Tax Help

Payroll Tax Liabilities and Small Businesses

The IRS does not make taxes easy for small businesses. They must stay up-to-date with changes regarding local, state, and federal taxes, and payroll tax liabilities is one of them.

The complexity of payroll taxes and other tax liabilities for small business owners have led many to hire an accountant or tax professional to handle the myriad of issues. Even if this is the case, business owners need to stay informed on how payroll tax works.

Payroll Tax

The IRS requires any small business with employees to withhold payroll taxes from their paychecks to cover applicable federal, state, and local taxes. The most common types of taxes withheld from an employer paycheck include:

  • FICA Medicare
  • FICA Social Security
  • Local Income Taxes
  • State & Federal Income Taxes
  • FUTA (Federal Unemployment Tax Act)
  • Disability Insurance Taxes

One should note that not every employer is required to withhold all of the above taxes. It depends on where the business is located, what type of industry it serves, and other factors. Regardless, it is vital that you withhold payroll taxes. The failure to do so can result in extreme IRS fines and penalties.

Self Employed vs. Small Business Owners

If you have more than one person that works for your company, the payroll tax is mandatory. The same rules apply to companies that are incorporated, regardless of how many employees there are.

However, self-employed individuals or freelancers operate on different terms. Instead of receiving withheld taxes on their paycheck, they instead pay estimated taxes on self-employment income each quarter.

How to Calculate Payroll Taxes

Once you know whether or not you need to file payroll taxes to the IRS, the next step is to determine how to properly calculate them. Many small business owners do not have the time nor the expertise to handle payroll calculations, so they may hire an accountant or tax professional to help them.

To calculate payroll taxes, you must:

  1. Determine the number of taxable workers.
  2. Determine the taxable wages.
  3. Calculate withholding amounts.

Taxable workers are traditional employees as well as independent contractors. The difference is independent contractors receive a lump sum of their earnings while traditional employees have applicable taxes withheld from each paycheck.

Small business taxable wages are defined not only as compensation but other components like bonuses and gifts that contribute to earnings for your employees as well.

How to Calculate Payroll Withholdings

In order to determine the correct payroll tax liability, you need to effectively calculate the withholdings from each paycheck. You must determine not only how many local, state, and federal taxes need to get withheld, but FICA and FUTA too. This is where the process gets a little complicated.

The IRS has its own set of rules and tax brackets for determining the applicable federal tax. The wage brackets are separated into different payroll periods and percentages.

Meanwhile, state taxes have their own type of tax bracket tables. The number of taxes withheld varies based on where you conduct business. Alaska, Florida, Taxes, Washington, and Wyoming are the only states that do not impose a state income tax, while Arizona and Pennsylvania have unique exceptions.

FICA and FUTA have additional requirements and methods for calculating payroll tax, but each would require an entire article to explain them. Based on federal law, small business owners are required to withhold FICA (and sometimes FUTA).

Contact Levy & Associates for Tax Help

Small business owners have enough on their plate to deal with time consuming payroll tax. It is a very good idea to consider hiring a tax professional to help deal with the mandatory federal and state requirements.

Contact Levy & Associates at 800-TAX-LEVY, or visit us online at to learn what we can do for your small business.

Contact Levy & Associates for Dependable Tax Audit Services

Levy & Associates is available for free initial consultations. We’re happy to answer any questions you have about the audit process or address any concerns about your specific situation.

There’s never a good time to be audited, and the time-consuming process will take away from your business or family if you try to face it alone. Let us handle and coordinate communication, so you can return to your daily life.