As an employer, payroll tax is as inevitable as any others imposed by the government. While taxes are beneficial, it doesn’t have to be a complicated process. Here’s a quick and easy guide in settling state payroll tax.
What is Payroll Tax?
Payroll tax comes in two forms:
- Withholding tax - As the name implies, withholding tax is income withheld from your employees’ paychecks. This is a requirement for every employee, whether self-employed or regularised into a private institution.
- Government program taxes - This one is a bit more complicated, as it involves and influences a host of other factors that pertain to government programs in your country. This could include your medicare, social security, unemployment insurance, and other similar aspects, depending on which nation you call home.
What is a Look-Back Period?
A Look-Back period is a timeframe for two different activities depending on whether your business is starting out or has been operating for a while already. In the former, the look-back period is when you decide your company’s payroll schedule. This is important because every payroll schedule has its own advantages and disadvantages. However, the main point is that this also determines the schedule at which you are required to deposit taxes. This may differ from country to country.
Here’s an example that would make it easier to understand: In the United States, following a monthly payroll schedule requires you to deposit on the 15th of the next month. Therefore, your payroll in July must be filed and deposited by the 15th of August at the latest.
On the other, a semi-weekly schedule follows a completely different approach. Here’s a chart to demonstrate how it works:
When you should deposit taxes
Saturday, Sunday, Monday, or Tuesday
The following Friday
Wednesday, Thursday, or Friday
The following Wednesday
Next-day deposits, on the other hand, are directed towards businesses whose payroll tax obligation is $100,000 and higher. This scheme is mandated to continue for the rest of the year and the succeeding year.
As you can see, your schedule affects your payroll tax so keep these important dates in mind while planning your business. The Look-Back Period’s second definition is the time where you ensure that you are following the right payroll schedule by depositing and filing on time.
The Payroll Process
Before you can process payrolls, there are a few preparations that need to be done. First, you need to understand and set a wage calculator, a system that makes sure that all of your calculations are correct and accurate. Every business calculates their payments differently, as different employees have different workloads and office cultures. Having one already set up means you don’t have to constantly scramble for the right calculations every payroll. The second is deciding who will be in charge of all the accounting tasks. You could either have an in-house team or outsource it. Either way, making it clear who needs which tasks will save you from confusion.
The process itself consists of 4 steps:
- Distribute pay to employees
- Set aside money for taxes
- Make a payroll register
- Pay payroll taxes online
- File payroll reports
Each operates in a system that you can devise for maximum efficiency and minimal effort. There is no such thing as a perfect system, as there are many complexities in business that make this impossible. However, that does not mean that there isn’t a system that best fits your company.
Penalties of Untimely Deposits
Taxes may be unavoidable, but choosing to ignore them will make things much worse. You could be forced to pay 2% penalty for 1-5 days late settlement; 5% for 6-15 days late payment, and 10% for more than 16 days late or within 10 days since the initial notice from the IRS. The maximum penalty can reach up to 15%.
Some countries add more penalties to this. You can even be accused of tax evasion and put behind bars for a lengthy amount of time. Avoid these nasty penalties by knowing the right tax schedule of your country and paying punctually.
Going into the nitty-gritty of the state payroll tax may seem daunting, but with a system in place, you are sure to keep tabs on your compliance on a regular basis. However, if you find this too overwhelming to attend to, hiring a payroll tax service provider can help you get going. Outsource this responsibility to the right people!
Schedule a consultation with us today. We can get down to the most minute details and make every aspect of payroll taxes clear to you. Download our Australian Payroll Whitepaper and make payroll tax management a simpler task.
This post was first published 28 July 2016 and edited 13 October 2020.