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Handling Employer Tax Responsibilities
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Handling Employer Tax Responsibilities
Note: The ARRA (Recovery Act) initiatives and/or programs referenced in this article will expire on September 30, 2010. Any statements about qualifying time periods, or extensions of these dates, as they pertain to the availability of ARRA programs are over-ridden by the expiration of the Act on September 30, 2010.
You cannot grow your business single handedly; you may need to staff up. When you do this, making payroll, avoiding on-the-job problems (e.g., injuries, discrimination, or sexual harassment), and displaying minimum wage posters are the least of your worries. Even if you have only one employee (including yourself), you face a wide array of obligations to your employees, to the IRS, and to your state. Handling these obligations is;t easy and i-s time consuming, but messing up can cost you in penalties, interest and time. Following the rules can protect you in case of an audi-employment tax audits are coming soon as yo'll see. Here is a brief outline of what you must do to stay compliant.
Withholding. You must withhold federal (and state, if applicable) income taxes from employee wages, based on the information given to you on their Form W-4. Withholding also includes the employee share of Social Security and Medicare (FICA) taxes, and in some states, disability and other payments.
You may also have to withhold for employee contributions to various employee benefit programs, such as 401(k) plans, flexible spending accounts (FSAs), and savings plans.
Employer taxes. You must pay the employer share of FICA, along with federal (FUTA) and state unemployment taxes.
Depositing taxes. Yo'll need to deposit the taxes with the U.S. Treasury (and your state). This can be done at a federal institution approved to accept these deposits or by electronic transfer from your bank account to the Treasury using EFTPS.gov. Do't have money in your account? These tax payments can also be made by credit card using an IRS-approved processor (Link2Gov.com and Official Payments Corporation), but yo'll pay a hefty convenience fee to the processor.
Tax returns. You must file a quarterly employer return, Form 941, Employe's Quarterly Federal Tax Return, with the federal government to report income tax withholding and FICA payments. Small employers who pay less than $1,000 a year in employment taxes may be able to instead file Form 944, Employe's Annual Federal Tax Return once a yea'the IRS must notify you of your eligibility for this. Also, there are also quarterly state returns as well as an annual FUTA return (Form 940, Employe's Annual Federal Unemployment (FUTA) Tax Return).
New responsibilities. The American Recovery and Reinvestment Act of 2009 created new chores for employers:
- Implement withholding tables reflecting the Making Work Pay credit so employees can have more take-home pay.
- Implement the COBRA subsidy to account for the 65% federal subsidy of premiums for certain terminated employees if you are subject to COBRA (federal or state). The subsidy is up to nine months for those involuntarily terminated on or after September 1, 2008, and before January 1, 2010. You have to notify terminated workers of their eligibility to receive the subsidy, lay out the subsidy amount when paying the insurance premiums, and then recoup the subsidy by reducing your employment tax deposits or claiming a tax credit on your quarterly employer return. The Department of Labor has notices you can use for this purpose.
Coming employment tax audits. When the weather turns colder in the fall, the IRS is launching a random audit program to gather information from approximately 5,000 employment tax returns so it can better target employers in the future. Even if you've done nothing wrong, you can face this audit. Here's your best defense: Keep your employment-related records in good shape so you'll be prepared in case you are unlucky and are audited.
Caution: Even if you use an outside payroll service or accountant to handle the deposits and paperwork, you remain responsible for your employment tax obligations.
You can find out more about federal employment tax responsibilities from the IRS by viewing Publication 15, Employer's Tax Guide.
Barbara Weltman, founder of Big Ideas for Small Business, Inc., author and publisher of Idea of the Day[sm], and weekly host of radio show, Build Your Business, which airs each Monday from 4pm to 5pm Eastern on wsRadio.com.
About the Author:
Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser's Small Business Taxes, J.K. Lasser's Guide to Self-Employment, and Smooth Failing as well as a trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® and host of Build Your Business Radio. She has been included in the List of 100 Small Business Influencers for three years in a row. Follow her on Twitter: @BarbaraWeltman.