As an employer, there are many aspects of your business that you must keep up with. Not only do you have to be an expert in all the areas that revolve around your particular trade, but you also must deal with all the business administration duties, including payroll taxes. Filing taxes for your payroll can present major challenges that not only jeopardize operational efficiency, but also incur costly penalties if you make mistakes. Make sure you’re prepared to deal with the following 12 payroll tax filing challenges that could affect your business.
1. Lump-sum tax payments
Some businesses find it difficult to set aside funds to cover quarterly and annual tax payments. If you’re not prepared, paying large amounts at once can wreck your cash flow. It could even force you to close your business if you don’t have enough money left over for operating expenses. Failure to pay isn’t an option, either, as that can incur large fines and other penalties. The best practice is to continually estimate your tax payments and set money aside in a different, “untouchable” account that’s separate from business checking. That way, you’ll have funds available when lump-sum tax payments are due without the need to dip into operating funds.
2. Meeting payment deadlines
You’re busy running your business, so it’s no wonder that payment deadlines can sneak up on you. It can be difficult to juggle all the different payments you might need to make and when to make them. For example, FUTA (Federal Unemployment Tax Act) deposits are due quarterly. Miss the deadline, and you could be subject to automatic fees based on a percentage of your tax liability. Not only that, but you could lose eligibility for certain tax credits that can have a profound impact on profitability. It’s a good idea to make a list of every payroll tax deadline your business must meet, then develop a system to remind you about each in plenty of time to collect the data and funds you need to comply with regulations.
3. Accurate employee withholdings
As a business, you’re responsible for maintaining employee withholdings until tax payments are due. It’s critical that you not only separate these funds from business operating accounts, but also that you transfer the accurate withholding amounts for each employee so funds are available come tax time. Make sure you have a system to accurately enter withholding information for each employee. Your system should also be able to calculate the amount of money withheld for each employee so your payments and reports are accurate.
4. Filing the correct forms (and on time)
Similar to payments, it’s important to understand exactly which forms your business must file and when they should be filed. You probably know you need to file Form 940 annually, but did you know Form 941 must be filed quarterly? What about Forms 944, W-3, W-4, and W-4P? The federal tax code is complex, and the IRS doesn’t give businesses a pass if they don’t know which forms need filed or if they miss filing deadlines. It’s a good idea to become well-versed in the tax code so you understand which forms apply to payroll taxes, how to accurately fill them out and when to file them. Failing to meet your filing obligations can result in stiff penalties that put your business – and your livelihood – at risk.
5. Issuing the correct forms to employees and contractors
Just about everyone is familiar with Form W-2, which is issued to employees and includes tax withholding information. However, many businesses must also issue 1099s for contractors, and large businesses as well those that provide health care coverage must issue Forms 1094 and 1095 to comply with the Affordable Care Act (ACA). Those are just a few examples of forms you might need to furnish to your employees. If those numbers seem Greek to you, it’s fair to say you might need to brush up on payroll tax laws to help maintain compliance and avoid penalties.
This is a big one, and it’s a common issue for small businesses that do their taxes themselves. There are a bevy of tax credits and deductions available to businesses that know how to identify them and exercise their rights to use them. Moreover, improper employee classifications, untracked hours and erroneously classified compensation can result in tax overpayment. Again, the key to avoiding paying more than your fair share of taxes is to gain expert knowledge of the payroll tax code – or hire someone who already knows it.
7. Taxable and exempt benefits
Do you offer fringe benefits to your employees? Perhaps you pay for meals, health club memberships or allow personal use of company vehicles. What about health care coverage, retirement or pension plans? Do you know which benefits are taxable and which are exempt from payroll taxes? If not, you could be overpaying or underpaying. Neither are ideal, but the latter could land you in legal hot water with the IRS. Review the tax code so you understand which benefits are subject to taxes – and how to accurately calculate your liability – and which are not to help you comply with tax laws.
8. Keeping up with ever-changing tax laws
Speaking of tax laws, it can be difficult (even frustrating) to keep up with a tax code that constantly changes. Tax laws change almost every year, and sometimes they change more than once a year. Some of the most volatile aspects of the payroll tax code include FUTA, overtime rules, ACA regulations, paid leave, minimum wage and tax exemptions – all of which can change each year (or even more frequently). Imagine having a good system in place to help you stay compliant with tax laws, only to have those laws change in the middle of the year so you’re forced to reconfigure your system. That can make calculating annual payroll taxes a nightmare for many businesses. The problem isn’t limited to the federal level, either, as both state and local tax laws are in constant flux. It’s important to keep on eye on employer tax and payroll tax news, as well as check the IRS website regularly, to help keep abreast of changes in tax laws. In addition, you should be in tune with changes to state and local tax laws to help you remain compliant across the board.
9. Employee tracking
There’s a lot to keep track of when you have employees. Salaries and hourly wages are only part of the equation. Employees must be properly classified, whether they’re part-time or full-time, and large businesses should track whether any combination of employees equates to a full-time equivalent for ACA reporting. In addition, compensation types and benefits should be categorized appropriately for accurate tracking and payroll reporting compliance. Paid leave, personal days, vacation days and even tips can muddy the waters if you’re not familiar with tax law – how should these types of compensation be tracked? Which are taxable and which are exempt? New trends are also challenging both HR and payroll departments. Where employees were traditionally paid weekly, biweekly or monthly, concepts such as flexible pay and daily pay are working their ways into payroll departments. The solution is to develop a system that efficiently and accurately tracks employee compensation as well as payment types, categories, classifications and benefits. The task is easier said than done.
New ways of thinking about employee payment represent modern payroll challenges. As the workforce becomes more globalized, companies find themselves needing to track and pay remote overseas employees, gig workers, foreign employees and contractors. Currency conversion can be a headache, as can new payment methods such as bitcoin and pay cards, which are increasing in demand as a younger workforce eschews traditional bank accounts. Foreign regulations can be difficult to navigate, and even multi-state compliance can prove daunting to businesses that hire out of state. Which forms do you need to file, what payments do you need to make, and when is everything due when you hire a global workforce? The answers to these questions are important to helping you stay compliant with payroll tax regulations.
11. Accurate and efficient reporting
It’s not easy to develop a system to track employees, generate reports, meet payment deadlines and maintain compliance. Excel spreadsheets aren’t up to the demands of today’s tax code. They’re cumbersome, complicated and leave plenty of room for both human and machine error. Going it alone isn’t ideal for many employers, especially since you have a business to run. You can hire in-house personnel to assist with payroll, but even that can present challenges. Full-time staff can be expensive, and (we hate to say it) could quit at a moment’s notice. What will you do when your in-house payroll expert decides to leave for greener pastures just before tax season?
Employee turnover is a common challenge for payroll, but turnover within payroll and HR departments can be another obstacle that makes it difficult to stay on top of tax obligations. Every new hire must be trained in the tax code and in your system, which takes time and resources away from other essential tasks. You might need to implement an in-house training program to make sure new employees are up to speed with your payroll tax payments and fillings. Even if you don’t experience much turnover, in-house staff probably need to undergo training every time tax laws change. Again, this takes time and resources away from other business operations; plus, it can be costly if you send staff to tax seminars or hire outside help to teach in-house staff about new regulations.
Deluxe Payroll helps you meet payroll tax filing challenges
If you’d rather spend your time tending to your business than dealing with payroll taxes, now is a good time to consider partnering with an experienced payroll service that can help you meet your tax obligations, save money and avoid penalties. Deluxe Payroll offers a full suite of tax filing services designed to help you maintain compliance. Benefits of partnering with Deluxe Payroll include:
Period-based payroll tax payments
Deluxe can help you avoid large lump sum payments that could wreck cash flow with a system of paying your payroll taxes per period instead. This alone can increase the effectiveness of a business by increasing cash flow.
Deluxe Payroll is well-versed in tax filing and payment deadlines, so payments and tax filings are automatically done on time via Deluxe's electronic filing system. This can help you avoid unnecessary tax fines and late penalties. For additional peace of mind, Deluxe Payroll will also send you automatic notices when your taxes have been paid.
Tools and software
Take advantage of online tools and dashboards that help you remain in compliance.
Accurate employee reporting
From verifying withholdings to proper employee classification and compensation categorization, Deluxe Payroll can help you accurately report and pay tax obligations. This includes issuing the correct forms to employees, contractors, remote/overseas workers, the IRS and state and local tax agencies.
No need for training
While it never hurts to have experts in-house, when you partner with Deluxe Payroll, you can outsource some of the time-consuming work of payroll and HR employee turnover.
From tax credits and deductions to accurate employee tracking, Deluxe Payroll can help you meet your tax obligations. Deluxe Payroll offers peace of mind by helping you pay accurately and on time so you can focus on running your business.
Editor's note: This blog post was deemed accurate at the time of publication and may not reflect recent changes related to payroll law. The information provided in this blog does not, and is not intended to, constitute legal or financial advice.