If you’re running a small business and you’ve just hired your first employees, congratulations! Maybe you were a freelancer or self-employed, and your business has grown to the point where you need help. Hiring employees is a big step for any company, and it comes with a lot of responsibilities. One of the main obligations you now have as an employer is making sure your employees get paid. Sounds easy, right? You just write a check and that’s it! Well, yes, but there’s a lot more that goes into the process than that.
First Things First
When you decide to hire people to help run your business, you need to apply for an Employer Identification Number (EIN) with the IRS. This unique number is assigned to every employer for the purpose of filing your federal employer taxes and forms. State and local tax agencies require a separate registration, and may assign an ID number that is different the federal EIN. You also need to determine whether your new employees qualify as exempt or nonexempt based on requirements put forth in the Fair Labor Standards Act.
Additionally, at the time of hire, you must gather certain legal forms, including:
- The I-9 is filled out by employees and verifies that they can legally work in the United States. You must keep this form for at least three years after your employee starts or one year after they leave, whichever is longer.
- The W-4 (aka the Employee’s Withholding Allowance Certificate) is also filled out by employees and helps you withhold the correct federal income tax from their wages. You must keep this form on file for at least four years. Some states may require an additional withholding certificate, so it’s important that you do your research and determine what your state requires.
Take Note: If you’re planning to pay by direct deposit rather than paper paychecks or paycards, you’ll need to collect employees’ bank routing and account numbers.
Compliance is Key
Running a business requires compliance with many governmental regulations, and a new employer must be diligent in researching federal, state and local mandates. For example, employers must withhold and remit payroll taxes to the appropriate government agency in a timely fashion.
Social Security and Medicare Taxes
The Federal Insurance Contributions Act (aka FICA) requires you to withhold taxes for paying in to the social security and Medicare programs from each employee’s paycheck. You also must pay a portion of the taxes. The withholding rates for both the employer and employee are 6.2% for social security and 1.45% for Medicare. This is a very simplistic explanation of these taxes, but there are nuances you should make yourself aware of, especially if your employees accept tips. IRS Publication 15, (Circular E), Employer's Tax Guide, provides highly detailed information on this subject.
Federal Income Tax
Federal income tax is paid to the Internal Revenue Service under your federal employer identification number. The amount of withholding is influenced by a variety of factors. Some of the factors are determined by the employee’s Form W-4, such as marital stauts and exemptions, Other common items which impact federal withholding include pre-tax deductions, pay frequency, and taxable earnings..
State and Local Income Taxes
As every state and locality has different laws, it’s important to do your homework to determine whether withholding applies, and if so, how much.
These are taxes that you, as the employer, are solely responsible for; you do not deduct anything from your employees’ pay. This list is not all inclusive, but depending on the type of employer you are, you will likely be responsible for:
Federal Unemployment Tax Act (FUTA)
State Unemployment Tax (SUTA) (applicable in all states)
State Disability (not applicable in every state)
Show Them the Money!
When you deduct taxes from your employee’s pay, you must pay Uncle Sam and his kids, the states. Some taxes are deposited monthly or semi-weekly, and some are deposited quarterly, so it’s important that you schedule these very important dates on your payroll calendar or you could end up facing some hefty fines.
Depositing Your Federal Taxes
You are required to deposit withheld federal income taxes, social security taxes, and Medicare taxes through the U.S. Department of Treasury’s Electronic Federal Tax Payment System (EFTPS). Deposits are not determined by your payroll schedule. These taxes are deposited on a monthly or semi-weekly basis. You will also use Form 941, Employer’s Quarterly Federal Tax Return, to report your employees’ federal income tax withheld, as well as social security, Medicare, sick pay, and unemployment benefits. The IRS uses Form 941 to reconcile your tax liability with your payments.
Depositing Your FUTA Taxes
The FUTA deposit is made in the quarter during which the total tax due exceeds $500. It’s due by the end of the month following the end of that quarter. Since the FUTA tax isn’t withheld from your employees’ wages, all you’re required to do is file Form 940, Employer’s Annual Federal Unemployment Tax Return.
Depositing your State and Local Liabilities
State Income tax deposits are sometimes made at a different frequency than the federal, and are always paid to a State tax agency rather than the IRS. State Unemployment taxes are typically made to a separate state agency as well (such as a state department of labor), and will have their own filing requirements. Localities with income taxes will add another layer of filing requirements if your business is in a municipality that has a local income tax.
Depositing your federal and state taxes in a timely manner is absolutely crucial to the health of your business. If you’re late making your deposit, the IRS imposes a penalty of 2% on deposits made one (yes, one) to five days late, while a 10% rate is levied on those who are 16 or more days late. The fines can quickly add up.
Depending on the benefits your company offers, you may take out voluntary deductions from your employees’ paychecks. These payments cover human resources items such as health and welfare benefits; life insurance; short- and long-term disability insurance; and retirement plans, such as a 401(k); flexible spending plans for health or childcare. To further complicate matters, some of these deductions, such as flexible spending plans, are taken out pre-tax, meaning you subtract the money from your employee’s gross wages prior to calculating taxes.
You might also find yourself deducting money for court ordered child support payments or wage garnishments.
At the end of every year, you are responsible for calculating the total amount of all taxes withheld from each employee during the year and providing the correct forms. See our year end payroll checklist for more details.
By January 31 of the following year, you send your employees Form W-2, which details their total taxable wages. You send Copy A of the W-2 with Form W-3 to the Social Security Administration and Copy 1 to the state and local tax office indicated on the form.
Form 1099-MISC is another form you might encounter if you hire independent contractors, freelancers, or other non-employees. If you pay a non-employee $600 or more during the year, you’re required to provide that person with a completed 1099-MISC by January 31 of the year following payment.
While all of these functions can be done manually, with all of the required deadlines and potential for violations, it’s very risky. It’s important to your business that you get things right not only for compliance, but also to keep your employees happy. Investing in payroll software that can automatically perform all of these functions on time, every time – and that can grow as your company grows – is a smart business decision and definitely one to consider.
If you’re looking for a reliable partner to help manage payroll, look no further than Paycor. Paycor got its’ start in the Midwest, learning to manage the complexities of the nation’s most challenging regulatory environment. For nearly 30 years, we’ve given our clients the right technology, the best support and the most valuable thought leadership, all with the sole focus of helping them achieve their vision. We’ve lead in the way in keeping SMB clients compliant, and it all starts with our payroll solution. Want to see how we can help support your business needs? Get in touch with one of our expert solutions consultants.
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