Payroll taxes are the biggest tax problem that most small business owners face. In fact, more businesses are closed for non-payment of payroll taxes than income taxes.

When you pay employees, you must withhold federal income taxes, state and local income taxes (if your area has these taxes), social security, medicare, disability and/or unemployment taxes (in a few states only), and other non-tax deductions (medical, retirement, uniforms, etc.). You as an employer are responsible for paying the withheld taxes.

Restaurant and bar owners have a special problem with tip income. You are required to report all tips that your employees receive, and you must pay social security and medicare taxes on the tips. However, rarely will employees report the full amount they pick up, nor is there any practical way to find out all the tips unless they are put on credit cards. So in a tip audit, you can find yourself liable for amounts you cannot control, often based upon observations of agents who ate at your establishment and made notes for a day or so before they introduced themselves. Usually, the IRS will not question tips reported of 8% or more of wages. However, you should be aware that there is no "safe harbor" on tip reporting.

IRS Reporting
Most of the federal taxes are paid on a combined Form 941. This includes the federal withholding, social security and medicare taxes withheld from the employee, plus the company matching portion for social security and medicare. The 941 tax deposit is due monthly for most businesses on the 15^th of the month following the month that the pay checks were issued. We recommend that you pay more frequently, every pay period. The payments will be smaller, and you can forget about the deadline if you deposit the taxes when you issue pay checks. This will make the tax deposits more manageable for your cash flow.

941 payments are made on blue coupons that come in a yellow booklet from the IRS. You can order an endless supply of Uncle Sam's deposit slips at no charge by calling 1-800-824-1040. Mark the box called "941" and which quarter it applies to, and fill in the amount. Make the check payable to the BANK, not the IRS, and deposit it at your bank into Uncle Sam's account. Be sure to get a deposit slip acknowledgment from the bank, since this is your only proof that you made your tax deposit if the IRS (or the bank) loses it. The canceled check is not proof of payment, since the IRS may argue that you might have been making a loan payment.

If your payroll tax deposits exceed $50,000 per year, you are required to deposit the taxes within 3 business days of each payroll, and must make tax deposits electronically (so the government can get its cash faster). When applying for electronic deposit, you should select the debit method (not the credit method) to give you more control over the payments and cut bank costs.