Navigating the intricate web of tax laws and regulations can be daunting, especially when it comes to payroll taxes. Over the years, we’ve seen many businesses and individuals (“responsible persons”) run into payroll tax issues, sometimes inadvertently. It is important to understand that a portion of the required withholdings is your employees’ money, and you are being entrusted to submit those funds to the Internal Revenue Service (IRS) and the North Carolina Department of Revenue (NCDOR) on their behalf. Failure to remit your employees’ funds as required will result in trust fund liability and significant penalties and interest not just on your business, but on the individuals responsible for ensuring employee funds are properly remitted.
Here are some key tips to help you and your North Carolina business remain compliant and avoid payroll tax problems.
1. Properly Classify Workers
Misclassifying workers can lead to significant tax penalties. It’s crucial to determine if individuals working for you are employees or independent contractors. Remember, independent contractors are not subject to payroll tax withholdings, but misclassifying an employee as a contractor can result in back taxes and penalties. IRS and NCDOR may not respect your classification if the duties and work arrangements of your so-called independent contractor resemble those of an employee. You can find more information on IRS’s view here.
2. Understand the Basics
Before anything else, familiarize yourself with both federal and state payroll tax requirements. Employers are generally responsible for withholding federal and state income tax, Social Security and Medicare (FICA), and federal and state unemployment insurance taxes (FUTA) from employee paychecks. Here are some helpful links: Employment Tax Publications & Withholding Tax Frequently Asked Questions
3. Obtain Properly Completed W-4 and NC-4 from Employees.
These forms are crucial in determining the proper withholdings for your employees. As a result of the Tax Cuts and Jobs Act, if your employee is married, your employee and his or her spouse should coordinate their completion of these forms for their respective employers, even if the spouse previously completed a W-4, the spouse should update their form based on the new employment status of your employee.
4. Submit Payments and Filings On Time
Penalties can quickly accumulate for late payments or filings. Set reminders for all tax deadlines, including monthly, quarterly, or annual filings and deposits. For North Carolina state withholdings, consult the NC-5 series of forms and their respective deadlines on the North Carolina Department of Revenue’s website.
5. Maintain Accurate Records
Keep detailed records of all wages paid, taxes withheld, and any tax payments made. Not only is this a good business practice, but it will also be invaluable if you’re ever audited. Retain these records for at least four years, as recommended by the North Carolina Department of Revenue.
6. Stay Educated
Tax laws and regulations can evolve. Consider attending workshops, webinars, or conferences on payroll taxes, or ask your tax professional to keep you up to date as changes are made. Joining local business associations can also provide networking opportunities and access to shared resources.
7. Use Reliable Payroll Software and/or Professional Services
Modern payroll software can help automate tax calculations and withholdings, reducing the risk of errors. When selecting software, ensure it is updated regularly to reflect any tax rate changes. If you’re not comfortable handling payroll internally, consider outsourcing to a reputable payroll service. Your CPA or an experienced bookkeeper can be a valuable resource in this and many other areas of your business, allowing you to focus on doing what you love.
Our North Carolina Business and Tax Attorneys Can Help
If you have fallen out of compliance with your payroll taxes, the team at Wilson Ratledge welcomes the opportunity to work with you, your CPA, and internal team to get you and your business back on the right track. Contact us today for a consultation regarding your payroll tax compliance or audit issues.