Payroll Basics for 2006

At the beginning of a new year, payroll personnel need to be aware of and be prepared for the changes affecting their payroll process. This column addresses some of the guidelines and changes effective January 1, 2006 regarding payroll taxes, the timing of payroll tax payments, holiday bonuses and specific requirements of other payroll forms.

What forms should I have a new employee fill out?

New employees should fill out a Federal W-4 and an I-9. Some states, such as Iowa , also have their own W-4 which they require to be filled out and filed with the state within 15 days of the date of hire. Other states, such as Nebraska , require a copy of the Federal W-4 be filed with them. You should always check the rules of the state you are in.

Employers are required to keep W-4 and I-9 forms on file for each employee. All I-9's should be kept in a file separate from all other payroll records.  (see record retention)

What is the taxable Social Security wage base for 2006?

The taxable Social Security wage base for 2006 is $94,200. The total employee FICA tax rate is 7.65% (6.2% for Social Security and 1.45% for Medicare). There is no cap on Medicare wages.

What are FUTA and SUTA?

FUTA is Federal Unemployment Tax. The FUTA rate is .008 on the first $7,000 of taxable wages per employee. SUTA is State Unemployment Tax. The state will send out your new rate and taxable wage base at the end of each year for the upcoming year. For 2006 Iowa 's taxable wage base is $21,300 while Nebraska is $8,000 and South Dakota 's taxable wage base is $7,000.

How do I know when to deposit my Federal 941 payroll taxes?

There are three main ways to pay payroll taxes. There are monthly deposits, semiweekly deposits, and quarterly payments. Your deposit schedule for the year is based on the total tax you reported on forms 941 during the four-quarter look-back period, which is July 1 thru June 30 of the prior year. If you reported less than $50,000 of taxes you are a monthly depositor and your tax deposit is due by the 15 th of the month following your payroll. If you reported more than $50,000 you are a semiweekly depositor. If you are a semiweekly depositor and your payday falls on Saturday, Sunday, Monday and/or Tuesday your deposit is due on Friday. If your payday falls on Wednesday, Thursday, and/or Friday your deposit is due the following Wednesday.

There is also the $100,000 next day deposit rule. If your tax deposit is $100,000 or more on any day during the deposit period you are required to deposit the tax by the next banking day, whether you are a monthly or semiweekly depositor.

If you are a business with tax deposits under $2,500 per quarter you can file them with Internal Revenue Service Form 941 which is filed quarterly.

How do I deposit my Federal payroll taxes?

There are two ways to deposit your payroll taxes. You can make your deposit with a Federal Tax Deposit Coupon, form 8109 at your bank or you can make your tax deposit by EFTPS. EFTPS stands for Electronic Federal Tax Payment System. Deposits made by EFTPS must be initiated at least one business day before the deposit due date.

Corporations must make all depository tax deposits (such as employment tax, excise tax and corporate income tax) using the EFTPS system if the total deposit of such taxes in 2004 were more than $200,000 or the corporation was required to use EFTPS in 2005.

Once a taxpayer is required to make EFTPS deposits all future deposits must be made by EFTPS, regardless of whether the amount is reached in each calendar year thereafter.

If the corporation is required to use EFTPS and fails to do so, it may be subject to a 10% penalty. Corporations not meeting these criteria can register voluntarily. To get information on registering call 1-800-555-4477, 1-800-945-8400 or visit www.eftps.gov .

When do I deposit my state payroll taxes?

For Iowa :

All employers are now required to use the Iowa e-file & Pay System. You should have received a BEN Business e-file number from the Iowa Department of Revenue. You log into their website, file the appropriate month or quarterly withholding and print out the confirmation form. The confirmation number must be written on the Iowa withholding coupon when filed if paying by check. You may pay by check, e-pay or credit card or ACH credit.

Monthly deposits are required if the employer has withheld $500 to $10,000 a month.

Monthly deposits must be filed by the 15th day of the following month. The taxes withheld for the third month of each quarter must be filed by the last day of the next month.

Quarterly deposits are required if your Iowa withheld taxes are less than $1,500 a quarter. Quarterly deposits must be filed by the last day of the month following the end of the quarter, with the preprinted Iowa employer's withholding tax form.

You are a semi-monthly depositor if you withhold more than $10,000 per month and/or $5,000 semi-monthly. These deposits must be filed by EFT (Electronic Funds Transfer).

All depositors are required to file a VSP (Verified Summary of Payments) at the year-end. This summary form must be submitted by February 28 of the following year.

For Nebraska :

Monthly deposits are required if the employer has withheld more than $500 the first month of the quarter. A monthly deposit must be filed by the 15 th day of the next month. A monthly deposit is then required to be made for the second month of the quarter, whether or not the amount withheld for the second month is more than $500.

Every employer required to deposit taxes monthly, or who has requested to file monthly, must file the Nebraska Employer's Monthly Withholding Deposit Form 501N. The form is filed by the 15 th day of the following month. The form 501N is used only for taxes withheld during the first two months of the quarter. The taxes withheld for the third month of each quarter are paid with the Nebraska Quarterly Withholding Return, Form 941N.

A Nebraska Reconciliation of Income Tax Withheld, Form W-3N, is filed at the year-end. The Form W-3N is due on or before March 15 of the following year.

Do I need to deposit FUTA or SUTA taxes?

If your FUTA tax liability for the quarter is $500 or less, you may carry it forward and add it to the liability in the next quarter to see if a deposit is required. If your FUTA tax liability for any quarter is over $500 (including any FUTA tax carried forward from a previous quarter), you must make a deposit by the last day of the first month after the quarter ends. Deposits can be made by EFTPS or with Federal Tax Deposit Coupon #8109 at your bank.

SUTA taxes are due the last day of the month following the end of the quarter. They are paid in with the SUTA form.

When are W-2's due?

Generally, employers should furnish copies W-2s to employees by January 31 of each year. You will meet the furnish requirement if the form is properly addressed and mailed on or before the due date. If employment ends before December 31, you may give copies at any time, but no later than January 31. If an employee asks for Form W-2, you are required to give him or her the completed copies within 30 days of the request, or within 30 days of the final wage payment, whichever is later. However, if you terminate your business, you must provide Form W-2 to your employees for the calendar year of termination by the due date of your final Form 941.

Employers are required to furnish copy A of the Form W-2 to the Social Security Association with a completed Form W-3 by February 28. If you file 250 or more Forms W-2, you must file them on magnetic media (or electronically) unless the IRS grants you a waiver. You may be charged a penalty if you fail to file on magnetic media when required.

Employers are required to submit copy 1 of Form W-2 to the State of Nebraska along with a copy of the Form W-3N by March 15. Iowa does not require copies of Form W-2 with the VSP due by February 28.

Are holiday bonuses/gifts taxable?

A question that seems to be asked quite frequently this time of year is whether or not holiday bonuses or gifts are taxable.

The tax implications concerning holiday gifts are simply defined. A gift to an employee is tax-free only if it qualifies as a “de minimis” fringe benefit or is part of a “qualified” Awards Program. To qualify, the gift must be in the form of property or services. Additionally, a “de minimis” gift must be so small and infrequent, that accounting for it is impracticable. The IRS has allowed for inexpensive, non-cash gifts, such as a holiday turkey, theater tickets, flowers or books to be considered tax-exempt. On the other hand, gifts of cash or cash equivalents, such as gift certificates, are always considered wages for tax purposes. Your company must withhold income and payroll taxes, and must pay its share of payroll taxes.

The consequences of being unprepared and unknowledgeable of various tax withholding and payment laws can be costly to your company and possibly your employees. The additional taxes and the penalty and interest associated with the errors are a burden you need to avoid. If you need assistance with this topic or have questions regarding any other topic, direct them to tlockie@taxpros-plus.com or call 712.277.2834.

©2006 by Dierking Lockie & Associates PC
Elegant Web Design LLC of Sioux City Iowa