Understanding Payroll and Taxes for Your Business
- Melanie Queen
- Jun 28
- 3 min read
As a counselor, therapist, or coach, managing payroll and taxes is crucial for maintaining financial health and compliance. Whether you're hiring employees or working with independent contractors, understanding your responsibilities can help you avoid penalties and ensure smooth operations.
1. Classifying Workers Correctly
Accurate classification of your workers is essential:
Employees: You must withhold federal income tax, Social Security, and Medicare taxes from their wages. If you set the hours they work and you supply the computer or other supplies, they are employees!
Independent Contractors: You do not withhold taxes; they are responsible for their own tax obligations. If they can work around their own schedule with deadlines and they supply their own equipment and supplies then they can be classified as contractors.
Misclassifying employees as independent contractors can lead to significant penalties. For guidance on classification, refer to the IRS guidelines or consult a tax professional.
2. Understanding Payroll Taxes
Payroll taxes encompass several key components:
Federal Income Tax: Withheld based on the employee's Form W-4.
Social Security and Medicare Taxes (FICA): Both you and your employee contribute.
Federal Unemployment Tax (FUTA): Paid solely by the employer; not withheld from employee wages.
These taxes must be deposited regularly using the Electronic Federal Tax Payment System (EFTPS). Deposit schedules are determined by your tax liability, with options for monthly or semiweekly deposits. If your liability exceeds $100,000 in a single day, a next-day deposit is required.
3. Reporting and Filing Requirements
Employers must report payroll taxes using the appropriate IRS forms:
Form W-2: Used to report wages and taxes withheld for employees.
Form 1099-NEC: Used to report payments made to independent contractors.
These forms must be filed annually, and copies provided to employees and contractors. Ensure timely filing to avoid penalties.
4. You May Need to Register for State Payroll Taxes
In addition to federal requirements, many states require you to:
Register for state income tax withholding
Pay state unemployment insurance (SUI)
Follow local tax rules (city, county, etc.)
Each state is different, so check with your state’s Department of Revenue or Department of Labor—or ask your accountant to guide you.
5. Set Payroll Schedules and Stick to Them
The IRS requires timely deposits of payroll taxes. Missing deadlines—even by a day—can result in fines. Set up a reliable payroll schedule:
Weekly, biweekly, or monthly: Whatever works for your cash flow and obligations
Use software like Gusto, QuickBooks Payroll, or ADP to automate calculations, withholdings, and filings
6. Even If You Don’t Have Employees, You May Have Tax Duties
If you only pay yourself or work with contractors, you still need to:
Track your own salary distributions or owner draws (especially for S Corps or LLCs)
Send 1099-NEC forms to contractors paid $600 or more in a year
Pay self-employment taxes if you’re a sole proprietor
7. Keep Payroll Records Secure and Organized
The IRS requires you to keep payroll records for at least four years, including:
Employee W-4s
Paystubs and withholding info
Tax deposits and filings
Use secure cloud storage, password-protected files, or a bookkeeping platform that automatically archives this information.
8. Best Practices for Compliance
Maintain Accurate Records: Keep detailed records of all payments, withholdings, and filings.
Stay Informed: Regularly review IRS guidelines and updates to ensure compliance.
Consult Professionals: Seek advice from tax professionals or utilize services like Queen of Bookkeeping for personalized assistance.
By adhering to these practices, you can manage payroll and taxes effectively, ensuring compliance and peace of mind. Always reach out to a professional for your individual needs for your own situation. This is not meant to replace a professional consultation.
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