CHAPTER
18

Remitting and Reporting Taxes

In This Chapter

• Paying payroll-related taxes
• Quarterly estimated taxes
• Reporting on various business taxes
• Other types of business taxes

The Congressional Budget Office estimates that for fiscal 2015, $1.5 trillion in individual income taxes are due, along with $1.1 trillion of payroll taxes. That collective $2.6 trillion dwarfs the estimated $628 billion due from corporate income taxes and other sources. There’s no doubt, payroll taxes have an impact on your business.

Payroll taxes fund much of our federal government, but sales taxes are a significant source of funding for most cities, counties, and states. The U.S. Census estimates that sales tax collections for the 12 months ended March 2015 will exceed $355 billion. As you’ve seen elsewhere in this book, your business will likely collect payroll and/or sales taxes on behalf of governmental agencies. In this chapter, we provide an overview of how to account for these taxes and remit them to the appropriate parties.

We assume here that you plan to process and remit payroll and sales taxes directly to the respective governmental agencies, as opposed to using an outside accountant or third-party payroll provider. To that end, we’ll demonstrate the typical abilities of accounting software to help you determine what you owe and then generate the corresponding reports.

As you’ve seen in Chapter 9, you can outsource payroll processing to third-party companies. Sales tax reporting can be outsourced in the same manner, although the ease of which you do this may depend on your choice of accounting software.

Remitting Payroll Taxes

Each paycheck your business issues is subject to a number of withholdings (see Chapter 12). Some payroll taxes are the shared responsibility of both employee and employers; others are borne solely by employees or employers. For example, income tax withholding is an employee responsibility, Social Security and Medicare taxes are split between employee and employer, and employers bear the entire cost of unemployment and disability taxes.

As you’ll see later in this chapter, all businesses follow the same approach for reporting payroll tax liabilities and reconciling the amounts due. However, there are marked differences when it comes to remitting (paying) payroll taxes. Generally, there’s an inverse relationship between the amount you need to remit and the length of time you’re given to make the remittance. This section gets you up to speed on paying various payroll taxes.

DEFINITION

In the context of payroll taxes, remit means to send the money to the appropriate governmental agency. In this chapter, the terms remit, deposit, and send all indicate the same thing. Depending on which agency you’re paying, you may be required to pay electronically or you can pay by check.

Federal Payroll Taxes

The Internal Revenue Service (IRS) now requires that all regular tax payments be made electronically through the Electronic Federal Tax Payment System (EFTPS). Publication 966 provides an overview of this system, but in short, every business must register with EFTPS either online at eftps.gov or by telephone at 888-725-7879. Within 7 business days of registering, you’ll receive a personal identification number (PIN) that’s required so you can pay your business’s taxes online or over the telephone.

DEFINITION

In the context of payroll tax deposits and reports, business days are typically Monday through Friday, with the exception of state or federal holidays. If a tax deadline falls on Saturday, Sunday, or a holiday, the deadline is extended to the next business day. The term business day is used interchangeably with banking day.

Although the IRS still accepts paper checks for payments due on tax forms, the EFTPS system is generally faster and easier. You must arrange EFTPS payments no later than 8 P.M. Eastern Standard Time the day prior to the tax payment’s due date. Late payments can be subject to interest and tax penalties. Although you shouldn’t count on it, the IRS sometimes notifies you it’s elected to waive the interest and penalties for certain late payments, but these are limited situations when the IRS perceives that taxpayers are striving to be compliant when a deadline has been missed.

The frequency with which you’ll remit federal payroll taxes depends on the amount of taxes you’ve remitted in the previous year. All new businesses are considered monthly payers, meaning all federal payroll taxes for the previous month must be remitted by the fifteenth of the following month, as shown in the following table. Use the dates shown when due dates fall between Monday and Friday; otherwise, use the following business day when the fifteenth falls on a weekend or a federal holiday.

Remittance Schedule for Monthly Payers*

*Between $2,500 and $50,000 annually

Businesses that remit more than $50,000 in payroll taxes per year will receive notification from the IRS that the business must start depositing payroll taxes on a semiweekly schedule. In effect, this means payroll taxes are typically remitted 3 business days after the payroll date. The following table provides a breakdown of this schedule.

Deposit Schedule for Semiweekly Payers*

*$50,000+ annually

If at any point you have payroll taxes of $100,000 or more on a given day, the taxes must be deposited in full the next business day. Regardless of prior status, your business is reclassified as a semiweekly depositor for the remainder of the current calendar year, as well as the following year.

At the opposite end of the spectrum, if your payroll taxes are consistently less than $2,500 per quarter, the IRS might inform you that you can deposit payroll taxes quarterly when you file Form 941 (which we discuss later in this chapter).

BOTTOM LINE

With regard to payroll taxes, governments try to strike a balance between risk management and paperwork reduction. As you may have noticed, the more you owe in taxes, the sooner the government expects to have the money in hand. This reduces the government’s risk that the funds will be misappropriated within your business before they’re paid. On the other hand, if your business generates little taxable activity, you’ll get some relief by having to make fewer tax deposits throughout the year.

Federal Unemployment Taxes

Federal unemployment taxes (FUTA) are usually deposited on a quarterly basis, but you might be able to make as few as one deposit per year. The magic number in this case is $500 in accumulated tax liability.

As long as your accumulated unemployment tax liability remains below $500, you can defer a quarterly payment to the next quarter. If at any point your liability exceeds $500, you must make a deposit for that quarter. At that point, the $500 threshold starts over again.

Quarterly FUTA tax deposits must be remitted electronically through the EFTPS system on the same schedule you use for filing your other federal payroll taxes on Form 941. If your total FUTA liability for the year is less than $500, you can remit the entire amount due when you file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return (more on this later in the chapter).

State Withholding Taxes

As you learned in Chapter 12, most but not all states levy some form of state income tax. We can’t provide specific guidance for all the states here, but we can tell you that most states follow the federal thresholds we discussed earlier.

Depending on your state, you might have the option of remitting taxes by mailing a paper deposit form and a check, although remitting payroll taxes electronically is often much easier. State withholding taxes are remitted to your state’s version of a Department of Revenue. Check to see if your state offers an online portal where you can remit taxes.

Your federal taxes deposits likely will be much higher, so don’t be surprised if you’re required to submit federal taxes on a semiweekly basis but are allowed to remit state withholding on a monthly basis.

State Unemployment Taxes

State unemployment taxes (SUTA) typically are remitted to your state’s version of a Department of Labor. As noted in Chapter 12, all 50 states levy unemployment taxes.

Many states require quarterly deposits and reporting of state unemployment taxes. As with federal unemployment taxes, you might pay SUTA on a different schedule than the remittance schedule for state income tax withholding. You’ll likely be able to make electronic deposits, but you might have to use a different website for the deposit than you use for state withholding taxes.

Local Withholding Taxes

Deposit requirements for paying local income taxes can differ even beyond the state and federal levels discussed here. Rest assured that if your local county or city levies a local income tax, the information for complying with the regulations will be easy to find via an internet search.

RED FLAG

State and federal governments will use every means necessary, including hefty monetary penalties and criminal prosecution, to ensure taxes collected on their behalf are paid in a timely fashion. In situations when you have to choose who to pay first, always pay the government first. The punitive actions creditors and vendors can apply against you pale in comparison to what governments can bring to bear. The Official Payments website (officialpayments.com) allows you to pay federal taxes with a credit card.

Reporting Payroll Taxes

Reporting the payroll taxes you owe or have paid typically occurs on a quarterly and/or annual basis. This means you need to submit reports for each type of payroll tax to the corresponding governmental agency.

As we noted earlier in the chapter, remitting and reporting occur on different timetables. Businesses with significant tax liabilities must send the taxes due to the respective government agency as frequently as the next banking day, while businesses that owe minimal taxes may only have to pay quarterly or sometimes annually.

No matter how often you pay, every business follows the same schedule with regard to filing payroll tax returns, even if no tax is due for a given period.

Federal Payroll Taxes

At the end of each calendar quarter, you must prepare and submit Form 941 to the IRS. This tax form is used to report the amount of federal income tax withheld from your business’s employee paychecks during the quarter, as well as to calculate the amount of Social Security and Medicare taxes due. This form also serves to reconcile the tax deposits you made with the actual taxes due. You can request a refund of overpayments, or use this return as a vehicle for catching up underpaid payroll taxes.

Form 941 must be filed by the end of the month following each quarter, as shown in the next table.

Form 941 Filing Dates*

*Within a month of the end of each calendar quarter

At the end of each year, you’ll also prepare and file annual Forms W-2 and W-3. Each employee who received a paycheck at any point during the year must be issued a Form W-2 that reports the total wages paid and the employment taxes withheld during the year. Employees use this form as documentation for their personal income tax returns.

Employers use Form W-3 as a transmittal document that informs the IRS and the Social Security Administration of the total payroll taxes withheld during the year, as well as the number of W-2 forms being submitted. The total payroll on Form W-3 should always match the sum of the payroll you reported on the four 941 forms you submitted during the year.

At the end of each year, you’ll also need to prepare and file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return. You use this form to report and remit the federal unemployment taxes for a given year.

ACCOUNTING HACK

Don’t panic if you discover you’ve made an error when filing Forms 940 or 941. The IRS has a somewhat confusing mechanism for filing amended returns. Certain forms, including Form 941, have an X series of forms used for filing amended returns, so you can submit Form 941X if you find an error in a previously filed Form 941. Form 940 doesn’t have a 940X equivalent, so you’ll simply file a replacement Form 940 to correct any errors.

State Withholding Taxes

Your state’s equivalent of a Department of Revenue likely requires you to report the state income tax withheld on a quarterly and annual basis. These deadlines likely follow the quarterly federal file schedule given earlier, but be sure to check your state’s specific requirements.

If you happen to live in a state that doesn’t levy state income taxes, your periodic payroll tax reporting burden is a bit lighter than for most of us.

State Unemployment Taxes

You assuredly will be required to file a state unemployment tax return on a quarterly basis. As we note in Chapter 12, all 50 states levy unemployment taxes. Your state’s equivalent of a Department of Labor can provide specific guidance on the filing requirements for your state.

ACCOUNTING HACK

Many states allow payroll tax returns to be filed online via state-run websites, although as of this writing the IRS does not. However, you can use many accounting programs to file payroll tax returns electronically. This might entail an additional fee from your software vendor, but it can greatly streamline the reporting process. You’ll typically need to make payroll tax deposits outside your accounting software or through your third-party payroll provider. The latter also can file federal, state, and local payroll tax returns on your behalf.

Sales Tax

Most states and municipalities collect some level of sales tax on consumer purchases. Sales taxes are most often levied on goods, but your local jurisdiction might tax services instead of or in addition to physical goods. Within a given state, each county and city can have different tax rates.

The reporting and remittance schedule for sales taxes varies by state and municipality. As with payroll taxes, you’ll find an inverse relationship between the amount of tax you collect and the frequency with which you must remit and report sales taxes collected. Unlike payroll taxes, many jurisdictions do provide a modicum of compensation for complying with sales tax reporting. For instance, Georgia companies are entitled to keep 3 percent of timely sales tax deposits as vendor compensation.

Typically, you’ll need to register for a sales tax account with your state’s equivalent of a Department of Revenue. The sales tax rate you collect may be based on the city or county where your business is located, or it could be based on your customer’s location. Be sure to research your sales tax requirements, if any, because failure to collect sales tax from your customers means the government will look to your business to cover the shortfall.

The frequency with which you remit and report payroll taxes is based on the amount of taxes you collect. Businesses with minimal sales tax activity may only be required to remit and report once per year.

Sales tax collections can get very complex very quickly, but your accounting software can help. As shown in the following figure, your accounting software typically allows you to set up sales tax items or codes you’ll assign to each customer. Further, you can indicate whether inventory items, which may be products or services, are taxable or nontaxable. By setting up sales tax in advance, your accounting software keeps track of your taxable and nontaxable transactions, as you’re required to report the totals for both on your sales tax return. Some accounting programs offer more hand-holding than others. The following example shows a typical sales tax liability report that can be used to report and remit sales taxes due.

Your accounting software likely offers something along the lines of this Sales Tax Liability Report, from QuickBooks desktop.

If you have any complexity in your sales tax reporting, consider outsourcing sales tax compliance to a third party such as Avalara (avalara.com), Exactor (exactor.com), or Vertex (vertexsmb.com). If you collect sales tax in only a single county, you can easily configure your accounting software to perform the necessary calculations. However, sales tax returns often require you to detail your sales by county and further break those down into separate tax amounts per county. For instance, a 7 percent sales tax could be comprised of a 4 percent state tax, a 2 percent local tax, and a 1 percent local transportation tax. Multiply this by several counties, and you’ll quickly be seeking a better way.

RED FLAG

Don’t be surprised if you’re required to collect, remit, and report sales taxes for more than one state. If you have an office or even single employee based in a state, or if you make sales to a customer in a state, your business may be required to collect sales tax or other taxes for that state. You also might have to file a use tax return to your own state for purchases you’ve made where no sales tax was collected. Although typically out-of-state and international customers are exempt from your local sales tax, sales tax enforcement is changing as state and local governments seek to recoup tax revenues. Enlist the help of a tax adviser or third-party service to help navigate the ever-changing rules.

Other Taxes

The taxing authority of government agencies knows few bounds. Your business could be subject to taxes beyond the scope of this book. Your county, city, or township might level an annual business license tax based on a percentage of your annual revenue. If your business owns property or equipment, likely you’ll need to file and prepare some type of property tax return on an annual basis and then separately remit that tax payment.

The federal government assesses excise taxes on certain goods and services, while state and local governments have their own assortment of special purpose taxes.

Annual State Registration Fee

Your business might be required to file an annual registration return and fee with your state. This is a separate tax from what we’ve covered in this chapter, and the deadlines and requirements vary by state. These returns usually inform the state of the physical and/or mailing addresses of your business, as well as the names of general partners or corporate officers.

Penalties apply for late or missed filings, so be sure to mark your calendar each year.

Business License Tax

Depending on where your business is located, you might be required to pay a business license tax to your county, city, or township. Business license taxes are used to fund local government activities and are often some combination of a percentage of your annual revenue and number of employees.

You might be required to file a business license tax annually by a certain date and remit the tax due within a short period of time thereafter.

Ad Valorem Taxes

The Latin term ad valorem means “according to value” and is often used to refer to taxes that are based on the value of real estate and personal property. Such taxes are usually enacted at the county or township level, based on an annual assessed value.

In the case of real estate, local tax assessors make an annual determination of the market value of each property. Exemptions are sometimes available, and each taxing authority has a mechanism by which taxpayers can appeal what they feel are unfair assessments.

Separately, your business also might be required to file a personal property tax return. In this context, personal property is considered equipment, furniture, computers, and other assets owned by the business. Your return typically reports the initial purchase price of these items.

Excise Taxes

The federal government assesses an excise tax on certain goods, primarily gasoline, but also sport fishing gear, archery equipment, tires, and even vaccines. States and local jurisdictions often charge excise taxes on alcohol and tobacco products.

Excise taxes are typically borne directly by manufacturers and retailers, but ultimately, they make up part of the final price of products paid by consumers. Be prepared to either research the tax requirements of your industry thoroughly or enlist the assistance of a qualified tax professional.

Tourist Taxes

Your state or local government might collect special taxes that are primarily borne by out-of-town visitors. These taxes are often referred to as tourist taxes and may be special assessments on hotel rooms, vacation properties, rental cars, and other visitor-oriented services.

If these taxes apply to your business, you might have to file special returns above and beyond those listed in this chapter. It’s always best to consult with a tax adviser to determine if your business is subject to this or any of these other unique tax situations.

The Least You Need to Know

• If your business has employees, you must calculate, withhold, and remit federal, state, and sometimes local payroll taxes in a timely fashion.
• Along with income tax, state and local governments get their revenue through a variety of taxes, including sales tax, property tax, franchise tax, and more. Check with your state authorities to find out which taxes you are liable for.
• Paying taxes isn’t an option. Pay all your federal, state, and local taxes first and on time.
• In addition to paying taxes in a timely fashion, you typically have to report on taxes owed to federal, state, and local taxing authorities on a regular schedule.