FINANCES: Resist Temptation

It’s not only a question of “if” you have ever spent your employees’ tax money, but rather how often has this scenario happened and did you pay it back?
 
We have all done it. We needed some cash so we borrowed from the tax dollars being held for the next deposit with the intention of paying it back before it was due. Sometimes it worked and sometimes it didn’t, leaving you open for penalties and interest from Uncle Sam and/or your state government.
 
I suggest creating a separate checking account for payroll. It’s a simple principle -- out of sight, out of mind. Whether you realize it or not there is a principle at work in your life called The Law of Money. Simply stated, the Law of Money says that with any significant sized budget (home or business) an individual will spend all dollars placed in it. If you had a great month, you spent all the money in your checkbook. During a slow month, you spent what you had and it was sufficient. The law simply says we can, will and do spend what we have.
 
Unfortunately tax dollars are no different. If we look at the checking account and see money we expect it can be spent, even if we know better in our hearts.
I am suggesting a totally separate account for payroll.
 
Just as important is calculating your matching tax rate. Matching taxes are the taxes the company pays over and above what the employee pays. Matching taxes include Social Security and Medicare. Matching taxes also include FUTA Tax (Federal Unemployment) which is small, only eight tenths of a percent, but we still have to pay it. The final matching tax is state unemployment, which varies from state to state and from company to company within the state.
 
Some states’ minimum tax is 2 percent while others is a tenth of a percent. Some states max out at 10 percent, 12 percent or 15 percent. The base taxed varies also. Some states tax the first $8,000 earned while others tax the first $10,000, $12,000 or $15,000 earned.
 
One big factor in determining your state’s unemployment rate is how many employees you have laid off over the past 12 months. If you have laid people off and they filed for unemployment, the real dollars come out of your account. At the end of each year the state reviews each account and, if money has been drawn out of your account, your rate goes up.
 
For example, assume your state’s unemployment rate is 2 percent. That would mean your matching tax rate would look like this:

FICA/Medicare 7.65%
FUTA Tax .80%
State Unemployment 2 %
Total 10.45%

What does the 10.45 percent mean? It means for every $100 the company pays out in gross payroll it is costing the company an additional $10.45 on top of that for company matching taxes. Now let’s say your weekly gross payroll is $3,000. The first step is to determine your total payroll including the matching taxes. To determine this number, multiply your gross payroll by 1.1045 to get the total, which should be $3,313.50.
 
Now transfer the total $3,313.50 over to your new payroll checking account. Once the money is transferred, write your payroll checks out of your new payroll checking account. When the checks have been written, what is left in the payroll checking account? Right, all the employees’ withholding taxes plus all of the company’s matching taxes.

When it comes time to make the tax deposits, the money is then sitting there waiting for you to use it.
 
One minor technicality: The FUTA tax is only on the first $7,000 of the employees income and your state unemployment tax cuts off at some point depending on which state you live in. Usually it cuts off somewhere after the first $8,000 to $15,000 earned.
 
I would continue transferring the entire matching tax rate to the new account. The “extra” money then simply becomes a savings account.
 
Speaking of savings accounts, would you miss $100 out of your company checkbook each week? Some wouldn’t miss $200 or $300.

Try this, go to the person in the office who writes the checkts -- the account manager of office manager -- and instruct them to write a check out of the company checkbook once a week for $100 or whatever amount you choose. Then instruct them to deposit the check into a savings account. When the amount in that savings account reaches a predetermined level either buy a CD or put it into a mutual fund.
 
Make it clear you want this done every week and you don’t want them reminding you about it from that point on. Do you realize what even $100 a week will amount to in just a few years? At $5,200 a year you would have invested more than $25,000 in five years, plus interest or growth.
 
Remember the Law of Money? You will spend what you have and won’t miss what’s not there. Set up a separate account and transfer extra dollars to it so you don’t spend them and they’re available when needed . LL