1. Obtain an Employer Identification Number (EIN)
Before hiring employees you need to get an employment identification number (EIN) from the U.S. Internal Revenue Service. The EIN is often referred to as an Employer Tax ID or as Form SS-4. The EIN is necessary for reporting taxes and other documents to the IRS. In addition the EIN is necessary when reporting information about your employees to state agencies. To obtain an EIN you can contact the IRS directly or apply online.
2. Set up Records for Withholding Taxes
The IRS states that you must keep records of employment taxes for at least four years. Also keep good records for your business to help you monitor the progress of your business prepare your financial statements identify source of receipts keep track of deductible expenses prepare your tax returns and support items reported on tax returns.
The following describes the three types of withholding taxes:
Federal Income Tax Withholding (Form W-4)
Every employee must provide an employer with a signed withholding exemption certificate (Form W-4) on or before the date of employment. The employer must then submit Form W-4 to the IRS.
Federal Wage and Tax Statement (Form W-2)
On an annual basis employers must report to the federal government wages paid and taxes withheld for each employee. This report is filed using Form W-2 Wage and Tax Statement. Employers must complete a W-2 Form for each employee to whom they pay a salary wage or other compensation.
Employers must send Copy A of Form W-2 to the Social Security Administration (SSA) by the last day of February (or last day of March if you file electronically) to report the wages and taxes of your employees for the previous calendar year. In addition employers should send copies of Form W-2 to their employees by Jan. 31 of the year following the reporting period.
Depending on the state where your employees are located you may be required to withhold state income taxes. Visit the state and local tax page for more information.
3. Employee Eligibility Verification (Form I-9)
Federal law requires employers to verify an employee’s eligibility to work in the United States. Within three days of hire employers must complete an Employment Eligibility Verification Form commonly referred to as an I-9 form. This requires you to examine acceptable forms of documentation supplied by the employee to confirm the employee’s citizenship or eligibility to work in the U.S. Employers can only request documentation specified on the I-9 form. Employers who ask for other types of documentation not listed on the I-9 form may be subject to discrimination lawsuits.
Employers do not file the I-9 with the federal government. Rather an employer is required to keep an I-9 form on file for three years after the date of hire or one year after the date of the employee’s employment termination whichever is later. The U.S. Immigration and Customs Enforcement (ICE) agency conducts routine workplace audits to ensure that employers are properly completing and retaining I-9 forms and that employee information on I-9 forms matches government records.
4. Register with Your State’s New Hire Reporting Program
The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 requires all employers to report newly hired and re-hired employees to a state directory within 20 days of their hire or rehire date.
5. Obtain Workers’ Compensation Insurance
Businesses with employees are required to carry Workers’ Compensation Insurance coverage through a commercial carrier on a self-insured basis or through the state Workers’ Compensation Insurance program.
6. Unemployment Insurance Tax Registration
Businesses with employees are required to pay unemployment insurance taxes under certain conditions. If your business is required to pay these taxes you must register your business with your state’s workforce agency.
7. Obtain Disability Insurance (If Required)
Some states require employers to provide partial wage replacement insurance coverage to their eligible employees for non-work related sickness or injury.
8. Post Required Notices
Employers are required by state and federal laws to prominently display certain posters in the workplace that inform employees of their rights and employer responsibilities under labor laws. These posters are available for free from federal and state labor agencies.
9. File Your Taxes
If you are new employer there are new federal and state tax filing requirements that apply to you.
- Generally each quarter employers who pay wages subject to income tax withholding Social Security and Medicare taxes must file IRS Form 941 Employer’s Quarterly Federal Tax Return. Small businesses with an annual income tax liability of $1000 or less may file IRS Form 944 Employer’s Annual Federal Tax Return instead of Form 941.
- You must also file IRS Form 940 Employer’s Annual Federal Unemployment (FUTA) Tax Return if you paid wages of $1500 or more in any calendar quarter or you had one or more employees work for you in any 20 or more different weeks of the year.
For assistance with any of the steps above contact the Lindemeyer CPA team.
10. Get Organized and Keep Yourself Informed
Being a good employer doesn’t stop with fulfilling your various tax and reporting obligations. Maintaining a healthy and fair workplace providing benefits and keeping employees informed about your company’s policies are key to your business’ success.