Payroll Tax Deferral: The Bottom Line

Payroll Tax Deferral: The Bottom Line

The COVID-19 Pandemic has certainly had a financial impact on us all: Businesses have been closed – some of them permanently – countless employees have been furloughed if not let go entirely, and we’re afraid of what might happen next.

In a recent Executive Order, the President has suspended the Federal Payroll Tax, deferring the 6.2 percent payroll tax that funds Social Security in hopes of bolstering consumer spending and ultimately stimulating an economy that is still struggling under pressure from the systemic, lasting shutdowns across the nation.

But what does all that mean for the American people?

First, a little information is necessary, here: Every payday, 7.65% of your wages are subtracted from your paycheck to fund Social Security and Medicare (6.2% for Social Security; 1.45% for Medicare). Your employer – or if you are the business owner – pays an equivalent amount of tax.

It’s noteworthy that employers already can defer payment of their share of Social Security taxes on wages paid through the end of the year. For 2020, the Social Security tax is only levied on the first $137,700 of earnings; however, an additional 0.9% Medicare tax is collected on wages over $200,000 for the year.

Now, under the Executive Order, under the president’s executive order, Social Security taxes (6.2%) won’t be taken out of your paycheck if your pre-tax bi-weekly salary is $4,000 or less – for the remainder of 2020. This means that someone making $10 per hour and working 40 hours per week will get about $25 more per week, or around $100 per month. From September through December, that will add up to about $446. A full-time worker making $15 per hour would get approximately $37 more per week, $149 more per month, and $670 by the end of the year. For someone making $25 per hour, the savings will be about $62 per week, $248 per month, and $1,116 through December, and so on.

But – and this is especially important to all taxpayers – the IRS reports reiterate that this Executive Order only applies to the rest of 2020, and as such, postpones the due date for these taxes until April 30, 2021. After that date, penalties, interest and “additions to tax” will begin to accrue.

The IRS guidelines do state that Employers – referred to as the “affected taxpayers” in the documentation issued – “may make arrangements to otherwise collect the total applicable taxes from the employee.”

But make no mistake; the IRS will collect those deferred and accrued taxes as soon as they are legally able to do so.

Starting a Business?

Starting a Business?

Starting a business can be an overwhelming process, and no matter how successful you just know you’re bound to be, it may be necessary – and it’s always a good idea, anyway – to get some help from an accountant or bookkeeper; tax preparer or tax planner.
Dunham Tax Professionals can be a critical component in the success of your new business

Did you know that an accountant can and does:

  • Form your business
  • Help write a business plan
  • Audit your cash flow
  • Find cost-cutting opportunities
  • Advise on business strategy
  • Manage debt
  • Chase down payments
  • Write and submit loan applications
  • Plan budgets
  • Set up your accounting software
  • Manage inventory
  • Recommend business tools
  • Help open new bank accounts
  • Oversee payroll
  • Year-end financial reporting
  • Prevent audits
  • Advise on personal finances

A bookkeeper can and does:

  • Reconcile accounts
  • Record transactions
  • Manage accounts receivable and accounts payable
  • Adjust entries
  • Prepare financial statements
  • Send invoices
  • Set up and manage technology and tools
  • Stay up to date on laws and regulations
  • Basic payroll

Moreover, a Tax Preparer and Planner can and does:

  • Answer your questions
  • Look over your returns
  • Find deductions that apply to you
  • File your taxes
  • Prepare and submit your documents
  • Be there for you

Contact Dunham Tax Professionals or make an appointment today, to work together to determine your business needs.  Let us focus on what we’re good at so that you can focus on what you’re good at: Keeping your business going.

Common Payroll Mistakes in Small Business

Common Payroll Mistakes in Small Business

Paying your employees may seem like an easy task, but there are common mistakes that happen, that have costly consequences. Payroll errors cost company money, yes, but it can also tarnish a company’s reputation, not to mention, get them into trouble with the IRS.

These are the most common mistakes a business can make regarding payroll.

  • Paying Incorrectly – Think it can’t happen to you? You’d be surprised how often it can and does happen in business. Always double-check that the payment amount was entered into the payroll system correctly, and check that the employee reported the hours properly.
  • Bank Holidays – You need to know when they occur and plan accordingly. A Bank holiday is a lost business in terms of payroll processing.
  • Payroll Taxes – The government collects payroll taxes on a pay-as-you-go basis, including federal and state, as well as any local taxes, as applicable. (An expert like Dunham Tax Professionals can inform you which of these will apply to your business.)
  • Pay Frequently – There are state laws that dictate a minimum pay period. You are allowed to pay more frequently – if that’s feasible for your business – but are prohibited from doing less than the mandated minimum. In short, pick a realistic pay schedule and always stick to it.
  • Late Payments or None at All – Again, stick to the pay schedule as obligated. Forgetting to process payroll, or processing it late, can create huge issues for employees.
  • Employees Vs. Contractors – It may be that you hire contractors to do temporary work for you. That’s fine, but the designation of an employee or a contractor is a legal distinction – and misclassification can result in some penalties. (When in doubt, ask a professional, such as Dunham Tax Professionals)
  • Maintaining Payroll Records – If a business owner fails to keep accurate payroll records, an audit may be triggered. Typical records that need to be kept include; copies of W-2 Forms, pay stubs, time sheets, etc. it is noteworthy that every state varies, but by and large, these documents must be kept for a period upwards of 3 to 4 calendar years.
  • Staying Up to Date on Laws and Regulations – These laws and regulations are always changing. That’s why it’s so important to consult with an expert in these matters: Dunham Tax Professionals is available to help you navigate these complicated requirements, wherever your business is located, keeping you abreast of changes, and keeping your business current and moving forward.
Businesses should implement best practices

Businesses should implement best practices

State and federal employment laws and labor regulations are continually being updated. Therefore, it can become more complicated for small businesses to keep current in regard to HR and payroll trends.

Be mindful of the following things as a basis of implementing best practices.

  • Paid Leave – States are passing paid leave legislation at a rapid rate – Michigan was first among these – and it may be a challenge for a small business to monitor having fewer resources than a larger business. The most notable change in Michigan is that businesses with 50 or more employees must offer leave to all types of staff, including temps and independent contractors. This may not apply to your business at the onset, but that may change whether it be through regulatory changes or the success and growth of your business.
  • Payroll Fraud – It happens much more frequently in small businesses than in larger companies. Payroll fraud can be committed by employers, who engage in wage theft; employees, such as those who work in the payroll department; third parties, such as cyber criminals. There are certainly things a business can do, here, to combat this, from routine audits of payroll, implementing safeguards against timecard manipulation and segregating payroll duties to a few people and having a “checks and balances’ policy, as well as providing cyber awareness training to your employees, including your payroll staff.
  • Timekeeping – Whatever the size of your business, federal law strictly mandates that employees who should be paid, i.e., those who are not volunteers, are to be paid the contract wage for each hour worked.
  • The New W-4 – Without the W-4 form, payroll processors cannot make the correct deductions from an employee’s wages. The form has been in place for decades, but for the tax year beginning 2020, an updated version is being issued.
  • Exempt versus Nonexempt – Determining whether an employee is exempt or nonexempt under the Fair Labor Standards Act (FLSA) and state law can be a chore –which is probably why some small businesses simply pay their entire staff a salary and then treat everyone as exempt – but identifying everyone as salaried-exempt without considering their job duties, these small businesses risk violating federal and state wage-and-hour laws. That’s why it’s always best to consult an expert like Dunham Tax Services to know how to proceed.
  • Pay Satisfaction – Always ensure you pay your employees fairly and accurately, on time, and when contractually obligated to do so. Moreover, make sure to offer convenient methods of disbursement, e.g., paper check, direct deposit, pay card.
  • Outsourcing – this may be an option for a small business to use an outside service provider than to hire staff to do this.
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