What are Withholding Taxes?
Anyone who has ever received a paycheck knows there are taxes withheld from their gross pay. These taxes are referred to as withholding taxes and generally include:
- Federal income taxes
- Social Security taxes
- Medicare taxes
- State income taxes.
State Income Taxes
Most states have a personal income tax. However, seven states do not have a personal income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two others, New Hampshire and Tennessee, tax only dividend and interest income.
Don't Mess Up on Trust Fund Taxes!
Federal income taxes, social security, and Medicare taxes withheld from employees' wages are called trust fund taxes becuase you hold them in trust until you turn them over the the U.S. Treasury.
There have been many cases where a small business owner withheld these taxes from employees' paychecks and simply kept them for himself and never turning them over the the U.S Treasury. A very dumb move!
Failure to withhold and remit trust fund taxes to the U.S. Treasury can result in stiff penalties and even criminal prosecution if you knowingly and intentionally did not turn these taxes over the the Fed.
The Trust Fund Recovery Penalty:
The Trust Fund Recovery Penalty is 100% of the tax due! And get this, not only can the business owner be held liable for these taxes, other people responsible for handling the business's payroll, such as the bookkeeper, can also be held liable for nonpayment of trust fund taxes.
Best advice: Use a payroll service. You'll sleep a lot better.
Using a Payroll Service is Smart and Inexpensive
If you have employees, using a payroll service is one of the smartest and cheapest things you can do to protect yourself and eliminate the hours that go into payroll processing, reporting, a tax compliance. Not to mention the proparation and issuance of paychecks.
Do yourself a favor and check out: Intuit Online Payroll Software and make running payroll simple so you can focus on what you do best.
Wages Paid By Single-Member LLCs
Beginning back in January 1, 2009, employment taxes on wages paid to employees by a single-member LLC must be reported and paid under the entity's own name and tax identification number (TIN) and not under the name and TIN of the owner.
What This Rule Means:
It means two things:
- If you set up a single-member LLC, you'll need to get a Federal Employment Identification (EIN) number for the LLC itself and use that number on employment tax returns when reporting and paying employment taxes to the U.S. Treasury.
- It also means, eligible single-member entities may no longer elect to treat employment taxes for employees as a direct liability of the owner, as was the case in 2008 and prior tax years.
Disregarded Entity Clarifed:
A disregarded entity is simply an entity that is not considered separate from its owner or from another entity.
For example, a sole proprietorship is a disregarded entity because the business and the owner are one and the same and not considered separate entities. In contrast, a corporation is a separate entity, separate and apart from its shareholders.
A single-member LLC and a qualified subchapter S subsidiary (QSub) are examples of disregarded entities. However, for employment tax purposes, single-owner disregarded entities and qualified subchapter S subsidiaries (QSubs) are treated as if they are separate entities. Again, this exception is made for employment tax purposes only.
In 2008 and prior years, the owner was allowed to use his own name and tax identification, such as a social security number, on employment tax returns. Now, the owner of a single-member disregarded entity, such as a single-member LLC, must use the entity's name and the entity's tax identification number on employment tax returns.
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Have an accounting or bookkeeping question? Email it to me.
- Return to the Payroll Taxes Table of Contents to find related links.