You’ve worked hard and invested time building up your business. Now, the workload is overwhelming, and you may need some help. When hiring employees for the first time, you need to know about tax, safety, benefits, and privacy-related legal issues.
In this article, we’ll focus on the tax-related responsibilities of small business owners.
Here’s what you need to know about taxes when you decide to take the next step and decide it’s time to start hiring employees. Once you find the right person with the perfect combination of skills and experience, you must know about these tax duties:
1. Securely collect and maintain employee records.
Record keeping is the highest priority. Why? Just ask the Equal Employment Opportunity Commission, the National Labor Relations Board, the Department of Labor, the Social Security Administration, and the IRS. These agencies all require employers to set up a recordkeeping system that is comprehensive and highly secure.
Employee records will include each employee’s personal identifying information, and the information necessary to properly collect and pay federal and state taxes.
You must maintain these employment records while you employ the individual, plus four years afterward. You also need to have the records available for the IRS on demand.
2. Make sure each employee is eligible to work in the U.S.
Federal law requires every employee starting a new job to complete the U.S. Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. You can get I-9 Forms online, at USCIS offices, or by calling (800) 870-3676.
3. Get each employee’s Social Security numbers.
You must get each employee’s name and SSN to complete a Form W-2, Wage and Tax Statement, for each person. This requirement also applies to resident and nonresident aliens.
Don’t accept an Individual Tax Identification Number (ITIN) in place of an SSN for employee identification or for work. ITINs are available only to resident and nonresident aliens who aren’t eligible for U.S. employment and need identification for other tax purposes.
4. Obtain a Form W-4 to withhold income taxes.
You must comply with the law that says you need to withhold income tax from your employees’ wages. Give your newly hired employees the Form W-4, Employee’s Withholding Allowance Certificate, which they should fill out and return to you. Then, you use the form to determine how much income tax to withhold for each employee.
The amount of income tax withholding is based on your employees’ filing status and the number of withholding allowances they choose on the form. If a new employee doesn’t give you a completed Form W-4, you should withhold tax as if the employee were single, with no allowances. You may have to withhold additional taxes on wages paid to nonresident aliens.
5. Withhold Social Security and Medicare taxes.
The Federal Insurance Contributions Act (FICA) provides for a federal system of old-age, survivors, disability, and hospital insurance. The old-age, survivors, and disability insurance part is financed by the Social Security tax. The hospital insurance part is financed by the Medicare tax.
You must withhold Social Security and Medicare taxes from your employees’ wages and pay the employer’s share of these taxes, as well. Generally, all employee wages are subject to these taxes, regardless of age or whether the employees are receiving Social Security benefits.
6. Deposit all the withheld taxes.
You must deposit federal income taxes you withhold from your employees’ pay, as well as the employer and employee portions of Social Security and Medicare taxes. You must make these federal tax deposits electronically.
How To Make Electronic Deposits
Most employers use the Electronic Federal Tax Payment System (EFTPS). It’s a free service that the Department of Treasury provides. You’re automatically pre-enrolled when you request an EIN from the IRS. If you don’t want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make the electronic deposits for you.
There are two deposit schedules: monthly and semi-weekly.
Before the beginning of each calendar year, you must determine which schedule to use. The schedule is based on the total tax liability you reported during the last year. In the first year that you have employees, you’ll generally deposit taxes on a monthly basis. Under the monthly deposit schedule, you’ll need to deposit employment taxes by the 15th day of the next month.
You’ll also need to file Form 941, Employer’s Quarterly Federal Tax Return, with the IRS for every quarter that you pay wages subject to income tax withholding (including withholding on sick pay and supplemental unemployment benefits), or Social Security and Medicare taxes. That’s unless you get a notification from the IRS saying that you can file the more simple Form 944, Employer’s Annual Federal Tax Return.
Remember: Don’t Ever Use Federal Tax Deposits For Other Purposes.
This is crucial to remember. If you don’t send the government-required federal tax deposits, the IRS will pursue the debt, and you can be subject to steep penalties and other consequences, in addition to the tax bill.
7. Every quarter, pay Federal Unemployment Tax (FUTA).
Only the employer pays the FUTA; it isn’t withheld from employees’ wages. For 2017, the FUTA rate is 6% of the first $7,000 of wages you pay to each employee during the year. You must deposit FUTA by the last day of the first month that follows the end of the quarter. If the due date for making the deposit falls on a Saturday, Sunday, or legal holiday, you can make the deposit on the next business day.
8. Don’t forget about state tax issues.
In addition to all the federal requirements, you must follow regulations from each state whose residents you employ. State requirements are usually similar to federal requirements. But, states can modify their requirements, so it’s critical to learn the state requirements that may apply to you.
Hiring Employees Can Grow Your Business… But It Can Also Get Complicated
As you can see, the taxation and reporting requirements facing employers are significant and can be complicated. That’s why many small business owners seek professional help for some or all of their administrative functions – so they can pursue their passions.
We strongly recommend that employers should consult with trained and experienced tax advisors, so you can be sure you’re considering and completing all federal and state tax requirements.
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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.