If you are starting a small business and plan to hire employees then it pays to understand what your tax obligations are so you start on the right foot. Many organizations use an accountant to make sure that taxes are done correctly.
As a small business you might be operating on a shoestring budget and will be looking to take care of these things yourself. Which means that you need to understand your obligations when it comes to making sure you are tax compliant for your employees.
In this article, we will go over what you need to be doing for tax purposes for your employees.
1 – Reporting and your employees
Let’s start at the end of the process and go backwards. This is because your employees will be reliant on you to be able to file their taxes themselves. Throughout the year, you will be withholding taxes from their paycheck and at the end of the year will have to send them a tax form that outlines the withholdings.
It depends on what type of employee they are as to what form will need to be sent. For instance, if you are working with contractors that are not exactly employed by your company then you will send them a 1099 for self-employed people.
Those that are on your payroll will need a W-2 to be able to do their tax return. Make sure that you have the right window envelopes to send the forms so they reach your employees in time. They also need to be sent out to them as soon as possible so there are no delays for them to report their taxes.
2 – FICA and FUTA
There are two big factors that have to be kept in mind when you have employees. The first is FICA which is withheld from the paycheck and the other is FUTA which is not.
FICA are social security and Medicare withholdings for when your employee retires or is forced out of work due to an injury. These taxes are separate from the federal income taxes and state income taxes if that applies to your particular state.
FUTA is the Federal Unemployment Tax Act that is a sort of insurance for when an employee is laid off. The amount you pay comes to 6% of the first $7,000 the employee earns. If you have at least one employee that works at least 20 weeks of the fiscal year then you have to pay into the fund.
3 – The W-4
The amount you will withhold for federal and state income taxes is going to depend on the W-4 that your employee will fill out when they are hired.
Things like marital status, amount of dependents and even any additional withholdings the employee cares to make will be the factors that are calculated for how much is withheld and deposited.
Some employees will want the maximum to be withheld so they can get a refund, others would rather have the minimum to have more money in their paycheck.