The Tax Situation When You Have Employees
Once you have at least one person working for your business, you're an employer. Being an employer comes with a wide range of responsibilities, including withholding, depositing and paying employment taxes. How can you make sure you're fulfilling all your tax duties to avoid getting hit with fines and fees?
First, make sure to mark your calendar with key dates. The IRS has an Employment Tax Due Dates page with information on what you need to do and when you need to do it. Notably, you have to file returns four times a year, and at the end of the year, prepare and file Form W-2, Wage and Tax Statement, to report wages, tips and other compensation paid to employees. Each employee needs a copy. You will use Form W-3, Transmittal of Wage and Tax Statements to transmit Form W-2 to the Social Security Administration.
Employers generally must withhold income tax from employees' wages. To figure out how much tax to withhold, you will need to use the employee's Form W-4, the appropriate method and the appropriate withholding table described in Publication 15-T, Federal Income Tax Withholding Methods. You must then deposit your withholdings. The requirements for depositing vary based on your business and the amount you withhold.
Other key responsibilities
Employers also have to withhold Social Security and Medicare taxes from employees' wages and make sure they submit the matching amounts. (Something else to budget for!) To figure out how much tax to withhold, use the employee's Form W-4 and the methods described in Publication 15, Employer's Tax Guide and Publication 15-A, Employer's Supplemental Tax Guide. You must deposit the taxes you withhold. You can find the detailed requirements for depositing on the IRS.gov website.
The employee tax rate for Social Security is 6.2%. For Medicare, the current rate is 1.45% for the employer and 1.45% for the employee, or 2.9% total. Also, an additional Medicare Tax applies to an individual's Medicare wages that exceed a threshold amount based on the taxpayer's filing status. Employers are responsible for withholding the 0.9% Additional Medicare Tax on an individual's wages paid in excess of $200,000 in a calendar year, without regard to filing status. The employer does not have to match this additional portion, however.
Employers report and pay Federal Unemployment Tax Act (FUTA) tax separately from federal income tax and Social Security and Medicare taxes. You pay FUTA tax only from your own funds. Employees don't pay this tax or have it withheld from their pay. Again, refer to Publication 15 and Publication 15-A for more information on FUTA tax.
Don't forget the states
This is just the beginning of an employer's responsibilities. You are likely subject to state withholding rules as well. It's essential that employers be on top of the general rules and any annual rate changes. Understanding these tax issues is important, since you bear the responsibility of fulfilling your tax obligations related to your employees. It's important to send out payments on time to avoid penalties and late fees. Be sure to work closely with financial professionals to make sure you stay compliant.