As the owner of a fledgling startup, you understandably want to run a tight ship. In limiting your expenditures, you likely have a skeleton staff and take on as many roles as you can yourself. But there are some areas of running a business that are best left to qualified professionals as they require a specialized skill set.
One of these areas is financial recordkeeping. Proper recordkeeping helps business owners keep track of day-to-day transactions and their enterprise’s overall performance. Part of this process entails calculating what employees are due after making all statutory deductions.
Configuring these deductions is a central part of payroll management. Given the steep penalties for failure to factor these deductions into your tax returns and make the corresponding remittance, this is something you can’t afford to leave to chance.
What Could Go Wrong?
Before expounding on what could go wrong if you fail to follow government stipulations, here is a definition of payroll taxes. Simply put, they are taxes levied on the wages or salaries you pay your employees every month.
The payroll tax has three kinds of taxes: income tax, MEDFICA (medical aid tax), and FICA (social security tax). Typically, you will remit these taxes biweekly or monthly according to the Internal Revenue Service (IRS) employer tax guide and regulations stipulated by your local state revenue service.
The IRS has penalties for failing to pay federal payroll taxes on time, and the penalty amount depends on how late you make the deposit. They will hand you a two percent penalty on the total amount due if you delay by less than five days. If you’re more than 15 days late, you will face a five percent penalty. Besides remitting the taxes themselves late, there’s a penalty if you fail to follow the procedures for filing tax returns. That could result in you facing heft fines or even time in prison.
If you fail to provide your employees with W-2 forms, they can’t file their personal tax returns. And because of this, they may report you to the IRS, exposing you to the possibility of intensive audits and, eventually, prison time and fines. Note that the IRS holds the person appointed by the business entity to handle employee tax remittances personally responsible for failure to comply with payroll tax regulations.
Using Tax Management Software
In light of the grave consequences of failing to report and remit payroll taxes, as required by federal and state tax agencies, you need to choose the best option for executing this duty. You can either bring in an accounting consultant or do it yourself using a computerized payroll system.
The latter option will no doubt appeal to you as a startup owner because of its lower cost. Popular accounting software providers can charge fees of up to $30 per month to access their payroll systems, far less than you would pay a dedicated accountant, whether in-house or an outsourced consultant.
Tax management software has come a long way over the years. Modern packages come with simple steps that you will find easy to follow. If your business is a small operation with only one or two employees, you may not see the need for bringing in hired hands when you can sort your payroll tax headache in a few mouse clicks.
On the other hand, depending on a computer program for your tax needs has a few drawbacks. What will you do when you encounter a unique complexity with one of your employees not accounted for by the software? You might have to bring in a certified public accountant (CPA) to help you deal with the issue.
Relying on just software also means you miss out on the advice a CPA could have offered drawn from their years of practical experience. Such guidance could even save your business money in the long run.
Using a CPA
With an accounting professional by your side, you have someone you can bounce questions off of even when it’s not tax season. If you work with the CPA for years to come, they can spot loopholes through which you could be missing out on substantial tax savings.
If speed is your primary need when doing your payroll, this option may frustrate you. A CPA will want to take their time as they sift carefully through your company’s financial documents and records. A payroll system promises instant processing at the click of a button. However, if a problem arises in your payroll processing, hiring a CPA for payroll tax management will likely save you time. Whereas you may have wasted time racking your brain for a solution, a CPA will quickly iron it out, drawing on their years of experience in handling such issues.
Of course, bringing in a CPA will cost you. Their fees will likely be much higher than what you will spend on payroll processing software; however, a CPA can offer assistance in many other ways over and above computing employee tax remittances. Yes, software packages can handle your accounting needs, but these tend to have a steep learning curve.
Playing the Long Game
The ultimate decision to go with software or a CPA should depend on the long-term gains the solution will offer. Imagine a scenario where payroll tax laws change, and your payroll system does the computations using the old parameters. That could end up costing you in penalties, whereas a CPA, naturally in tune with all the changes happening in their industry, would seamlessly affect the new parameters. Remember, options that cost less upfront often prove more expensive in the long run.