With the end of the year here, small businesses need to wrap up their year-end tax estimates. If this is a depressing thing to think about in the middle of the holidays try to focus on the savings possible when you plan your taxes well. Consider the savings potential in payroll taxes, for instance.
Those year-end bonuses
The holidays are bonus time – every employee expects a Christmas bonus or a year-end bonus. The bonuses that you pay aren’t just simple payments. These involve payroll tax withholding and employer matching. There may be Medicare taxes and FICA involved, too.
When payroll withholdings are accounted for, a bonus check for $1500 will only net an employee $1386. Employers often find this unattractive. The only way to avoid this is to work backwards from the net figure that you wish to see your employees receive. It would be a mistake to avoid going through payroll to sidestep this hassle, though. There could be penalties involved.
The fringe benefit packages
Publication No:15 of the IRS has information on pre-tax fringe benefits. You could consider replacing salary raises with fringe benefits. Offer health benefits, child care benefits and so on and you’ll save on your payroll taxes – compared to what you would pay if you compensated your employees in higher salaries instead.
Hiring a veteran before the year runs out
The IRS rewards businesses for hiring veterans of the armed forces. Hire one before the last day of the year and you become eligible for the Expanded Tax Credit. You can get up to $9600 in tax benefits for each veteran employed. Many factors determine how much credit you actually get. You get to claim the maximum if the veteran has been jobless for a long time (if you decide to employ him full-time and then pay him a full salary). It also depends on whether the veteran was disabled in the line of duty.
If you contribute to the state unemployment fund, you should ensure that you receive a statement about any rate changes there might be by January. If there’s anything like this you need to talk to your payroll provider about it to make sure that you pay no penalties for making incorrect tax payments.
Other things to remember
When you record your payroll expenses in your accounting software, you should ensure that the gross wages and the year-to-date wages match. Any paycheck withholdings need to be placed in a separate current liability account and your payroll taxes should be on a separate line. Many businesses neglect to check that their payroll report, their profit and loss statement and their balance sheet, display those payroll figures. The figures that you show against payroll expenses on your income tax return should be the exact amount that you declare on your W3.
Small businesses have a lot to complain about when it comes to their payroll taxes. There are plenty of ways to make things better though. Try these tips and you will probably find a way to make the tax bite a little less painful.