If you hire employees there is information that you need to secure for your records and forms that you must complete. You must verify that each new employee is legally eligible to work in the United States. Have the employees you hire fill out Form I-9, Employment Eligibility Verification, and Form W-4, Employee's Withholding Allowance Certificate. If your employees qualify and want to receive advanced earned income credit payments, they must give you a completed Form W-5, Earned Income Credit Advanced Payment Certificate.
Employee's Social Security Number (SSN)
You are required to get each employee's name and Social Security Number (SSN) and to enter them on Form W-2. (This requirement also applies to resident and nonresident alien employees.) You should ask your employee to show you his or her social security card. You may, but are not required to, photocopy the social security card if the employee provides it. Record each new employee's name and social security number from his or her social security card. Any employee without a social security card should apply for one using Form SS-5, Application for Social Security Card. The Social Security Administration (www.ssa.gov) offers social security number (SSN) verification and quick access to relevant forms and publications.
The proper handling of employment tax is a very important part of operating and managing a small business. This can be a major pitfall for some small business owners and is avoidable.
Federal employment taxes include the following:
When you pay your employees, you do not pay them all the money they earned. The income tax and the employees' share of FICA (Social Security and Medicare) you withhold from your employees' paychecks are the part of the money you pay to the U.S. Treasury. This portion of their wages must be sent to the U.S. Treasury and is called "Trust Fund" taxes. Your employee's trust fund taxes, along with your employer's matching share of FICA, are paid through the Federal Tax Deposit (FTD) System. This money should not be used if your business has a cash-flow problem. It is not your money. It is actually your employees' money. Generally, you don't hold the money and send it with the employment tax return. You make Federal Tax Deposits on a schedule throughout the quarter and you must make them timely. The longer you delay paying the money, the more it can cost you. Congress established large penalties for employers that delay in turning over employment taxes to the U.S. Treasury.
- Federal income tax withholding
- Social Security and Medicare taxes
- Federal unemployment tax (FUTA)
The easiest way to make your deposits of withheld taxes and FICA is by using Electronic Federal Tax Payment System (EFTPS). This is a tax payment system provided free by the U.S. Department of Treasury, which allows businesses to pay federal taxes electronically via the Internet or phone 24/7. EFTPS via the Internet is a secure government web site that uses the highest level of security available. You can also use Form 8109, Forms 8109-B, Federal Tax Deposit Coupon. For additional information, refer to www.irs.gov, keywords "Employment Taxes for Small Businesses".
Federal Income Taxes/Social Security and Medicare Taxes
To know how much income tax to withhold from employees' wages, you should have a Form W-4, Employee's Withholding Allowance Certificate, on file for each employee. Ask all new employees to give you a signed Form W-4 when they start work. Make the form effective with the first wage payment. If employees claim exemption from income tax withholding, they must indicate this on their Form W-4. The amount of income tax withholding must be based on filing status and withholding allowances as indicated on the form. If a new employee does not give you a completed Form W-4, then withhold tax as if he or she is single with no withholding allowances.
To figure how much to withhold from each wage payment, use the employee's Form W-4 and the methods described in Publication 15, Employment Tax Guide, and Publication 15-A, Employer's Supplemental Tax Guide.
Social Security and Medicare taxes pay for benefits that workers and families receive under the Federal Insurance Contributions Act (FICA). Social Security tax pays for benefits under the old-age, survivors, and disability insurance part of FICA. Medicare tax pays for benefits under the hospital insurance part of FICA. You withhold part of these taxes from your employee's wages and you pay a matching amount yourself.
You file the following forms to report federal income tax withheld, Social Security, and Medicare taxes.
Federal Unemployment (FUTA) Tax
- Form 941, Employer's Quarterly Federal Tax Return or
- Form 944, Employer's Annual Federal Tax Return
The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. You report and pay FUTA tax separately from Social Security and Medicare taxes and withheld income tax. You pay FUTA tax only from your own funds. Employees do not pay this tax or have it withheld from their pay.
- Report FUTA taxes on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return.
Certain Taxpayers May File Their Employment Taxes Annually
To reduce burden for certain small business taxpayers, employers who have an employment tax liability of $1,000 or less for the year can file Form 944, Employer's Annual Federal Tax Return, instead of Form 941, Employer's Quarterly Federal Tax Return. Eligible employers are notified by mail.
Form W-2 Wage Reporting
After the calendar year is over you must furnish copies of Form W-2, Wage and Tax Statement, to each employee to whom you paid wages during the year. You must also send copies to the Social Security Administration. If you do not provide the correct employee name and SSN on Form W-2, you may owe a penalty unless you have reasonable cause.
The Form W-2 includes the employee's withheld income tax, Social Security tax and any advanced earned income tax credit payments. A copy of this form must be given to the employee by January 31st after the end of the year. You must also send a copy of the W-2 to the Social Security Administration (SSA). Filing these forms timely is important to ensure employees are credited with the proper Social Security amounts for retirement. Employers can prepare and file up to 20 W-2s at a time, free of charge, at the Social Security Administration's web site at www.ssa.gov. You can also print out all the necessary copies of the W-2 for your employees and state taxing agencies.
The due dates for filing Forms W-2 with SSA are:
- The last day of February for paper forms
- March 31 for forms filed electronically
The IRS and SSA exchange employment tax data. This data is an IRS document matching program that compares amounts reported to the IRS with amounts reported to SSA. When there is an imbalance, the employer is asked to provide information to help resolve the discrepancy.
This information provides a brief overview from the Internal Revenue Service of issues and decisions involved in owning a small business and avoiding common pitfalls.