How to Reduce Payroll Taxes
- October 15th, 2014
- Comments Off on How to Reduce Payroll Taxes
Employers are responsible for paying their share of FICA taxes for every employee on their payroll. Between the employer’s and the employee’s contributions, FICA taxes are 15.3% of the employee’s total wages. That means that if you’re paying an employee an annual salary of $50,000, you’re paying an additional $3,825 each year in FICA taxes. If you’re looking for a way to reduce payroll taxes for which you’re responsible every year, you have several options.
Reduce Payroll Taxes: Hire Independent Contractors
As a small business owner, you’re liable for your share of your employees’ payroll tax contributions, but you’re not liable for the payroll taxes of independent contractors. Contractors are liable for paying the entirety of their own payroll taxes, because, as independent entities, no one is responsible for them but themselves. This is one of the most attractive reasons for employers to use the services of independent contractors. An employee may qualify as an independent contractor if the following apply:
- The employer has little or no control over how the employee’s work is done;
- No benefits are provided for the employee;
- The employer negotiates payment with the employee instead of following a set standard; and
- The employee is free to work for other employers during the current period of employment.
Reduce Payroll Taxes: Form an S Corporation
By operating an S Corporation, as opposed to a sole proprietorship, many business owners are able to reduce the amount of personal payroll taxes for which they’re responsible. Owners of S corporations are required to pay themselves a “reasonable” salary, and pay the appropriate taxes on said salary. However, sole proprietors are considered personally liable for their company’s taxes, as well as payroll taxes on all income, not just their own. As an S corporation, business owners only have to worry about covering the taxes for their personal salaries, not the unearned income that comes from their business.
Stay tuned for more tips on how to reduce payroll taxes, coming soon on the JRH & Associates blog!
For answers to all your accounting-related questions, feel free to call the tax professionals at JRH & Associates at (516) 794-5752!