Tax Tip #3: Hiring a New Employee?
The decision to hire a new employee is a big step for small business owners. It’s one that contains many governmental tax and legal obligations; thus remaining in compliance with these rules is extremely important. The following can be used as a guide for business owners to consider when hiring a new employee.
1. Obtain an Employment Identification Number
Before hiring your first employee, it is important that you obtain an employment identification number (EIN). This number is used when reporting necessary tax and other related documents to both the IRS and state governmental agencies. To get an EIN, you must file IRS Form SS-4.
2. Complete form I-9 for each employee
United States Citizenship and Immigration Services (USCIS) require employers to use form I-9 to verify each employee’s eligibility to work in the U.S. The form is not supposed to be filed but must be kept on file for three years after the date of hire or one year after the employee’s termination. Employers can electronically verify the eligibility of employees by using E-Verify. This is a free internet based system, provided by the government.
3. Obtain a form W-4 from each employee
Each employee will need to complete the form indicating the number of allowances they are claiming year end for tax purposes. The form would then be used by the employer to withhold the correct amount of tax from each employee’s paychecks. The form is not supposed to be filed but must be kept on file and updated if the employee wants to change their allowances.
4. Obtain worker’s Compensation Insurance
Business owners, with employees, are required to have workers’ compensation insurance. Workers’ comp is required in most states. However, some may make an exception for businesses with very few employees. Owners are required to obtain coverage through a commercial carrier, or their state worker’s compensation insurance program, or on a self-insured basis.
5. Report the employee to the state’s new hire reporting program
Employers are required to report information on all new employees and re-hired employees to their state’s new hire program within 20 days of the hire date.
6. Register with the state’s labor department
Business owners are required to register with their state’s labor department to pay state unemployment taxes, for every new employee.
7. Set up a payroll system for tax withholding
Business owners will need to withhold a portion of the employee’s income for income tax and FICA tax payments. Along with the employee’s portion, the employer will have to deposit an equal amount of FICA taxes to the IRS. Also, depending on the state where the employee work and/or resides, the owner will have to withhold and submit state income tax.
In addition, every year employers must submit a form W2 to the federal government showing the amount of wages paid and taxes withheld from each employee, for the previous calendar year. The employer must submit this form by the last day of February to the social security administration. Further, each employee has to receive a copy of the form no later than Jan 31, for income tax reporting.
8. File employment taxes
Employers are required to file Form 941 (Employer’s Quarterly Federal Tax Return), to report federal income tax & FICA taxes withheld from employees paychecks. Alternatively, Form 944 (Employer’s Annual Federal Tax Return) can be filed if the employer’s tax liability is $1,000 or less. In addition, employers must also file Form 940 (Employer’s Annual Federal Unemployment (FUTA) Tax Return), to report unemployment tax if they paid wages of $1,500 or more in any calendar quarter, or if they had at least one employee during any day in a 20 week time frame. The owner is responsible for this tax. It is not to be withheld from their employee’s paychecks.
The federal government requires that employers keep good records of employment taxes for at least four years. This is extremely important because it helps when preparing tax returns and supporting items reported on returns. The government also requires that the proper amount of tax is deposited when due and the correct return is filed. Heavy penalties and interest will be assessed for late deposits, late filing, willful failure to pay, file tax returns, or filing false or fraudulent returns.