How to record payroll withholding taxes accurately
Keeping accurate payroll withholding tax records is essential if you want to avoid a government audit. Here’s how.
Your employees pay tax through you
As a business, you pay tax on the profits made by your organisation. But that's not the end of your tax liabilities. You also have to collect tax from your employees on the money they earn. This may be called pay-as-you-go (PAYG) or pay-as-you-earn (PAYE) tax, withholding tax, employment tax, or deduction of tax at source.
Each of your employees is taxed on their income. The amount of tax will vary depending on their salary and a range of other factors.
However, your employees don't actually write cheques to the government tax office each month. Instead, you collect (withhold) and pay their tax for them.
So it's important to keep accurate payroll withholding tax records. In this guide we'll look at what's involved in doing that.
The importance of keeping records
Keeping accurate payroll withholding tax records is a legal requirement. When you collect taxes from your employees, in legal terms you are acting as a fiduciary agent of the government.
This is one of your obligations as a business owner, and there are serious penalties for failing to do it properly. Expect a government audit if you don't follow the rules carefully.
But even if there were no penalties, it would still be important to keep comprehensive records. Accurate numbers can tell you a lot about the state of your business.
They let you know in detail how your money is being spent. They also tell you how much each employee is costing you in real terms – not just the cost of their salary.
What should you record?
Different tax authorities will have different requirements. But all of them will want some essential information. Luckily, that information is also useful for you in running your business. For example:
- Details of all employees, including names, addresses and social security numbers
- Start and end dates of the payroll tax reporting period
- Full details of salary or wage payments made during the reported time period
- Additional payments such as pensions, benefits and retirement contributions
- Any payments such as goods or services you provide to your staff instead of money
- Expenses incurred by and paid to your employees – including all receipts
- Any special pay such as maternity or paternity pay, sickness pay, or overtime
In short, anything of monetary value that you pay or give to your employees should be recorded. It all affects their income and the tax you need to withhold.
Looking after your records
Keep all payroll withholding tax information safe. In most countries it must be kept for four years or more, but check local laws to be sure.
The storage method should be secure and reliable - check if you need to keep paper or digital records.
Many companies use cloud-based accounting software for this. Their information is automatically encrypted and backed up remotely. That gives business owners greater peace of mind.
Simplifying the work with online payroll software
Payroll withholding tax recording used to be done by hand, using pen and paper. This was time consuming and laborious. Luckily you can now use good payroll accounting software to do most of the work for you.
The big advantage here is the ability to tie different systems together. That's especially true if you're using cloud-based software. That means that the application runs online, and can share data securely. So you save time. For example:
- Employee time-tracking can be handled electronically, not on paper time-sheets
- Tax codes are updated automatically
- Employees can help you by keeping their own contact details updated and applying for time off through the system
- Travel and expenses reports can be processed much faster
- The software can calculate payroll tax for you, using up-to-date tax rules
- You can access your information securely from anywhere at any time, using a laptop, smartphone or tablet
All of this takes the struggle out of payroll record-keeping. It will also help when you come to file your reports with the tax office.
Filing online – a choice or requirement?
Governments are trying to make payroll reporting easier for businesses – and for themselves. Many now offer online tax report filing as an option, and in some countries it's mandatory.
Reporting periods are getting shorter too. Businesses used to have to file reports every quarter or every year. Now some authorities require you to file reports every time you pay an employee. It's important that your payroll records are accurate, whenever you file them.
This sounds like a lot of work for business owners. But with the right payroll accounting software it's easy to keep track of the important numbers. Accounting software companies work hard to connect to government tax systems. Cloud-based payroll accounting software is updated regularly and automatically. So you'll always have the newest reporting tools to file online.
Better business insight
Never forget the value of payroll records to your business. They're based on information that you should be collecting anyway. But they can give you a different perspective on your business.
- Reports help you focus on areas where you can cut costs without damaging productivity
- Expense claims might show you where you can save money – perhaps you could offer different travel options to your employees
- If sickness pay is high, maybe there are ways you can improve the working environment for your people
You can't rely on payroll records to tell you everything about your business, of course. But they can give you a different insight into what's probably your biggest business expense – your people.
Don't forget to pay!
You need to ensure that withheld taxes are paid on time, every time. We've mentioned that there are penalties for failing to keep accurate records. But there are also penalties for failing to pay the right amount of tax on behalf of your employees.
Those penalties increase the later you pay. So make sure you set reminders for payment dates in your accounting software. Then you'll never miss a payment.
Part of good business
As you can see, keeping accurate records is important. The information will help you keep track of what you're paying your employees. It will also ensure you withhold the right amount of tax. Doing this properly will keep you on the right side of the law.
If your payroll records are accurate, it's a good indicator that your business is running well. So take the time to put the right recording system in place. Then you'll stay compliant with tax law – and have great insight into your business.
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
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