Are you excited to finally be able to hire your first salaried employee? If your small business is entering the growth stage and you’ve found the perfect candidate (or candidates) to help make your entrepreneurial dreams come true, congratulations are in order.
But you also need to make sure your employee taxes are in order.
To comply with IRS regulations, you must report employee wages, tips, and other compensation to the IRS and meet the deadlines for paying payroll, Social Security, and Medicare taxes throughout the year. It all starts with the W-4 form.
Every new hire must receive and turn in a W-4 form. The W-4 helps determine the federal income tax withholding based on the employee’s filing status, allowances, and the IRS withholding tax tables.
The employee determines the amount of withholding, but if the IRS decides the employee did not have enough income tax withheld, the responsibility falls on you, the employer, to remedy the situation:
- You will be directed to increase the amount of withholding by issuing a “lock-in” letter that specifies the maximum number of withholding allowances permitted for that employee.
- Give the employee a copy of the letter, and have the employee file a new W-4.
- Once a lock-in rate is issued, the employee is not allowed to change the withholding without IRS approval.
As far as taxes, employers must deposit and report employment taxes by the IRS deadline schedule. The taxes include state and federal income tax withheld and both the employer and employee Social Security and Medicare taxes. There are two deposit schedules, monthly and semi-weekly.
Before the beginning of each calendar year, you must determine which of the two deposit schedules you are required to use. FYI: The schedule for depositing and the schedule for reporting will not be the same. To determine your schedule, see IRS Publication 15.
While Social Security and Medicare taxes (known as FICA taxes, after the Federal Insurance Contributions Act) are consistent across all states, income taxes vary according to income tax rates in each state.
Important numbers for 2017:
- The Social Security tax rate is 6.2 percent (amount withheld) each for the employer and employee (12.4 percent total).
- The Social Security wage base limit is $127,200—meaning that once the employee wages surpass that base limit, the maximum tax is still based on $127,200.
- The tax rate for Medicare is 1.45 percent (amount withheld) each for the employee and employer (2.9 percent total).
- There is no wage base limit for Medicare tax, and you must withhold a 0.9 percent additional Medicare Tax from wages you pay to an employee making over $200,000 in a calendar year.
In addition, employers must report and pay Federal Unemployment Tax (FUTA) separately from federal income tax, Social Security, and Medicare taxes. This is an employer-paid tax; employees do not pay FUTA tax or have it withheld from their pay.
Even if you hire part-time workers or hire workers for short periods of time, both you and the workers are required to report and deposit taxes the same as you would with full-time employees.
Finally, the IRS requires employers to use the electronic funds transfer system (EFTPS) to make all federal tax deposits. Don’t worry if all this sounds overwhelming—your tax advisor or payroll system will remind you when to deposit and determine how much you owe.