for paying taxes: income tax, estimated tax, self-employment tax, excise taxes, and employment taxes. Employers must pay particular attention to:
Federal Income Tax
Employers are responsible for paying federal income taxes for all employees. The amount is based on the amount paid to employees over the course of the year, including bonuses and commissions. The employer must withhold these taxes from employees’ paychecks as well as matching those payments.
Social Security and Medicare Tax
Social Security and Medicare, including the Additional Medicare Tax, help support vital programs and ensure that employees can access those funds later, if they need them. Employers must both withhold taxes from employees’ paychecks and match those payments.
Federal Unemployment Tax
State Unemployment Tax
Like the Federal Unemployment Tax, employers must pay a State Unemployment Tax in Arizona. This amount helps protect employees who need to file for unemployment in Arizona.
Common Mistakes in Processing Payroll
Many employers make mistakes in the payroll and tax administration process–many of which can have substantial consequences for the business.
Processing Payroll Late
Employees who receive their paychecks late likely will not be employees of that business for long. Employees count on their paychecks arriving promptly, with the funds they need to take care of their families. In addition to ensuring that payroll goes out on time every week, according to Arizona law, if an employee is terminated, they must receive their final checks within seven days of the termination date or the next pay date, whichever comes first. If an employee quits, they must receive their final check on the next pay date. If the employer fails to issue payment, the company may face fines and penalties.
Incorrect Employee Information
Employers must have the right information for employees, including:
- Legal name
- Social Security number
- Date of birth
- Current address
- Payroll data, including employee start and termination dates, hourly rates, and gross wages
Failing to properly file employee information could lead to fines and penalties.
Incorrect Pay Totals
Failing to calculate pay totals correctly can quickly lead to unhappy employees–not to mention extra time needed to process employee payroll a second time.
Maintaining Historical Payroll Records
According to federal regulations, employers must keep up with historical records for three years. Arizona law requires four years.
Errors on Tax Forms
If employers fill out tax forms incorrectly, it could cause them to pay either too much or too little in payroll taxes. These errors can also impact W-2s and year-end tax returns, causing complications for employees. Errors may include:
- Failing to properly deposit and report employment taxes
- Filing payroll taxes late
- Misclassifying workers
One of the easiest ways to avoid common pitfalls, save administrative time and costs, and improve accuracy is outsourcing payroll. In addition to handling payroll directly, outsourced providers offer add-on packages, including time and attendance tracking software, HR consulting and administration, workers’ compensation insurance, and employee benefits.
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