Keep a Watchful Eye on Payroll Procedures, Dealers
What you don’t know about the basics of payroll can cost you
That’s the word of caution offered to kitchen and bath dealers
from Ken Higgins, CPA, a Lake Hiawatha, NJ-based accountant who
specializes in small business.
“It’s the number-one reason why small businesses go under,”
Higgins observes. “If you end up behind to the Internal Revenue
Service, you’ll be in worse trouble than if you borrowed [the
money] from a loan shark.”
Here are the basics, according to Higgins, who advises that
kitchen and bath dealers adhere to the following procedures:
Federal taxes must be withheld from your payroll. Besides the
federal income tax, which is computed from the employee’s W-4 form,
you must withhold FICA and Medicare.
The FICA, or Federal Insurance Contributions Act taxes, pay for
Social Security. They are collected at a rate of 6.2% of gross
salary (up to a specified limit $84,900 for the year 2002).
The Medicare tax is computed at a rate of 1.245% of gross
salary. There is no limit for Medicare tax.
These taxes should be withheld by the employer and deposited in
a federally-authorized bank. “You can deposit them monthly, but I
recommend you do so weekly,” says Higgins. “And, make sure you keep
the receipt stamped by the bank.”
The FICA and Medicare tax must be matched by a contribution by
the employer. “Many small businesses withhold the tax from their
employees, but don’t send in the matching funds,” notes Higgins.
“Then they get hit by penalties and get swamped.
“The onus is always on the employer,” Higgins adds. “If the
company goes bankrupt, the IRS will go after the person who’s
Nor is the danger limited to the business owner. “The IRS takes
the position that if you had payroll authorization and could sign a
check, you are personally liable and responsible. This means even
if you were only the office manager, you could be on the hook for
what your boss did,” Higgins explains.
“Interest and penalties in cases like these are enormous. If
you’re not up to date, get up to date even if you have to take out
a bank loan to do so.”
In addition to federal taxes, there are state income taxes in
some states. Some states demand they are paid monthly, while others
are more lenient.
Every state has state unemployment insurance, or SUI, to be
withheld. Your accountant will know how much to deduct. All but
five or six states also require disability insurance to be
In addition, you may be required to withhold taxes for your
county, town or local municipal district.
Some employers wish to have their employees share the cost of a
health plan, pension plan or individual retirement account. If so,
those are also deducted. These contributions can reduce your
employees’ gross income for tax purposes.
If an employer provides a car for an employee, the IRS may count
it as part of the employee’s gross income. The miles it accrues
while conducting business are considered part of the cost of doing
business, and depreciation on the vehicles can be deducted from the
corporate taxes. However, other mileage is counted as personal use
and is subject to tax and not just Federal income tax; it may be
counted in computing the FICA and Medicare taxes, as well.
It’s important that accurate records are kept if you or your
employee has a corporate car, Higgins reminds dealers.
Employers are not required to give a breakdown of deductions
with each salary disbursement, but an employee has a right to ask
for one at any time. And, of course, a W-2 has to be sent out every
year by January 31, showing the gross pay and all amounts withheld
for the previous year.
If you use independent contractors, be sure that they fill out a
W-9 and invoice you for their services, Higgins advises, adding
that kitchen/bath dealers should not get caught in the trap of
paying people “under the table.”
“You can get hit with massive penalties for withholding or for
worker’s compensation insurance not paid,” he points out. “I
recommend that if employers have even a two-person payroll, they
look into using a payroll service like ADP, Paychex, or Ceridian,”
Higgins further advises. “Rates are low ($15 to $30 a month,
typically), and it cuts down the time involved in payroll.”
Be warned, however, Higgins adds “many of these companies do not
archive records for very long. You should request copies of every
form generated by them every three months and archive them
yourself, both by scanning them into your computer and keeping the
hard copy. That way, if a dispute arises, you will not be caught
out without documentation.”