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  • Payroll forms can put a lot of pressure on business owners. When you’re in charge of a small business, it’s up to you to make sure that these forms are not only completed accurately, but on time as well. If you’re not careful, the penalties can range from $50 per faulty form all the way up to hundreds of thousands of dollars for notable violations.

    One of the biggest struggles of managing payroll forms is simply knowing which forms apply to your business and what they do. We’ve compiled a list of payroll forms that you’ll likely need to know for your small business and how they work.

    Form SS-4

    What is it?

    An SS-4 form is an application for an employer identification number (EIN). These unique nine-digit numbers are used to identify business entities and are required by most businesses before they can file and report taxes.

    When is it due?

    Unless you’re just about to start your business and haven’t paid anyone yet, you likely already have an EIN. There are some situations where you may need a new EIN, which the IRS has listed on its site. Aside from those scenarios, you won’t have to worry about refiling form SS-4 once you have your EIN.  

    Form W-2

    What is it?

    A W-2 form is a wage and tax statement that details what you paid an employee and the taxes you withheld from their wages for the government during the last calendar year. W-2s need to be completed for any employee who worked for you in the past year and copies should be sent to the Social Security Administration (SSA) and the employee listed on the W-2. In addition, you should hold onto a copy of each W-2 for at least years.

    When is it due?

    W-2 forms must be sent to your employees and the SSA by Jan. 31 of each year. Most state governments set the deadline at Jan. 31 as well, but make sure to check with your specific state tax agency in case your state’s date differs. 

    You can also request extensions to file forms with the SSA and distribute forms to your employees. For an SSA extension, you’ll need to fill out Form 8809 and submit it to the IRS between Jan. 1 and Jan. 31. The IRS will then either deny your request or grant you a single 30-day extension. 

    As for distribution to employees, you must mail a letter to the IRS to request an extension. The letter must explain why you need an extension, your name, business address, EIN, and signature. If approved, the IRS will grant you either a 15- or a 30-day extension.

    Form W-3

    What is it?

    W-3 forms are closely related to W-2s. Essentially, W-3s are transmittal forms that summarize the all the wage and tax statements made on the W-2s that a business files. In short, if you fill out 10 W-2 forms for your 10 employees, Form W-3 should represent a total of all 10 W-2s.

    When is it due?

    Form W-3 should be sent along with your W-2 forms to the SSA by Jan. 31. However, you don’t need to send W-3s out to your employees.

    Form 1099

    What is it?

    Form 1099 is used to report compensation for independent contractors and other nonemployees. If you pay a contractor more than $600 in a year, you need to report how much you paid them to both the contractor and the IRS so that these wages can be evaluated for tax purposes.

    When is it due?

    Contractors should receive their 1099 forms by Jan. 31. You also need to submit 1099 forms to the IRS by Jan. 31 as well.

    Form 1096

    What is it?

    Remember how the SSA requires a Form W-3 to show a total of all your W-2 forms? Form 1096 has the same relationship with your 1099 forms and should include a summary with the total amount of your 1099 payments from the last calendar year.

    When is it due?

    Form 1099 needs to be submitted along with all your 1099 forms by Jan. 31.

    Form W-4

    What is it?

    Form W-4 is used by employees to determine how much they’ll individually have withheld in payroll taxes. On this form, your employees will note how many withholding allowances apply to them. These allowances will allow you to determine the amount of payroll taxes each employee will have withheld from their paychecks.

    When is it due?

    Form W-4 doesn’t have an annual due date like other payroll forms. Instead, employees should fill a W-4 form out when they are hired. The IRS does recommend that employees submit a new W-4 form each year to account for any financial or personal changes, but it’s not mandatory. In this case, simply continue to withhold taxes based on an employee’s original Form W-4 until he or she provides a new one.

    Form 940

    What is it?

    Form 940 deals directly with Federal Unemployment Tax Act (FUTA) taxes. Your business must pay FUTA taxes if you meet the following requirements:

    • You paid at least $1,500 in wages in any calendar quarter during the past two years
    • You had one or more employees for at least some part of a day in any 20 or more different weeks during the past two years

    FUTA taxes are based on employee wages, but are only paid by the employer and not the employee, so make sure not to withhold FUTA taxes from employee wages. These taxes are paid quarterly and then reported once a year through Form 940.

    When is it due?

    Form 940 should be completed and filed to the IRS by Jan. 31. However, the IRS will extend the filing due date to Feb. 10 if you pay all your FUTA taxes on time.

    Form 941

    What is it?

    Form 941 is used to report both federal income taxes and Federal Insurance Contributions Act (FICA) taxes, the latter of which includes Medicare tax and Social Security tax. If your business’ quarterly tax liability is between less than $2,500, you can also use Form 941 to make tax deposits as well. If your liability is more than $2,500, the IRS requires that you follow a deposit schedule.

    When is it due?

    Form 941 is due quarterly, which means you should complete and report them by the following dates:

    • Jan. 31
    • April 30
    • July 31
    • Oct. 31

    Form 944

    What is it?

    Form 944 is very similar to Form 941, except that it’s used by employers who only need to file their FICA taxes once a year. The IRS grants an exemption for small employers whose annual liability for social security, Medicare, and withheld federal income taxes is $1,000 or less for the year. If your business falls within those limits, you get to file Form 944 instead of Form 941.

    When is it due?

    If you meet the requirements for Form 944, your reporting and payment deadline is Jan 31.

    Form 1095-B

    What is it?

    Form 1095-B is used by small employers to report employee health coverage if they offer a self-insured health plan. With a self-insured plan, employers pay medical bills instead of just a premium, so the IRS requires Form 1095-B to verify that individuals on your plan had minimum essential coverage. If you offer a fully-insured plan, your health insurance provider will fill out and file Form 1095-A for you.

    When is it due?

    A copy of Form 1095-B should be filed for each full-time employee covered by your plan. Individual forms should be mailed to corresponding employees by Jan. 31. The filing deadline for the IRS differs depending on how you send Form 1095-B to them. Paper forms should be mailed to the IRS by Feb. 28, but the deadline extends to March 31 if you electronically file the forms. It’s also important to keep a copy of each employee’s forms.

    Form 1094-B

    What is it?

    Like the W-3, Form 1094-B is a transmittal form used to summarize your collective 1095-B forms. This form is very simple and only requires some basic company information and a total for the number of 1095-B forms you will submit along with Form 1094-B.

    When is it due?

    The deadlines for 1094-B are the same as Form 1095-B. The only difference is that employees do not receive 1094-B.

    Place an Emphasis on Proper Payroll Management

    Payroll forms can be tricky, but they’re just one part of the payroll puzzle. Payroll administration is comprised of many different steps and responsibilities that can have major impacts on your business. To see just how much can go into the payroll process, check out our guide on what it takes to manage payroll for a small business.

    Even when you have a good understanding of each payroll form, the time and effort it takes to complete them and manage your payroll can put a serious dent in your schedule. That’s why many owners turn to GMS to handle payroll administration for their small business. Our experts take an active approach to managing your payroll so that you can spend your time growing your business instead of struggling with forms and tax calculations.

    Want to find out how GMS can save you time and money while strengthening your business’ HR functions? Contact GMS today to talk to one of our experts about your business.

  • Managing payroll is no simple process. There are several different steps and responsibilities that you need to address, all of which make managing payroll for a small business both time-consuming and difficult. Of course, that process becomes even more stressful when the IRS comes knocking.

    While the overall odds of an IRS audit for a small business is low, there are certain factors that can greatly increase the chances that your organization is targeted. The IRS looks for a variety of red flags to identify taxpayers and businesses that are more likely to have inconsistencies in their taxes. Here are nine small business IRS audit triggers that may increase your odds of an inspection in the future.

    A person preparing for IRS small business audits. 

    Consistently Filing Payroll Taxes Late

    Late payroll tax filings can lead to more than just penalties. Regularly missing filing deadlines is a surefire way to get your small business on the IRS’ radar. It’s in your best interest to try and file your taxes in a timely manner, even if that means you’ll need a head start to get them done. Remember, it’s better to get ahead of schedule than deal with IRS headaches in the future.

    Failure to Report Taxable Income

    Late filings are one thing, complete failure is another. A failure to report your payroll taxes is just about the biggest red flag of all for the IRS. 

    Not reporting your own personal income is also another warning sign. The IRS wants to ensure that you aren’t withholding income in your calculations. If you fail to report payroll taxes or personal income, you should expect to hear from the agency at some point.

    Reporting Net Losses in Multiple Years

    If your business has reported net losses in three or more of the past five years of operation, the IRS may want a closer look at your books. The IRS typically assumes operations that  show a profit in at least three out of five years are legitimate companies. As such, the IRS may view businesses with multiple net losses in recent years as a potential offender of hobby loss rules.

    In short, the IRS wants to identify if your business has “an actual and honest profit motive” and not just a hobby that’s abusing tax deductions. The problem is that these hobby loss rules can disallow certain deductions that may have saved you money. As such, you’ll want to make sure that any deductions you claim for your business are supported with the appropriate receipts and documentation.

    Too Many Deductions

    Claiming tax deductions available to your small business is one of the simplest ways to reduce your income tax bill. However, claiming too many deductions can put you and your small business at greater risk for an IRS tax audit.

    It’s important to be careful when you choose your deductions as a small business owner. The general rule of thumb for the IRS is that your expenses should be considered “ordinary and necessary” for your line of business. If you think that a meal, stop for gas, or travel expense pushes the boundaries of ordinary and necessary, it may be safest to not make a claim. This is especially true for sole proprietors, as they are at greater risk for audits than other small business owners.

    Another potential red flag for the IRS is if you suddenly claim more deductions than you had in past years. The IRS may see a sudden increase in deductions as suspicious and may audit you to make sure this new trend is by the books. To avoid this from happening, compare your deductions from recent years to make sure you’re consistent with your deductions.

    Excessive Claims of Business Use for a Vehicle

    Car expenses can be typical for many business owners – the IRS even publishes standard mileage rates for businesses each year. However, the IRS is quick to scrutinize whenever someone claims 100 percent business use of a vehicle. If you do, you’ll want to carefully document not only your vehicle expenses, but also the purpose of your various trips. The IRS will want to know whether your business vehicle was used for legitimate business-related activities and not personal commuting expenses like driving to your office from home.

    Another potential red flag for the IRS is if you deduct expenses in multiple ways. The IRS allows you to determine deductible car expenses through the standard mileage rate or actual expense methods such as fuel, repairs, and general upkeep. While you can choose between the two deduction methods, you cannot use both in the same year. If you do, the IRS may come calling about your business deductions. 

    Net Operating Loss Carrybacks or Carry-Forwards

    It’s not uncommon for small businesses to carry forward net operating losses to reduce a company’s future tax liability. In fact, the CARES Act amended rules to allow “for a carryback of any net operating loss (NOL) arising in a taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2021.” As such, small business owners have some additional flexibility to account for net operating losses.

    While these carrybacks and carryforwards are allowed, they can increase the odds of an IRS audit. The IRS will want to make sure that these transactions are up to agency standards and that everything is conducted legally. Make sure to properly document any such carrybacks or carry-forwards to make sure your business is in the clear in the case of an IRS audit.

    Giving Large Sums to Charity

    Donations are a great way to support important causes and help people in need. Unfortunately, the IRS adopts a more skeptical view of small businesses giving to charity. If your business suddenly increases the amount of money donated in a year, the IRS may want to make sure that these donations aren’t an attempt to abuse the tax code.

    One way to avoid IRS scrutiny is to maintain a steady level of donations each year. By slowly scaling up your charity efforts, the IRS will have less reason to find your donations as a suspicious way to avoid paying small business taxes.

    Cash Transactions

    Businesses that deal mostly in cash transactions are naturally bigger targets for the IRS. The explanation for this is because it’s much more difficult to verify cash income. Because of this reason, your small business may simply be more prone to IRS audits if you regularly process cash transactions.

    Large cash transactions are another sign that can trigger an audit. Purchasing new business equipment, company vehicles, or other investments with cash will potentially draw agency attention. If you can, try to pay for these business expenses using credit or debit cards to avoid IRS scrutiny. 

    If you prefer cash, just make sure to maintain detailed records of cash transactions to help in the case of an audit. You can also complete IRS Form 8300 for any receipts exceeding $10,000 within the U.S.

    Rounded Numbers and Calculation Errors

    Sometimes simple mistakes can lead to IRS scrutiny. As you may expect, mistakes on your tax filings are going to attract IRS attention. However, you may not realize that you’re making a mistake when you do the math.

    One common issue with tax returns occurs when small businesses use rounded numbers. While rounded numbers may seem convenient, the IRS will get involved if they see that a business isn’t using exact numbers to denote earnings and expenses for tax purposes. The best way to be safe from this red flag is to avoid average and round numbers and always work in decimal points unless otherwise specified in your tax filings.

    Protect Your Small Business from IRS Penalties and Other Dangers

    Filing payroll taxes is no simple process. Not only is the filing process complex, the rules regularly change from year to year to make it an even more confusing task. Fortunately, you don’t need to let payroll tax management take up too much of your busy schedule.

    When you need to free yourself from the struggles of payroll tax management, GMS can help. Our experts can not only save you valuable time, we can also help you stay up-to-date with ever-changing regulations and avoid costly penalties. Contact GMS today to talk to our team about how we can make your business’ payroll simpler, safer, and stronger.

  • On Aug. 8, 2020, President Trump signed an executive order to allow employees to defer a portion of payroll taxes until 2021. Since news of the order broke, business owners have sought additional clarity on how this payroll tax will work and how it will impact their responsibilities as employers. Let’s break down some of the specifics of the proposed pay tax deferral and what those details mean for small business owners.

    A paycheck with tax deductions affected by the payroll tax deferral executive order.

    What Does the New Payroll Tax Deferral Change?

    In short, the executive order allows employees who make less than $4,000 every two weeks (equivalent to less than $104,000 per year) to defer part of their payroll tax payment until 2021. According to the order, employees would have the choice to opt-in for this tax deferral. If an employee elects to defer payments, the employer must honor this decision.

    Payroll taxes are defined as the FICA taxes taken out of each paycheck to fund Social Security and Medicare programs. The executive memo signed by Trump only refers to the Social Security portion of these taxes, which makes up 6.2 percent of each paycheck. As such, an employee can defer up to $2,232 depending on that person’s salary.

    While both employees and employers pay these payroll taxes, the payroll tax deferral only impacts what the employee owes in taxes. Typically, both employers and employees contribute 6.2 percent of an employee’s wages in Social Security tax. Employers would still have to pay their share of these taxes even if the employee opts to defer their portion until 2021.

    When Will This Deferral be in Effect?

    According to the executive memo, employees can defer their payment of Social Security taxes starting Sept. 1, 2020. The deferral period continues through Dec. 31, 2020, giving employees a four-month window to push back their share of Social Security tax.

    Will These Deferrals be Forgiven?

    As of yet, it appears that employees who defer their Social Security taxes will still need to pay back the deferred amount in 2021. While the President signed the executive order to defer these taxes, it’s important to note that he can only delay the payment dates.

    Only Congress has the ability to reduce taxes, meaning that the executive order in question is simply a means to push back payment of these taxes without action from Congress. As such, employees who opt to defer these taxes should prepare to owe upwards of $2,232 in 2021.

    How Does This Deferral Impact Employers?

    While the payroll tax deferral only applies to employees’ share of Social Security taxes, the deferral will still have a direct impact on employers. According to the order, employers must honor employee requests to defer their taxes and update their payroll process to accommodate these deferrals.

    In addition to payroll system changes, there may be additional complications for employers. Employers are legally responsible for withholding payroll taxes, including an employee’s share of Social Security tax. It’s currently uncertain whether deferring these taxes would complicate IRS requirements. As of Aug. 27, 2020, the IRS and U.S. Treasury Department still have not offered guidance regarding the executive order, effectively leaving business owners in a bind.

    In addition, it’s also unclear if employers could ultimately be liable to pay back deferred taxes in 2021 in certain situations. The uncertainties surrounding the executive order is a notable concern and will require clarification from the IRS and other government bodies to allow employers to fully understand how the payroll tax deferral will impact them.

    How Can Small Business Owners Prepare for the Payroll Tax Deferral?

    To start, you’ll want to educate your employees about the current terms of the payroll tax deferral. The decision of whether or not to opt out is up to them, but make sure that they know that whatever taxes they defer will still need to be repaid in 2021 barring Congressional action.

    You’ll also want to pay close attention to any new information from the IRS or other appropriate agencies that will help clarify employers’ responsibilities. It’s difficult to navigate these types of changes, but new details will help you and your employees understand exactly where they stand with the deferral.

    While traversing these types of orders and legislative changes are tricky, you don’t have to face these questions alone. GMS can help you stay up to date with complicated payroll tax laws and other critical HR responsibilities. Contact GMS today to find out how a PEO can make your business simpler, safer, and stronger.

  • When you own a small business, you have several responsibilities that you need to oversee throughout the year. Payroll tax management is one of the more notable obligations that are on your plate. Unfortunately, it’s not necessarily obvious how to estimate payroll taxes for a small business.

    While it’s not the most enjoyable job, it’s critical that you calculate payroll taxes correctly. Every employer must withhold payroll taxes from each paycheck, so proper handling of these deductions is important to both your employees and the government. This responsibility is a lot of pressure for a small business owner who isn’t familiar with how to withhold payroll taxes. That’s why we’ve put together a breakdown of how to calculate payroll taxes for your small business.

    A small business owner learning how to calculate payroll taxes. 

    What Payroll Taxes Do Employers Pay?

    Payroll taxes are one part of what the IRS considers as employment taxes. The term “employment taxes” actually refers to a variety of taxes that are directly connected to your employees. These taxes include:

    • Federal and state income taxes
    • Federal Insurance Contribution Act (FICA) taxes
    • Federal Unemployment Tax Act (FUTA) taxes
    • Additional Medicare tax
    • Self-employment tax

    While some people confuse payroll taxes with income tax, the term “payroll taxes” specifically refers to FICA taxes. These FICA taxes are made up of a combination of Social Security and Medicare taxes, both of which are deducted from employee paychecks to fund their respective programs. Altogether, FICA taxes account for a total flat rate of 7.65 percent that’s split between Social Security and Medicare.

    These taxes are deducted from employee paychecks, but employees aren’t the only people who contribute these percentages to Social Security and Medicare. Both employees and employers are responsible for paying them, and the employer payroll tax percentage is the same as what employees owe. As such, your business needs to match the flat percentage deducted from each paycheck.

    How to Calculate FICA Taxes

    The bad news about calculating payroll taxes is that you’re going to have to do some math. The good news is that the math for calculating FICA taxes is much easier than estimating federal income taxes. 

    The reason why FICA taxes are much more manageable to calculate is that they’re flat percentages. As of 2021, the combined FICA tax rate is 7.65 percent of an employee’s gross pay. That rate is split into the following percentages:

    • Social Security tax – 6.2 percent
    • Medicare tax – 1.45 percent

    Of course, payroll deductions aren’t always that easy. There are a couple of exceptions to the base rates that can affect your calculations for both Social Security and Medicare taxes if an employee makes more than a certain wage threshold.

    Calculating Social Security taxes

    In general, calculating Social Security taxes is straightforward – just multiply an employee’s gross pay by 6.2 percent. The resulting number should be deducted from an employee’s paychecks and matched by the employer. However, there is an annual limit to how much employees and employers contribute to Social Security taxes. 

    Every year, the Social Security Administration sets a wage base for Social Security taxes. Essentially, employers and employees only have to pay these taxes up to a certain dollar amount. The taxable maximum is set at $142,800 for 2021, which means that Social Security taxes only count toward the first $142,800 an employee makes in a year. For example, an employee who makes $150,000 wouldn’t pay Social Security taxes on the final $7,200 in gross pay.

    Additional Medicare tax

    As with Social Security taxes, there are certain wage thresholds that will impact your exact calculations. Unlike Social Security, these thresholds can mean that individuals pay more in Medicare taxes. 

    There are no annual Medicare tax limits. Instead, employees who earn more than certain amounts have to pay an additional Medicare tax rate of 0.9 percent. Those wage thresholds are: 

    • $200,000 for employees who are single
    • $250,000 for a married employee who files jointly
    • $125,000 for employees who are married, but file separately

    It’s important to note that the additional Medicare tax only applies to wages earned above the set thresholds. For example, an employee who is single and earns $250,000 would owe 1.45 percent on the first $200,000 and a combined 2.35 percent on the subsequent $50,000.

    Another key detail is that employers are not required to match any additional 0.9 percent contributions. Instead, they would only contribute the standard 1.45 percent. However, employers should still withhold the additional 0.9 percent Medicare tax from employee paychecks. Employees should also file Form 8959 if they meet the requirements for additional Medicare tax.

    Payroll Tax Deductions Examples

    Instructions on FICA tax calculations are nice, but sometimes it’s best to see an example on how to break down these calculations. Let’s start by assuming you have an employee who makes $52,000 in gross pay a year. Here’s a quick breakdown of the annual payroll tax responsibilities for that employee.

    Annual breakdown of payroll taxes for a small business employee. 

    While the numbers above give you an idea of how much both you and your employee will pay in annual payroll taxes, you’ll also need to determine deductions on a per-paycheck basis. Identifying per-paycheck tax deductions will allow you to withhold the right amount from each employee’s paycheck while helping you keep track of what you owe when it’s time to pay the employer portion of payroll taxes. 

    Determining deductions on a per-paycheck basis depends on your pay frequency. There are multiple pay period options depending on your location – weekly, biweekly, semimonthly, and monthly are all fairly standard. You’ll need to divide an employee’s annual gross pay by the number of pay periods in a year and apply the appropriate FICA tax percentages to that individual paycheck. Here’s a breakdown of that same $52,000 employee on a biweekly pay period.

    Per paycheck breakdown of payroll taxes for a small business employee. 

    How to Pay the Employer Portion of Payroll Taxes

    Calculating and withholding FICA taxes is just one part of the process. As an employer, you still need to pay those withheld and matched taxes to the IRS.

    Employers can report and pay FICA taxes through their Electronic Federal Tax Payment System (EFTPS) account. Employers must send regular payroll tax reports to the IRS through Form 941. The due dates for Form 941 are the final day of each quarter (April 30, July 31, Oct. 31, Jan. 31). 

    In terms of depositing payroll taxes, the frequency depends on how much you paid in the past year. Businesses that reported more than $50,000 in federal taxes on average must deposit taxes semiweekly. Businesses that pay on a monthly business owe these taxes by the 15th of the following month.

    New businesses or businesses that reported less than $50,000 on average only have to pay federal taxes on a monthly basis. The due dates for these payments depend on your paydays. If paychecks are due Wednesday through Friday, you need to deposit taxes by the following Wednesday. If payday falls on Saturday through Tuesday, those same taxes are due by the following Friday.

    Take the Pain out of Payroll Management

    Even if you have a grasp on calculating payroll taxes, you still have a lot of work to do. Managing payroll and tax filings can be one of the most time-consuming and challenging tasks there is for a small business owner. That’s why employers turn to GMS for payroll administration.

    When you work with GMS, you get to stop worrying about the ever-changing nature of payroll tax management and start spending time growing your business. Contact GMS today about how we can help you take control of your critical HR functions.