During previous posts, we’ve talked about the importance of managing your company’s finances. Keeping a detailed and accurate record is not only critical to understanding how money flows in and out of your business, but it is a vital component of paying your taxes.
Part of what we have discussed in other posts is the complexity of calculating taxes. To further this point, we’ve noted that taxes change constantly. In addition to federal and state taxes, some taxes differ by zip code. That’s a lot to track, especially when paying taxes is not your job—it’s a responsibility that comes with your job.
The specific taxes that are isolated by zip code, by municipality, are what we refer to as local taxes.
Although not all places have them, but some towns do have an additional local income that will be added to state and federal withholdings.
Why? The money gathered from these taxes will be spent on the specific needs of the communities that are requiring them. In the town where I live, one zip code has additional taxes to fund an elite school in its district. Although this is one such example, it doesn’t mean that every tax is like this. Some local taxes are even temporary.
As an employer, you need to know if one of your employees lives in a town that has a local tax. This is going to be particularly important now that a lot of companies are switching to remote work. It will expose you to the possibility that your employees will be moving. Maybe these taxes don’t apply to any of your employees today, but if you aren’t aware of where they are physically working form, this could result in a potential error in your tax calculations.
Accounting For Local Taxes
Before you can begin to figure out how to pay local taxes, you’ll need to know what your employee’s gross pay is. This is a good time for a reminder: Gross Pay is the amount of money made before taxes are taken out. This should come as no surprise because you’re reading this to learn to take taxes out.
Gross Pay is nothing more than an hourly rate multiplied by the number of hours worked during a period of time. When you use a payroll service like PayWow, you will only be required to enter the information in. The calculations will be done for you.
Before touching the gross, check to see if there are any pre-tax deductions. Common examples of these would include things such as health insurance and 401(k) contributions. The important thing to note here is that you need to find out if pre-tax deductions are considered when determining local taxes. The best way to answer this is to contact the local tax office for that employee’s town.
After you know what amount to tax, look up or contact the town you need to withhold taxes for. You will likely be told to apply the local tax in one of three ways.
If you have a flat tax, you will need to simply withhold a percentage of the total taxable amount of gross income.
There might also be a strict dollar amount. If this is the case, withhold the amount that you are instructed to withhold. No calculations needed.
Lastly, there could be a progressive tax. With this, there will be tables to follow. The more money your employee made, the more they are likely to pay. Our country runs on a progressive tax system.
One of the joys of having a payroll service is these calculations can and will be done for you—even the local ones. When you enter in your employee’s information, PayWow will be able to withhold the correct amount of taxes based on zip code.
And it’s very affordable. For a complete payroll service, you will pay $15 a month plus $2 per employee or contractor. Every minute you save is money earned.