Hi, I'm Janene.
I've started my real estate business,
and I'm sure it's going be a success.
In the last lesson,
I learned about the differences
between employees and contractors.
Now, I need to know how to manage payroll.
I've been doing all the reading I can,
but there's a lot of material here.
What I really need
is an overview of my responsibilities
and where I can look for more specific information.
Can you help me?
We sure can, Janene.
to How to Manage Payroll
so You Withhold the Correct Amount from Employees.
In this lesson...
we'll discuss your responsibilities as an employer
to identify wages that are subject to employment taxes;
we'll explain the difference
between an accountable plan and a non-accountable plan;
and we'll show you how to calculate
your payroll taxes using the appropriate method.
In the first part of this lesson,
we'll discuss the employment tax rules for wages
and other types of compensation.
What are wages?
But what exactly are wages?
And does all compensation count as wages?
Wages that are subject to federal employment taxes
include all payments you give an employee
for services performed.
These payments may be in cash or in other forms.
Salaries, vacation pay, bonuses, commissions,
and certain fringe benefits are some examples of amounts
that you include in wages for employment tax purposes.
Not all employee compensation is considered wages
However, not all employee compensation
is considered wages.
For example, if you pay the cost of an accident
or a health insurance plan for your employees,
these payments are not wages
and therefore are not subject to tax.
That seems pretty clear.
Accountable and Non-Accountable plans
But what about those accountable and non-accountable plans
you mentioned at the beginning of the lesson.
What are they?
Let's start with accountable plans.
An accountable plan is a reimbursement
or allowance arrangement between you and your employee
that meets all three of the following rules:
One, your employee must pay for deductible expenses
while performing services as your employee.
Two, your employee must account to you for those expenses
within a reasonable time,
and Three, your employee
must return to you any advanced amounts
that are more than the actual expenses
within a reasonable period.
What counts as a reasonable period?
What counts as a reasonable period
depends on the facts and circumstances.
Generally, it's considered reasonable
that if your employee received any advances
within 30 days of the time they incur the expenses,
that employee adequately accounts for the expenses
within 60 days after the time the expenses were paid
and the employee then returns any excess amount
within 120 days from the date the expenses were paid.
So then what would be a non-accountable plan?
You have a non-accountable plan
if an employee is not required to, or does not have to,
account for expenses in a timely manner.
It is also a non-accountable plan
if you advance an amount of money
to your employee for business expenses
and that employee is not required to
or does not return any amounts
not used for business expenses.
It makes no difference
if they were supposed to account for the money and didn't,
or if you didn't require them to account for it at all.
Basically, if you give your employee money
for travel or business expenses
and they never account for it or return any of it,
you have a non-accountable plan.
IRS Publication 15,
Employer's Tax Guide, has more information
on accountable and non-accountable plans.
So I understand the differences
between an accountable and non-accountable plan,
but how do I calculate payroll?
There are very specific rules
for specific types of workers.
Because you only need that information
if you have those type of workers,
please choose one of the following
as it pertains to your business:
Do your employees receive tips?
Is your business a non-profit organization?
Do you employ farm workers?
Choose one of the following:
When you have employees who receive tips
Many employees receive tips.
Tips are taxable income
and the tips employees get from customers
are generally subject to withholding.
By the 10th of each month
the employees must report to you
the tips they received in the prior month.
For example, if workers received tips in April,
they would report them to you by May 10th.
This includes cash tips
as well as tips charged on credit cards or to accounts.
If the 10th day falls on a Saturday, Sunday,
or legal holiday,
the employee has until the next business day
that is not a Saturday, Sunday, or legal holiday.
Also, if the total month's tips are less than 20 dollars,
then even though they would remain taxable to the employee,
they would not need to be reported to you.
If your employees receive tips...
Form 4070, Employee's Report of Tips to Employer,
is a great tool to give them to assist
in their reporting requirements.
Employee's Daily Record of Tips and Report to Employer
Form 4070 can be found in IRS Publication 1244,
Employee's Daily Record of Tips and Report to Employer.
In addition to Form 4070, there is also a daily log
employees can complete as well as helpful instructions
for recording and reporting tip income.
Publication 531, Reporting Tip Income
For more information, see IRS Publication 531,
Reporting Tip Income.
Some employees receive allocated tips.
These are tips you assign to an employee
in addition to the tips
the employee reported to you for the year.
Do this only if your business is a restaurant,
cocktail lounge or similar business
that must allocate tips to employees,
if the tips that are employee-reported
are less than 8 percent of their share of the food
and drink sales for the business,
and if you are not participating
in the Attributed Tip Income Program.
No income, Social Security, or Medicare taxes
are withheld on allocated tips.
Show the allocated tips separately in box 8 on Form W 2.
Do not include allocated tips in box 1
with wages and reported tips.
IRS Publication 531, Reporting Tip Income,
can give you more details on allocated tips.
Calculating allocated tips can be a difficult process.
But the IRS can help make it easier.
If your employees receive tips,
you can participate in the Tip Rate Determination
and Education program.
The IRS has several tip agreements to help employers
and employees understand
and meet their tip reporting responsibilities.
All are voluntary.
The two most common agreements
are the Tip Rate Determination Agreement, or TRDA,
and the Tip Reporting Alternative Commitment, or TRAC.
Again, see IRS Publication 531 for more information.
Non-Profit Organization Employees
Although many non-profit organizations
are exempt from income tax, their employees are not.
You must still withhold income tax
from the pay of your employees;
however, there are special rules
for Social Security taxes, Medicare taxes,
and federal unemployment taxes for employees
of non-profit organizations.
Publication 15A, Employer's Supplemental Tax Guide
For more information,
see the "Employees of Exempt Organizations"
section of IRS Publication 15A,
Employer's Supplemental Tax Guide.
To report income tax withheld
as well as employer and employee Social Security
and Medicare taxes on farm workers...
Form 943, Employer's Annual Federal Tax Return
use Form 943, Employer's Annual Federal Tax Return
for Agricultural Employees.
Form 943 is also used to report taxes
on wages of household employees
in a private home on a farm operated for profit.
If you employ both farm and nonfarm workers,
you must treat employment taxes
for the farm workers differently
than employment taxes for the nonfarm workers.
Publication 51, (Circular A) Agricultural Employer's Tax Guide
See IRS Publication 51,
Agricultural Employer's Tax Guide
Publication 225, Farmer's Tax Guide
and IRS Publication 225, Farmer's Tax Guide,
for more information.
How do withholdings work?
How do withholdings work?
And how do I know
if I'm withholding the correct amount?
To ensure that you are withholding the correct amount,
you'll first need to know the total amount
of compensation and benefits included
in each employee's wages for the pay period.
Then, you'll need to calculate the amount of income tax
to withhold from each employee.
How do I do that?
The two most common methods are the wage bracket method
and the percentage method.
Wage Bracket Method
Under the wage bracket method,
you simply locate in IRS Publication 15
the proper table for your payroll period
and the employee's marital status
as shown on the employee's Form W 4.
Then, look at the employee's Form W 4
for the number of withholding allowances claimed.
Using the number of allowances claimed on the Form W 4
and the amount of wages paid,
follow the column and row
to find the amount of tax to withhold.
For withholding computations for employees
claiming more than ten withholding allowances,
you will need to refer
to the special wage bracket instructions
in IRS Publication 15.
How would I calculate withholding
by the percentage method?
If the employee's wages are greater than the amounts
in the last wage bracket of the wage tables
or if you do not want to use the wage bracket tables,
you can use the percentage method.
This method works for any number of withholding allowances
the employee claims on any amount of wages.
To calculate withholding by the percentage method,
you will again use IRS Publication 15.
Using the percentage method table,
multiply one withholding allowance
for your payroll period
by the number of allowances the employee claims
on the Form W 4.
Then, subtract that amount from the employee's wages.
Next, find the amount to withhold from the tables
for the percentage method of withholding.
As with the wage bracket method,
those tables are found in IRS Publication 15.
Understanding wages for employment tax purposes
is not easy.
Remember to start with IRS Publication 15
to help answer most of your questions
related to compensation.
Withholding Employee's Share of Social Security & Medicare
What other withholdings do I need to know about?
You are also responsible
for withholding the employee's share
of Social Security and Medicare taxes.
The Form W 4 information does not change the amount
of Social Security and Medicare taxes.
Simply multiply the total wage
by the applicable employee Social Security
and Medicare tax percentages.
You can find the current employee rate
for Social Security on their Website at www.ssa.gov.
As an employer, you also pay a matching amount.
In addition, each year the amount of wages
subject to Social Security withholding changes.
You do not have to withhold any more Social Security taxes
once the employee's wages you have paid
reach that limit.
This is known as the wage base limit,
and this limit is published annually
in IRS Publication 15.
What about the Medicare tax withholding?
The employee tax rate for Medicare tax
is an additional percent
and, again, that rate can be found
There is no wage limit for Medicare taxes
so all wages are subject to withholding
and, just like Social Security taxes,
you as the employer must pay a matching amount.
Generally, you compute all payroll deductions
on the gross pay of each employee.
However, as your business grows,
there may be portions of an employee's pay,
such as certain contributions to retirement plans
that are not subject to some or all of these taxes.
You can learn about these plans in the lesson
"How to Set Up a Retirement Plan for You and Your Employees."
Would taxes have to be collected on tip income, too?
As an employer, you must collect income tax,
employee Social Security tax,
and employee Medicare tax
on the tip income your employees report to you.
You can collect these taxes from wages
or from other funds your employee makes available.
If the employee receives regular wages and reports tips,
calculate income tax as if the tips
were supplemental wages or a part of regular wages.
If you have not withheld income tax from the regular wages
because the wages were too low,
add the tips to the regular wages
and withhold income tax based on the total.
But if you withheld income tax from the regular wages,
then you have two options available:
You can withhold a flat 25 percent
or you can add the tips and regular wages
for the most recent payroll period
and calculate the income tax withholding
as if the total were a single payment.
Then, subtract the tax already withheld
from the regular wages
and withhold the remaining tax from the tips.
What if the employee's income is below
the 25 percent income tax bracket?
If the employee's income
is below the 25 percent income tax bracket,
calculating their tax using the 25 percent flat rate
may mean that you are withholding a lot more tax
than is necessary.
This could cause a hardship for the employee,
so try to consider this
before using the flat 25 percent withholding method.
What if the employee's regular wages aren't enough
for me to withhold all the tax owed?
What do I do then?
There may be times
when an employee's regular wages may not be enough
for you to withhold all the tax owed
on the regular pay plus reported tips.
If this happens, the employee can give you money
until the close of the calendar year
to pay the rest of the taxes.
If there is not enough money to cover all the taxes,
withhold taxes in this order:
all taxes on regular pay;
then, Social Security and Medicare taxes
on reported tips;
and finally, income taxes on reported tips.
Collect any taxes that remain unpaid
from the employee's next paycheck.
If taxes remain uncollected at the end of the year
the employee may be subject to a penalty.
Does it matter if the worker is full or part-time?
What if he or she has another job?
When it comes to withholding taxes,
there is no difference between full or part-time employees
and it does not matter if the worker has another job.
You are not responsible for knowing
when the employee's total wages reach the wage base.
You are only responsible for knowing
when the employee meets the wage base
for the wages you have paid.
There are exceptions, however,
when you take over an existing business.
If you acquire an existing business,
you may include the wages paid
by the previous employer to your employee's wages
when you calculate their annual wage base limit
for Social Security tax purposes.
IRS Publication 15 has more information on this topic
in the section "Successor Employers."
What about unemployment taxes?
What do I have to do with this?
Let's take a few minutes
to talk about the Federal Unemployment Tax Act, or FUTA.
FUTA directs the states and the federal government
to make and to run the unemployment tax program,
which provides unemployment payments
to workers who have lost their jobs.
The various states create
the actual employment insurance systems
and the federal government approves the state laws
and pays the administrative costs of the state programs.
Because this is a joint program
between the state and federal governments,
you are first subject to the state tax.
Then, this tax becomes a credit
against the federal tax.
In your state, you may even be exempt from the tax,
but you still have to pay the federal tax.
Conversely, you may not owe FUTA tax
but you still need to pay the state.
Unlike other payroll taxes,
this tax is the sole responsibility of the employer.
It is not deducted from the employee's paycheck.
You are an employer for FUTA tax purposes
and must file and pay the tax
if in the current year or last year
you paid wages of 15 hundred dollars or more
in any calendar quarter to employees
or had one or more employees at any time
in each of the 20 or more weeks.
The 20 weeks do not have to be full or consecutive weeks.
Count all regular, temporary, and part-time employees,
including employees on vacation or sick leave.
Not all employee wages are subject to FUTA tax:
there are exceptions for certain employers
as well as certain types of employees.
For more information, refer to the table
"Special Rules for Various Types of Services and Payments"
in IRS Publication 15.
For household workers, you are subject to FUTA tax
only if you paid total cash wages of 1 thousand dollars
or more for all household employees
in any calendar quarter in the current or prior year.
A household worker is an employee
who performs household work in a private home,
local college club, or local fraternity or sorority chapter.
For farm workers, you are subject to FUTA tax
on the wages you pay to farm workers
if you paid cash wages of 20 thousand or more
to farm workers during any calendar quarter
in the current or prior year
or if you employed ten or more farm workers
at least some or part of a day,
whether or not at the same time,
during any 20 or more different weeks
in the current or prior year.
How is the FUTA tax calculated?
Currently, the FUTA tax rate is 6 percent.
FUTA tax is figured on the first 7 thousand dollars
in wages paid to each employee during the year.
The tax is imposed on you as the employer;
do not collect it or deduct it
from your employee's wages.
You can take a tax credit of up to 5.4 percent against FUTA tax
for amounts you paid into state unemployment funds,
resulting in a net tax rate of .6 percent.
But you can only take this credit in full
if the taxes are paid to the state
by the time you need to file your Form 940 FUTA tax return.
See IRS Publications 15 and 15A for more information
on the FUTA tax as well as the current rate.
Remember, this tax is the sole responsibility of the employer.
It is not deducted from the employee's paycheck.
Can I have an example?
Let's say late last year you hired Frank
and paid him 35 hundred dollars in wages before the year ended.
All of the 35 hundred was subject to the FUTA tax
at a rate of 6 percent.
Assuming you are eligible
for the maximum FUTA state tax credit,
and all the required state contributions were paid on time,
your tax on Frank's wages would have been 21 dollars.
Then, let's say a few months into the beginning of this year,
Frank's total wages for this year reached 7 thousand dollars.
None of the wages you pay him after that
are subject to the FUTA tax
for the rest of the year.
Let's say, though, that Frank quits his job
and Nancy replaces him.
The first 7 thousand dollars you pay Nancy this year
is also subject to the FUTA tax.
Why is that?
the first 7 thousand dollars you pay each employee each year
is subject to the FUTA tax.
The FUTA tax you would pay is 42 dollars for Frank's wages
and 42 dollars for Nancy's wages.
Your total FUTA tax, this year, is 84 dollars.
What about due dates for paying the FUTA tax?
The due date for the first quarter is April 30th;
the due date for the second quarter is July 31st.
The due date for the third quarter is October 31st,
and the due date for the fourth quarter is January 31st.
Small business employers file Form 940,
Employer's Annual Federal Unemployment Tax Return,
to report FUTA tax.
If your liability for the fourth quarter,
plus any amount not deposited from an earlier quarter,
is over 5 hundred dollars, deposit the entire amount
by the due date of Form 940, January 31st.
If it is 5 hundred dollars or less,
you can either make a deposit or pay the tax
with your Form 940 by January 31st.
Some states may require
that you file state unemployment taxes
at various times throughout the year,
but the federal unemployment tax return
is filed annually.
The due date for the Form 940 is January 31st.
If you have deposited all of your FUTA tax on time,
however, you are given until February 10th to file.
As with all due dates,
if the date falls on a Saturday,
Sunday, or a federal holiday,
you can file on the next business day.
As you've learned with employment taxes,
FUTA tax also has rules on when you must deposit taxes.
If, at the end of any calendar quarter you owe,
but have not yet deposited,
more than 5 hundred dollars in FUTA tax,
you must deposit the FUTA tax
by the last day of the first month after the quarter ends.
If the accumulated tax
at the end of any of the first three quarters
is 5 hundred dollars or less,
you do not have to deposit the amount;
instead, you may carry it forward
and add it to the liability calculated
in the next quarter to see if you must make a deposit.
Remember, all this information is in IRS Publication 15.
This lesson has been a big help.
We're glad to be of assistance, Janene.
But before we end,
let's look at what we've covered in this lesson.
We identified wages that are subject to employment taxes,
learned about accountable and non-accountable plans,
and discussed how to calculate your payroll.
We've also defined wages subject to FUTA tax;
figured the FUTA tax due;
and described the deposit requirements for this tax.
Thank you for joining us for this lesson.
Best wishes on your business.