How to record payroll taxes accurately
Small Business Guides
5 min read
Keeping accurate payroll tax records is essential if you want to avoid a government audit. But it involves more than just recording how much each employee is paid. How do you ensure you get the numbers right?
Your employees pay tax through you
As a business, you pay tax on the profits made by your organization. But that's not the end of your tax liabilities. You also have to collect tax from your employees on the money they earn.
Each of the staff members you employ 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 checks 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 tax records. In this guide we'll look at what's involved in doing that.
The importance of keeping records
Keeping accurate payroll 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 payments made during the reported time period.
- Additional payments such as pensions, benefits and superannuation 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 maternity or paternity pay, as well as sickness pay.
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 tax information safe. In most countries it must be kept for four years or more, but check local laws to be sure.
It doesn't matter how you store the information, as long as it the storage method is secure and reliable.
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 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. They can keep their own contact details updated and apply for holidays through the system.
- Travel and expenses claims 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 tax 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.
Understanding the amount of tax you're withholding helps you understand the true cost of each employee.
- 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 staff.
- If sickness pay is high, maybe there are ways you can improve the working environment of your staff.
You can't rely on payroll tax 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 staff.
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 tax 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.