13 Steps to Comply With Federal and State Requirements for Employee Payroll Taxes

The process of Payroll, if done incorrectly can cost your business a lot in labor and tax penalties. Save time and money with the following steps.

Step 1: Your employees must complete IRS W-4 forms (Employees Withholding Allowance Certificate), and return them to your business. These forms indicate the number of withholding allowances each employee wishes to claim. On this form the employee can also indicate any additional dollar federal income tax withholding they wish to have deducted from their pay.

Step 2: Each employee must have a payroll card on which you keep their cumulative payroll information: Gross pay, all tax and other with-holdings and net pay. You should create a new payroll card for each employee every year.

Step 3: Calculate each employee’s gross pay for each payroll period by either dividing their annual gross pay by the number of pay periods in the year, or by multiplying their hourly wage rate by the number of hours they worked during the pay period in question.

Step 4: Determine the dollar amounts of Federal Income Tax to be withheld from each employee’s pay. You must also be certain to comply with any state tax withholding requirements.

Step 5: Calculate the annual Social Security (FICA) withholding required by multiplying the portion of each employee’s annual pay, $87,900 and under, by 15.3%, and adding to this dollar amount 2.9% of any dollars over $87,900.

Step 6: Identify any other deductions such as retirement or child support.

Step 7: Calculate net pay.

Step 8: Write the payroll check for the “net pay” amount.

Step 9: Make any and all applicable federal payroll tax deposits for this pay period. Review the Form 8109-B Deposit Coupon to see how to make your applicable Federal payroll tax deposits. Fill in the following items on deposit coupon:

Tax year month (1-12)

Dollar / cents amount

Employer Federal ID #

Name (of business)

Address (of business)

Telephone # (of business)

Type of Tax

Color in tax period (Quarter)

Once you have completed Form 8109-B, write a check for the total dollar amount of this required Federal payroll tax deposit, and make the check payable to “your bank,” put your business’ tax ID # on the check, along with the payroll tax period of the deposit, and then take the coupon and the check to your bank and make the deposit. (Don’t forget to get a receipt). The reason you make the deposit at your bank is that your bank, as member of the Federal Reserve, is a collector of Federal tax deposits.

Step #10: File IRS Form 941 (employer’s quarterly federal tax return). This is due on the last day of the month following the end of each calendar quarter. Form 941 summarizes all your business payroll activities for the quarter. Mail the completed Form 941, along with any tax dollars due (make any check payable to IRS, and put your employer ID#, along with the quarter to which it applies, on the check) to the appropriate address, depending on the location of your principal place of business.

Step #11: By the due date of the Form 941, you must also make any applicable 940 Federal Unemployment Tax deposits. The amount of Federal Unemployment Tax deposits due equals.8% of any employee’s gross pay under the $7,000 limit. This deposit is also made at your bank using the Form 8109-B (Federal Tax Deposit Coupon). The coupon should be filled in just as it was from the 941 deposits, except this time you should color in 940 instead.

Step #12: File any applicable state unemployment tax reports and pay any tax required at that time directly to the state.

Step #13: File all applicable year-end forms. At the end of the calendar year (and all due by January 31st, following the end of the calendar year), your business is required to provide the following three tax forms:

Form W-2: wages and tax statement (copies to employees, a copy kept with the employer, and a copy sent to the IRS, along with Form W-3).

Form W-3: Transmittal for the W-2 form.

Form 940: Federal Unemployment Tax form – send it in with a check for the total Federal Unemployment tax required (less) any 940 deposits made to date.

If you use contract labor, you will need to issue Form 1099 – miscellaneous income, for any dollars paid to individual contract laborers who received payment in excess of $600 per calendar year. A copy of each 1099 form must be provided to each contract laborer by January 31st – following the calendar year. Also due to the Social Security Administration by January 31st is Form 1096 (Annual Summary and Transmittal of U.S. Information Returns) along with a copy of each 1099 form. The employer must keep a copy of each 1099 form and the 1096 form for their files. Mail the 1096 form and all 1099 forms to the Social Security Administration.


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