As a small business owner, you are used to wearing a lot of hats. There are so many facets and complexities when it comes to operating your business. The team at TaxBandits wants you to know that you don’t have to wear a “tax professional” hat, we can help you figure out the IRS tax returns that are required for your business.
One of these returns is Form 941. You will use your payroll information and records when filing this tax return each quarter. Employers who withhold social security, medicare, and income taxes from their workers’ pay must file this tax return quarterly.
If you have made mistakes throughout the quarter, it will make filing much more difficult as you will need to resolve these mistakes to avoid incorrect reporting and the penalties that could result.
Classifying Workers Incorrectly
Be sure that you are making the distinction between employees and independent contractors. From there be sure that you are making the distinction between full time and part-time employees. According to the IRS here are the requirements for each.
You may pay an Independent contractor for their services, but they operate apart from your employees. These workers have direct control over the work that they do and the timeline in which they complete it.
These workers are considered to be self-employed by the IRS and therefore are responsible for paying self-employment taxes. You will need to provide your independent contractor with a Form 1099-MISC.
An employee does not have this freedom. They work for you and you control what their duties are. You, the employer control how the services are performed, no matter how much flexibility you allow them in completing these services. You will need to supply your employees with a W-2 and withhold income, Medicare, and social security taxes from their paychecks.
According to the IRS, a full-time employee works thirty hours per week or a total of 120 hours throughout the month. Any employee working less than this is considered to be part-time.
Incorrectly Classifying Tax Exempt Workers
Tax Exempt workers are not very common, but it is an important distinction to understand in the case that you do come across them. How will you know? Don’t worry, your employee will indicate that they are tax exempt on their W-4 when you hire them.
What does this mean for you as an employer? This means that you will not withhold any federal income tax from their paycheck. This exemption does not apply to medicare and social security taxes, you will still withhold these.
This employee will need to complete a new W-4 each year by April 15 and submit it to you in order to maintain their tax exempt status.
Miscalculating Overtime Wages
There is a general rule of thumb when it comes to calculating your employees’ overtime pay that is set by the Fair Labor Standards Act (FLSA).
This act states that after a full-time employee works 40 hours, their pay should be increased by 1.5 for each additional hour that is worked.
For example, if an employee earns $30 an hour, their overtime rate would be 1.5 times higher.
The overtime rate would be $45 per hour.
Paying The Wrong Tax Rate
It is important to stay up to date with the tax rates that the IRS has set in place. They can vary from year to year. The current tax rates for 2020 are:
Social Security tax rate is 6.2% each for the employer and employee.
The Medicare tax rate is 1.45% each for the employer and employee.
Running Payroll Late
This can be a big problem, not only will your employees be unhappy, but you be subject to fines and penalties. Depending on the schedule with which you make IRS deposits, this can become an issue.
So, there you have it. By avoiding these common mistakes, you can easily stay on the IRS’ good side when filing your Form 941 each quarter. You can get started filing today with TaxBandits!
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