Month: July 2026

Payroll is one of the most important responsibilities for any small business owner. Paying employees accurately and on time is only part of the job. Employers must also withhold the correct taxes, submit payroll tax payments by required deadlines, and file accurate reports with federal and state agencies. Even seemingly minor payroll mistakes can lead to penalties, interest charges, and unnecessary stress. The good news is that many payroll tax issues are preventable. By understanding the most common mistakes, business owners can stay compliant and avoid costly surprises.

A business owner in Litchfield recently hired her first employees. Wanting to make sure she had all of her bases covered, she contacted the team at Merrimack Tax Associates for advice on payroll taxes.

Missing Payroll Tax Deadlines

Payroll taxes operate on strict filing and payment schedules. Federal payroll tax deposits may be required monthly, semi-weekly, or even the next business day in certain situations. Quarterly payroll tax returns and annual reporting deadlines also must be met. Missing a deadline, even by a few days, can result in penalties and interest that can accumulate quickly. Setting reminders or using payroll software with automated tax payments can help ensure deposits and filings are submitted on time.

Incorrect Employee Information

Simple data entry errors can create significant problems. Incorrect Social Security numbers, employee names that don’t match government records, or outdated addresses can delay tax filings and cause issues when employees receive their W-2 forms. Review employee information carefully during onboarding and encourage employees to report changes promptly, especially after name changes or address updates.

Failing to Withhold the Correct Taxes

Payroll tax withholding depends on several factors, including an employee’s Form W-4, wages, benefits, and applicable federal and state tax laws. Incorrect withholding may leave employees with unexpected tax bills or require the employer to correct payroll records.  Whenever an employee submits a new W-4 or experiences a major life change, payroll records should be updated promptly.

Forgetting Taxable Fringe Benefits

Many employers provide valuable benefits beyond regular wages, but not all realize that some benefits are taxable. Personal use of a company vehicle, certain bonuses, gift cards, and other fringe benefits may need to be included as taxable wages. Failing to report taxable benefits can create reporting errors and additional tax liability. Reviewing employee benefits annually helps ensure proper reporting.

Poor Payroll Recordkeeping

Accurate records are essential if questions arise from the IRS or state tax agencies. Employers should maintain payroll registers, tax filings, employee forms, wage records, and proof of tax deposits for the required retention period. Incomplete records make it difficult to respond to audits or correct payroll mistakes if they occur.

Relying Too Heavily on Manual Payroll

Many small businesses begin by calculating payroll manually. While this may work for very small operations, manual processes increase the risk of calculation errors, missed deadlines, and incorrect tax filings. Modern payroll software can automate tax calculations, generate required forms, and remind employers of filing deadlines. Even with automation, payroll reports should still be reviewed regularly for accuracy.

Not Staying Current with Tax Law Changes

Payroll tax rules change periodically. Tax rates, wage limits, reporting requirements, and withholding tables are updated regularly. Business owners who continue using outdated information may unintentionally underpay or overpay payroll taxes. Reviewing payroll procedures each year and staying informed about tax law changes can help avoid compliance issues.

Protect Your Business with Professional Guidance

Payroll tax compliance doesn’t have to be overwhelming, but it does require attention to detail and consistent processes. Taking the time to verify employee information, meeting filing deadlines, maintaining accurate records, and staying current with tax regulations can significantly reduce the risk of penalties.

Thanks to the team at Merrimack Tax Associates, the Litchfield business owner now has a better understanding of how payroll taxes work.

Retirement accounts are designed to help you build financial security for the future, but there may come a time when you need to withdraw money. Whether you’re retired, changing jobs, facing an unexpected expense, or planning a major purchase, it’s important to understand that taking money from a retirement account can have significant tax consequences. The amount of tax you owe depends on several factors, including your age, the type of retirement account you have, and the reason for the withdrawal. Knowing the rules before you take money out can help you avoid unnecessary taxes and penalties.

An Amherst resident was struggling due to a recent job loss. Looking for supplemental funds during this period he was considering taking money out of his retirement account. 

Traditional Retirement Accounts

Withdrawals from traditional retirement accounts, such as Traditional IRAs and many employer-sponsored retirement plans, are generally taxable because contributions were often made with pre-tax dollars. When you take distributions, the money is usually treated as ordinary income and added to your taxable income for the year.

This means a large withdrawal could push you into a higher tax bracket, increase the amount of tax you owe, or even affect your eligibility for certain tax credits or deductions. It’s often beneficial to plan withdrawals carefully rather than taking a large lump sum if it can be avoided.

Roth Accounts Offer Different Tax Treatment

Roth IRAs and Roth 401(k) accounts are funded with after-tax dollars, which means qualified withdrawals are generally tax-free. To qualify, the account typically must have been open for at least five years, and you generally must be age 59½ or older when taking the distribution.

If these requirements are not met, some or all of the earnings portion of the withdrawal may be subject to taxes and possibly penalties. Because Roth accounts offer valuable tax-free income in retirement, many financial professionals recommend preserving these funds whenever possible.

Early Withdrawal Penalties

If you withdraw money from most retirement accounts before reaching age 59½, you may owe an additional 10% early withdrawal penalty on top of any regular income taxes.

There are exceptions to this penalty for certain situations, including qualified higher education expenses, certain medical expenses, disability, substantially equal periodic payments, and some first-time homebuyer withdrawals from Traditional IRAs. However, qualifying rules vary depending on the type of account, so it’s important to understand the specific requirements before taking a distribution.

Consider the Timing of Your Withdrawals

The year you choose to take retirement distributions can make a meaningful difference in your overall tax liability. For example, if you expect your income to be lower after retirement, waiting to withdraw funds could result in paying taxes at a lower rate. Similarly, spreading withdrawals over several years instead of taking one large distribution may help prevent moving into a higher tax bracket. Careful planning can help you preserve more of your retirement savings over time.

Don’t Forget About Rollovers

If you’re changing jobs or retiring, you may have the option to roll over your employer-sponsored retirement plan into another qualified retirement account. A properly completed direct rollover generally allows you to move your retirement savings without triggering immediate taxes or penalties. However, mistakes during the rollover process can create unexpected tax consequences. Following the IRS rules carefully, or working with a tax professional, can help ensure the transfer is completed correctly.

Make Retirement Withdrawals Part of Your Overall Tax Plan

Retirement accounts are valuable financial tools, and how you withdraw money from them can have a lasting impact on your tax situation. Every individual’s circumstances are different, and factors such as age, income, filing status, and retirement goals all play a role in determining the most tax-efficient strategy.

After speaking with the Merrimack Tax Associates team, the Amherst resident now has a better understanding of how these withdrawals will affect his taxes and retirement income in the long run.