Payroll tax filing can be a challenge when trying to keep up with ever-changing tax legislation and complex employee situations. Many organizations operating across the U.S. find it difficult to maintain compliance, while at the same time pay their employees accurately and on time.
There are many components to manage including employee records, compensation, wages, bonuses and deductions. Taxes and benefits need to be properly deducted and paid, wages must meet minimum requirements, and retirement funds must be placed into the proper accounts. All these steps need to occur within the complicated framework of local, state and federal tax and regulatory requirements.
Here are some helpful tips and background information about general payroll concepts, tax and wage exemptions, changing regulatory requirements, and some of the cost implications associated with non-compliance.
Staying on Top of Key Federal Employment Tax Requirements
Generally, the federal employment tax is made up of federal income tax (FIT); the Federal Insurance Contributions Act (FICA), also known as the Social Security and Medicare tax; and the Federal Unemployment Tax Act (FUTA). For each kind of employment tax, there are numerous requirements to consider when it comes to paying, withholding calculations, making deposits and reporting.
There are several legislative proposals in play that could impact FIT, FICA and FUTA, including:
- Tax reform legislation proposed to reduce income tax rates and increase the standard deduction for taxpayers.
- Possible legislation to replace the Affordable Care Act’s 40% excise tax on high-value health plans, scheduled to take effect in January 2020, with a “cap” on the tax exclusion for employer-sponsored benefits. If the “cap” becomes law, payroll systems would need to be modified.
- Possible legislation could repeal 0.9% additional Medicare tax the ACA imposes on taxpayers that earn more than $200,000 a year.
- It is expected that the Trump Administration and Congress will at some point turn their attention to strengthening the Social Security system, which could include raising the FICA tax rate or increasing the taxable wage base.
- A Trump Administration proposal to establish a nationwide paid leave program for new parents could potentially impact FUTA. The parental leave initiative, which would entitle new parents up to six weeks of paid leave, would be financed through the existing state unemployment insurance (UI) system. If the proposal were to become law, some states likely would need to raise UI taxes to finance it.
Fines and Penalties for Non-compliance of Federal Employment Taxes
Typically, it’s the employer’s responsibility to withhold, deposit, report, and pay federal employment taxes for their employees. Failing to comply with these requirements can result in harsh penalties including potential criminal liability, huge fines, and possibly jail time. Penalties are time-sensitive, rising as time goes by.