Sponsored - Another tax year is in the books and what a year is was! Preparing to file income taxes is likely to be more challenging this year with all the changes.
- For starters, many Americans’ personal situation have changed due to the pandemic. For example, those who collected unemployment compensation should receive a Form 1099-G from the state. Both federal and state unemployment compensation is taxable as ordinary income. Sadly, COVID took many lives and that may have an impact on a spouse’s tax return.
- Business owners that took advantage of government aid need to demonstrate compliance. Also, losses due to temporary or permanent closures may create entirely different tax scenarios.
- Congress passed many tax changes for 2020, most designed to help save taxpayers money. These changes are too numerous to detail here, but the takeaway is that this year, you’ll want to consult your tax professional for assistance with filing your taxes so you get the best possible results.
- Meanwhile, some rules remain the same. Remember, you have until April 15, 2021 to make potentially deductible contributions to your IRA for 2020. You can contribute $6,000 if you’re under 50 and $7,000 if you’re 50 or over for 2020.
Understanding Payroll Taxes
Sole proprietors who decide to add employees need to understand payroll taxes. As an employer, you are expected to withhold and pay federal payroll taxes. And if your employees work in a state with state income tax, you’ll need to withhold those too.
Both you and your employee must each pay 6.2% for Social Security and 1.45% for Medicare tax. These two taxes are commonly called FICA tax and the Social Security portion has a wage cap. For 2021, wages up to $142,800 are taxable for Social Security.
As an employer, you’ll pay the federal unemployment tax which is 6% on the first $7,000 of each employee’s earnings. For high earning employees, you must withhold the Additional Medicare Tax which is 0.9% of wages in excess of $200,000 in a year.
Based upon your employee’s Form W-4 inputs, you’ll need to withhold federal income tax from their wages. The amount to withhold depends on things like tax filing status, number of dependents and whether the employee has multiple jobs.
Most states have their own withholding form that your employee completes when they are hired. Keep in mind your employee can update these state forms, like the federal Form W-4, at any time to change their withholding amount.
Most states require the employer to pay a state unemployment tax. This tax rate varies so check with your local taxing authority to find your rate. Keep in mind some states also require employees to pay the state unemployment tax so this may need to be withheld from your employee’s paycheck.
Lastly, some cities, towns, and other local governments impose a payroll tax. Consult your tax advisor to make sure you are paying all required taxes correctly.
Don’t Forget to File and Pay
After you’ve withheld the employee’s portion of the payroll taxes, you must file payroll tax returns and pay the tax to the taxing authorities. Be sure to file on time because there can be significant penalties for being late.