Expert Brigitte Thompson
Question:
I need to hire my first employee, but have no idea how to do
accounting for it. I don't pay myself right now, all profits go into growing the company,
but I need help with some areas, so I'm going to have to pay someone. I don't want to just
classify them as an independent contractor, because they will be working right with me.
But where do I find out about withholding taxes and
everything else?
Answer:
Payroll is a topic which can cause apprehension in the heart of any taxpayer. There are
forms to complete before employees are hired and payroll taxes to be paid on a regular
basis. You are not alone in your search for more information!
This article is based on the Federal Tax Code which is applicable throughout the United
States. State payroll taxes do vary and can not be addressed in this article. Please
contact your state tax department for information on employer liabilities in your area.
This article is intended as an overview of the payroll process. Please contact an
accountant for more information.
The First Step~~
Before you hire an employee, you need to obtain an Employer Identification Number (EIN).
Form SS-4 (Application for Employer Identification Number) is used for this purpose and
can be ordered from the IRS. You can request this by phone (800-829-3676) or download it
from their web site http://www.irs.gov. The EIN is a
number used by the IRS to identify your business and will appear on all preprinted federal
payroll tax forms.
Once you have completed the form, you can submit it to the IRS by phone using Tele-TIN,
fax or the postal service. Details are provided with the form instructions. The EIN is
normally issued immediately when the Tele-TIN method is used and within 30 days via mail.
If you have any questions, Publication 1635- Understanding Your EIN, may also help with
this process.
Since state laws vary, you will also need to contact your state tax department to find out
which forms are required in your area. Most will require you to obtain an identification
number on the state level and remit state withholding tax and state unemployment tax based
on the predetermined schedule.
Ready to Hire~~
Once you have obtained your Employer Identification Number and understand federal and
state tax liabilities, you can officially hire an employee.
As an employer, there are taxes you will need to withhold from your employees, taxes to
match and those that you must pay on the employee's behalf. Federal tax, state tax, FICA
and Medicare are withheld from employees. The employer must match the FICA and Medicare
taxes from business funds. In addition, the Federal Unemployment Tax Act (FUTA) mandates
that employers pay into a fund to cover their employees and some states have an equivalent
unemployment fund.
Most states also require that employers purchase Worker's Compensation insurance. Contact
the company that is providing your business insurance for details if this is necessary.
The person hired will need to complete two forms before you can issue the first paycheck.
1. Form W-4 can be ordered from the IRS by calling 800-829-3676 or it
can be downloaded from their web site at http://www.irs.gov.
2. Form I-9 can be ordered by calling 800-755-0777 or visit the
Immigration and Naturalization Service web site at http://www.ins.usdoj.gov/graphics/formsfee/forms/I-9.htm.
These forms contain confidential information and must be kept on file at your business.
They do not get mailed out to any government agencies unless specified in the
instructions.
Processing A Paycheck~~
Each week the employee works, a time card of some sort should be maintained on which the
dates and hours worked are recorded.
Gross wages would be determined by multiplying the total hours worked by the employee's
rate of pay.
From gross wages, several deductions will be taken to arrive at net pay.
1. Federal tax withholding is determined based on the information
provided on the employee's W-4. IRS Publication 15 includes tables separated by frequency
of pay (weekly, biweekly, semimonthly and monthly). Within each section you will find
subsections for filing status, Single or Married.
Columns listing gross wages are included in each section. Once you find the line which
indicates the correct wages in the appropriate classification, you then refer to the
number of withholding allowances claimed on their W-4 (0,1, 2, etc.) and deduct the
appropriate dollar amount as Federal Withholding.
2. State withholding varies. Please contact your state tax department
for details on your state's liability.
3. FICA is also known as Social Security tax and for the year 2002, is
6.2% of the first $84,900.00 in gross pay. Once an employee exceeds this limit, FICA tax
is no longer withheld.
4. Medicare withholding for 2001 is 1.45% of gross pay. This tax is due
on all wages earned and does not have a cap.
Payroll Taxes~~
As an employer, you will be responsible for matching FICA and Medicare tax with your
funds. It is important to track these with each paycheck and remit them to the appropriate
agency by the due date.
Some Federal payroll taxes are due monthly, some quarterly and others annually. Learning
what to remit and when is an essential component of processing payroll. The Internal
Revenue Service can impose penalties and interest when taxes are not paid on time. Once
you obtain your Employer Identification Number, preprinted federal tax forms should arrive
regularly. Before mailing, be sure to make a copy of all completed forms for your records.
MONTHLY TAX LIABILITIES CAN INCLUDE:
Form 8109- 941 Tax
The funds that you withheld from the paycheck (FICA, Medicare, Federal tax) and those you
matched (FICA, Medicare) need to be sent to the IRS. Form 8109 is a coupon book provided
by the IRS and used to pay tax deposits. This form will need to be completed indicating
the appropriate tax being paid (in this case 941), quarter it covers(explained in more
detail below) and dollar amount included. The withholding and match for all employees for
the period are combined and included on one coupon.
Once the amount is determined, a check should be issued to your business bank for these
funds and taken in along with the coupon. Be sure to write your EIN in the memo section of
the check.
Tax deposits are due by the 15th of the month following the tax withholding.
QUARTER DEFINED:
The IRS breaks our calendar year into four quarters as indicated below. Certain taxes are
due each quarter.
1st Quarter
January, February, March
2nd Quarter
April, May, June
3rd Quarter
July, August, September
4th Quarter
October, November, December
QUARTERLY TAX LIABILITIES CAN INCLUDE:
FORM 941
This form provides the means to reconcile the 8109 deposits made each month with the
actual tax liability for the quarter.
If you have made all of your monthly deposits in the correct amount, you should not owe
anything. If you miscalculated, it will become apparent as you complete this form and can
submit the balance due.
Form 8109- 940 Tax
There are three tests used to determine your 940 Federal Unemployment Tax Act (FUTA)
liability and they are explained in Publication 15. If you are found liable, the tax rate
for 2002 is 6.2% of the first $7,000.00 in wages paid to each employee for the year.
Your state unemployment fund may have a different wage base and rate, and payments to it
will help reduce your FUTA contribution. Generally, you may take a credit against FUTA
provided you pay into your state fund. If you are entitled to the maximum credit, your
FUTA rate drops from 6.2% to .8%.
Deposit schedules vary based on total wages and are explained in Publication 15. If it is
determined that you need to pay quarterly, you would use the same 8109 tax coupons, but
shade in the 940 tax box instead of the 941 box. Make checks payable to your bank and
deposit by the 15th of the month following the end of the quarter.
If you need to pay annually, please refer to Form 940 discussed later in this article.
The FUTA tax is only paid by the employer. Funds can not be taken from the employee to
cover this tax.
ANNUAL TAX LIABILITIES CAN INCLUDE:
Form W-2
After the calendar year is over, this form is used to report the total wages paid and
taxes withheld from each employee. Copies are provided for your employees and for your
records, but the original must be mailed to the Social Security Administration (SSA). The
address is included in the instructions.
Form W-3
A Form W-3 is used to summarize the information contained on all W-2s and must be mailed
to the SSA. It is required even if you have only one W-2 to submit.
Form 940 FUTA
This form is used to reconcile all 8109-940 tax deposits made during the year. Even if no
tax is due, the form must be filled out and mailed to the IRS. If you did not make
quarterly payments, you would determine your annual tax due and send in your payment at
this time.
Worker Classification~~
Taxpayers can make the mistake of calling someone who works with them an independent
contractor instead of an employee. The IRS has very strict rules regarding this
classification which are addressed in more detail on their web site. Publication 15-A,
Employer's Supplemental Tax Guide can be of assistance.
When in doubt, the IRS can help you make this determination through Form SS-8,
Determination of Employee Work Status For Purposes of Federal Employment Taxes and Income
Tax Withholding.
Resources~~
Additional resources on this subject can be obtained by calling the IRS Forms Distribution
Center at 800-829-3676 or through their web site at http://www.irs.gov.
Publication 15- Circular E- Employer's Tax Guide
Publication 15A- Employer's Supplemental Tax Guide
Publication 334- Tax Guide for Small Businesses
Publication 535- Business Expenses
Publication 583- Starting A Business and Keeping Records
Publication 1635- Understanding Your EINBrigitte
A. Thompson is an accountant, former daycare provider and work at home mom of three. She
is the President of DATAMASTER, LLC, an accounting firm based in Vermont. Her book, The Home Daycare
Complete Recordkeeping System, is used throughout the United States as a reference
guide and training manual. She has been producing it since 1995 and updates it
annually.For more information, please visit her web site at DaycareRecordkeeping.com.
Disclaimer
All information is based on the current federal tax laws of the United States. Since these
laws are subject to change, neither the author (Brigitte A. Thompson) nor this web site
(www.MomsBudget.com) assume liability for modifications to the law which occur after the
creation of this work. Every effort has been made to ensure this information is as
accurate and complete as possible. These articles contain general information for
businesses and are offered as an overview of the law. |
