When companies outsource their payroll to third parties, it usually makes doing business a little smoother.  However, the IRS wants these businesses to remember that they are responsible for paying federal taxes.

There have been charges brought against individuals and companies who have appropriated funds that were meant for employment taxes, so it’s critical that employers who outsource their payroll are aware of these tips provided by the IRS:

1. Employer Responsibility: It is the employer’s responsibility to deposit and pay federal taxes. Even if they forward the payments to their third-party payroll service to make the deposits, the employer is always responsible for them.
If the payroll service doesn’t make the payments, the IRS will charge the employer with interest and penalties. The IRS can hold the employer accountable for other unpaid federal taxes.

2. Correspondence: If there happen to be account issues, be assured that the IRS will send a notice to the payroll service’s address. It is recommended that employers do not change the address on record with the IRS without notifying them, this way the employer, and the payroll service, doesn’t miss important information.

3. EFTPS: It’s a good idea to use a payroll service that uses the Electronic Federal Tax Payment System. To get their own PIN to verify payments, the payroll service can register on the EFTPS system.

There is more information about employer responsibility regarding federal tax payments with outsourced payroll service providers on irs.gov. Also, you may want to check with a qualified tax and/or payroll professional if you have questions.

Daniel Stoica Accounting Professional

Many small business owners find themselves even busier when they hire employees. Adding employees brings additional paperwork and oversight, and most small businesses just do not have the funds to hire people to handle payroll. However, there are many companies out there that offer payroll services, at a reasonable price, to small business owners. Following is a list of 7 ways outsourcing payroll can save your small business money.

Cost

The affordability is the main reason to outsource your payroll. A department on site that is devoted entirely to payroll can be costly. It costs to hire and train new employees, not to mention the hourly wage. There is also the cost of printing checks, keeping track of taxes and handling a payroll bank account. There can be significant savings by hiring a company that handles all of this for you.

Accuracy

Payroll mistakes can cost your company in a major way- not just with the business itself- but mistakes with takes could cost you in IRS interest and penalties. An experienced payroll service provider is less likely to make these kinds of mistakes, and they are usually responsible for handling mistakes that they make.

Speed

Payroll service providers work on nothing but payroll, so the service is much quicker than someone who would work on site because your payroll person may work on several other projects aside from payroll. Payroll service providers keep track of your regular employees as well as temporary or seasonal employees.

Reliability

The quality of work done by a payroll service will most likely stay the same, accurate and professional. These companies specialize in payroll alone, and only hire experience professionals.

Laws and Regulations

Tax laws change regularly. It’s difficult to pay for training for an onsite payroll employee to keep up with these new laws. Outsourcing your payroll will eliminate this extra cost.

Accountability

Payroll companies are responsible for any mistakes they make. If they do make a mistake, they must fix it.

Security

There is always someone who will try to take advantage. Hiring someone to work on site means the business owner will have to keep an eye on their employee to make sure they don’t make mistakes or check for dishonesty. There is usually little worry in this with a reputable payroll service provider. Their employees are stringently checked before they are hired.

Outsourcing payroll services is a real time and money saver for small business.  These are good reasons to use a payroll service.

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The IRS just made it a little harder for payroll departments to report tax information.

The IRS announced on its website that employers will now have to manually enter the Taxpayer Identification Number (TIN) on employees’ W-2 forms if they have Individual Taxpayer Identification Numbers (ITINs). This requirement will become part of the 2011 tax year.

No software can be used to populate TINs on W-2s, despite any override features. If employers don’t comply with this new rule, they could receive a written reprimand, a suspension, or, in the worst case, become ineligible to e-file. The IRS cited Rev. Proc. 2007-40, which gives them the right to take this action.

This was put in place in order to put a stop to taxpayer and preparer fraud. In earlier years, the IRS had used ITINs to weed out fraudsters.

An ITIN is a 9-digit number and has a range of 70-88 in the 4th and 5th digits. On April 12th of this year, that range was extended to 90-92 and 94-99 in the 4th and 5th digits. The IRS gives ITINs to taxpayers who must have a TIN but don’t have, and cannot get, a Social Security number.

This new regulation by the IRS would slow down the W-2 process. The IRS realises this will be a pain for payroll workers, but they have are doing this to help put a stop to tax fraud. They suggest that payroll departments work with their IT departments to update their software. The penalties for having non-manual TINs will be enormous.

Daniel Stoica Accounting Professional

Only two things are certain in life:  Death and taxes. Why do we pay taxes, though?  Surely there was a time when we didn’t have to pay taxes at all?

We have to take a look at history in order to answer this question. In the earlies days of our history, everyone generally worked for the good of others in their nomadic“tribes”. They basically bartered. Eventually, these tribes settled down and created communities.

A form of government evolved from these communities. Obviously, there have been many different types of governments,  from dictators and monarchies to republics and democracies. All of them have taxed their citizens for one reason or another, usually to run the government, but sometimes for their own benefit.

The concept of taxes for goods and services has changed quite a bit since the beginning. There are now many different taxes for many different things. These different taxes include:

-Real estate taxes – These are imposed by local governments to pay for schools, police and fire services, hospitals, waste management, road maintenance, parks, and libraries.

-Sales taxes – These taxes are taken by any level of government, but usually at the state level. These funds usually help with the state’s budget.

-Income tax – In the U.S., this tax is taken by the IRS and sometimes at the state level. In the U.S., income tax is constantly progressing.

There are also Payroll (FICA), Capital Gains, Corporate, Estate, Gift, and Excise taxes.  We would like to think that taxes benefit everyone equally, but that doesn’t always happen because people pay taxes for government services that some people don’t need or use. For instance, a childless person still pays taxes for a public school’s budget. And all of us are required to pay taxes despite the fact that some of us disagree with being taxed to fund certain policies or services. 

Of course, there are some people who refuse to pay their taxes. They are called “tax protesters”. These people regularly receive notices, audits and liens from the IRS for not paying their taxes.  Some even receive jail time.   

If you are in need of more details on why we are required to pay taxes, you should talk to someone who is not involved with a government entity. Consult with a tax professional for some answers.

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Sub-contractors and real estate and insurance agents are just a few occupations that receive a 1099-MISC. These people are independent contractors and are considered self-employed. They are responsible for paying their own taxes. Taxes are not taken out through the year. They have to make sure they withhold enough every time they are paid for their work.

For self-employed people who have some knowledge of taxes, or have retained the services of a tax professional, using the 1099 can be a good thing. If they are newly self-employed, however, there could be some major issues come tax time.

Regular employees have federal, state and payroll taxes taken out of their net wages every pay day. These employees are not completely responsible for their taxes, but someone who is considered and independent contractor is. Every quarter, an independent contractor needs to pay into their taxes. The way to figure your taxes is either 100% of last year’s tax liability or 90% of this year’s tax liability. If you don’t pay enough throughout the year, you will end up owing at tax time.

Another important factor about being an independent contractor is to keep track of ALL of your expenses through the year. Those who receive 1099′s can deduct expenses like a business owner can. Many small business owners and independent contractors use the same Schedule C to report their income.

Auto expenses and mileage are the most important expenses an independent contractor needs to keep detailed records of. The IRS allows for 50 cents for every mile driven for business purposes, plus gas, repairs, depreciation, and insurance. You will have to decide if you want to take the actual expense deduction or the standard mileage rate.

You must also take into consideration the actual definition of business miles. You cannot claim all miles you have driven, only those miles that are used for business purposes. Miles driven from your office to, say, appointments, are considered business miles. Miles driven while not working cannot be deducted.

If you choose to use the actual expense method, you can figure your deductions by totalling your auto expenses and multiplying that number by how many miles driven.

Some other expenses you can deduct as an independent contractor are:

~ Advertising expenses
~ Office supplies
~ Cost of uniforms/Equipment
~ Utilities
~ Insurance
~ Interest paid
~ Legal/professional services
~ Meals and Entertainment Expenses
~ Lodging expenses

The last issue an independent contractor needs to be aware of it the home office deduction. If you use part of your home strictly for the use of your business, you can take a deduction. It offers the ability to deduct part of your living expenses, which include rent or mortgage, insurance, taxes, and utilities. This deduction will also let you use some of your commuting miles into business miles.

If you have two offices or work locations (one outside the home and one in your home), you can use commuting miles as business miles. In addition to the Schedule C, you will have to file an 8832 form to take the home office deduction.

An independent contractor and self-employed person needs to understand what they are able to deduct in order to save money on your taxes. Purchasing tax software with expense and deduction spreadsheets or hiring a tax professional are two ways to help you save as much money on your taxes and may keep you from owing the IRS at tax time.

 Daniel Stoica Accounting Professionl

Accounting and tax professionals will often tell you that the most complicated requirement in the payroll process is taxation. Payroll taxes are imposed by each state, on each employer’s payroll, and of course each state has different rules.

There is a point in which businesses must begin to pay payroll tax. Many small companies, however, don’t need to pay payroll taxes because their total wages paid do not meet a certain base line.

The tax laws state that wages are taxable. Wages are generally referred to as any wage, allowance, or commission paid to an employee. It does not have to be in the form of money. Non-cash benefits are also eligible for payroll tax, such as corporate cars and business entertainment. Meal allowances, contracts and commissions paid for insurance, are some of the other types of earnings where payroll tax must be paid..

Payroll tax exemptions are for wages paid by hospitals, charitable organizations, religious organizations, and some local government bodies.

Payroll rules also exist for employers who are considered to be a group employer. Each member of the group has to pay a pro-rata proportion of the total tax payable by the group. These four groups are:

-A branch or agency of a parent business.
-Two or more businesses under the control of the same person.
-An employer who also uses the employees in another business.
-Corporations that are classes as related companies.

If the wages that are paid by an employer pass the specific amount appointed by each state, the employer must register as an actual employer and the wages are liable for payroll tax. This base amount varies from $43,000 per month to $125,000 per month, depending on the state, all of which are liable for taxes.

The annual rate of tax also varies between the states.

Careful thought must be taken where payroll tax requirements are concerned, because there are large penalties for errors. Also, legislation and regulations change frequently so these should be checked often. Because of these penalties, and the complexity of the payroll taxation system, it is wise for most businesses to outsource to a payroll service or accounting professional. These services provide companies with accuracy in completing their payroll needs, and it’s cost-effective.

Business owners who are not certain about these taxations and don’t know the ever-changing tax laws in their state should consult with a tax professional who will guide them through the process of getting their tax requirements in order and assist them with all of their forms.

Daniel Stoica Accounting Professional