Small Business Tax Obligations: Payroll Taxes

One of the issues small-business owners have to contend with is staying current with the many obligations for local, state, and federal taxes. 

While most business owners hire an accountant or a tax professional to deal with tax-related issues, understanding the tax system is important to those who bear the ultimate responsibility for fulfilling all tax obligations. This article will focus on the business owner's obligations with regard to payroll taxes.

Payroll taxes typically include FICA (Medicare and Social Security taxes); federal, state, and local income taxes; unemployment insurance taxes; and in some states, disability insurance taxes.

The first step to calculating payroll taxes: Determine which workers are taxable (i.e., employees vs. independent contractors).

The third step: Calculate the amount of funds that must be withheld from the taxable wages.

Any business with employees must withhold payroll taxes from employees' paychecks and pay applicable federal, state, and local taxes. 

The taxes usually withheld from employee paychecks include FICA (Medicare and Social Security taxes) and federal, state, and local income taxes, if applicable.1

Other withholding obligations include FUTA (Federal Unemployment Tax Act) and, in states such as California, Hawaii, New Jersey, New York, and Rhode Island, disability insurance taxes. 

Failure to pay taxes or missing a payment may result in heavy fines and penalties, so it is important to calculate the amount of payroll taxes owed and to pay them on time.

If the small-business owner does not have outside employees but is incorporated, the above rules apply for the owner's paychecks as well, because they are essentially the sole employee of the corporation. 

If the business is not incorporated and there are no employees, the owner will need to pay estimated taxes on self-employment income each quarter.

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