In one Forbes survey, more than 93% of businesses were overpaying on their taxes. Since the federal tax code alone is over 70,000 pages long, this figure is unsurprising. Before you file Form 941 this year, make sure you have taken advantage of every payroll tax credit available. 

Tax Credits for Small Businesses 

As a small business, you are eligible for certain payroll tax credits. You can find out all of the options you can get by visiting IRS.gov and searching for “small business credits.” The IRS updates these credits each December, and there are normally at least 50 credits small businesses can use.

Employee Retention Tax Credit (ERTC)

The ERTC is a COVID-era tax credit that you can apply for retroactively for 2021. You can apply for this credit up until April 15, 2025. If you qualify, the credit can reduce the amount of payroll taxes you are required to pay for qualified years. The ERTC covered the dates between March 31, 2020, to September 30, 2021. 

Work Opportunity Tax Credit (WOTC)

The WOTC is designed for employees who are a part of a targeted group. For instance, former felons and people who live in rural renewal counties are eligible for this credit. The credit covers up to 40% of $6,000 in wages paid to the worker. This works out to a maximum credit of $2,400 per eligible worker.

Secure Act 2.0

Secure Act 2.0 is a credit that can cover 100% of a 401(k)’s setup and implementation fees for the first three years. On a graduated scale, the government will provide matching 401(k) contributions worth 100%, 75%, 50%, and 25%. Originally, this credit was passed into law on December 29, 2022. It went into effect on January 1, 2024.

Research and Development (R&D) Credits

You will typically find R&D credits through your state and local government. These credits are designed to support research and development at local companies. However, you can also claim a research credit through Form 6765. This credit is designed for startups, and it can offset the startup’s payroll taxes by up to $250,000.

Tax Deductions for Small Businesses 

With tax deductions, the most common issue businesses face is performing the deduction at the wrong time. You should carefully review each tax deduction to see if it is supposed to happen pre-tax or post-tax. Additionally, W-2 employees have deductions that are different from 1099 employees, so you should carefully research which type of deductions you are eligible for.

As a small business owner, you must deduct certain taxes from your employee’s wages. You will typically need to deduct the following things from W-2 employees. 

• Disability insurance: Many companies provide disability insurance as a part of their compensation package. If you don’t, you may need to deduct the funds for this benefit from the employee’s paycheck. 
• Job-related expenses: Union dues, uniforms, and other job-related expenses may be deducted from the employee’s paycheck.
• Health insurance premiums: FSA accounts and health insurance premiums are often deducted from the employee’s paycheck. Depending on the benefits you offer, you may also need to deduct dental and vision premiums as well. 
• Life insurance: Life insurance is often covered by the employer. If the employee chooses to have more expensive coverage, the difference may be deducted from their pay.
• Retirement plans: Retirement plans, like 401(k)s and IRAs, are typically funded through employee contributions. The type of plan will determine whether these funds are deducted on a pre-tax or post-tax basis. 
• Stock purchases: Sometimes, employees are allowed to purchase their company’s stock through paycheck deductions. 

 

Make Your Payroll Deductions and Credits as Easy as Possible 

Filing your payroll taxes and handling employee deductions doesn’t have to be challenging. You can always use payroll software or hire an accountant if you need additional help. To avoid having payroll issues, remember to use the following best practices. 

1. Improve Your Onboarding Process 

During your onboarding process, you will typically have your employees complete W-4 forms. Most of your employee’s deductions, like their tax withholdings and health insurance elections, will be determined by this form. You need to develop a consistent onboarding process so that all of this information is collected properly. 

2. Invest in Payroll Software

You don’t have to become a payroll expert to run your small business. Instead, you can outsource your HR and tax needs to payroll software platforms. Once you have the software program set up, you can input the employee’s personal information, wage amount, pay frequency, withholdings, and benefit election. Then, the software program will automatically calculate the payroll deductions and issue the appropriate checks to each employee. 

3. Stay Organized

No matter what payroll method you decide to use, you should stay as organized as possible. You should keep a careful record of the amount you pay in payroll costs and taxes because the IRS may ask for these records someday. In addition, you should track the deadlines for your payroll tax filings and other important dates on your calendar. 

4. Pay and File Payroll Taxes on Time 

The most important thing you can do to stay compliant with the IRS is to pay your payroll taxes on time. If you do miss a tax payment, you may be able to get a one-time abatement. To get an abatement, you must fill out the appropriate form and send in a detailed letter that explains why you missed the tax due date. 

Remember Your Payroll Tax Credits and Deductions 

You are required to file your payroll taxes each quarter, and your payroll tax payments are typically made on a semi-weekly or monthly basis. Meanwhile, payroll tax deductions occur every time you issue paychecks to your employees. These payments are required, so it is important to keep careful track of them. 

If you need help figuring out your payroll tax credits and deductions, our payroll experts are here to help.