Always Know Your Cash – A Big Pile of Forms
Having employees can be pretty time-consuming all around. Paying them is no different. You have to deal with state and federal taxes, multiple report ﬁlings, unemployment insurance, and a whole lot more. Even if you have only one employee, you have to ﬁll out every form and meet every ﬁling deadline.
Once you have the basics covered, you can use your accounting soft- ware to help you manage payroll. Most of them come with a payroll module, and the rest often provide an add-on program that interconnects with the standard software. This is by far the easiest and quickest way to do your own payroll. The setup is the most labor-intensive part, but even that takes less time than you would imagine. Once that’s done, your part will be limited to telling the program everyone’s gross pay—the software can do all the rest.
It will calculate every deduction, ﬁgure out the take-home pay, keep track of the tax payments you (as the employer) have to make, even print out the paychecks. Before you get started cranking out the paychecks, though, there are several important steps you have to take.
You’ve probably gotten a paycheck at some point in your life and were as dismayed as everyone else when you ﬁrst realized how much money is taken out. Now you will be the one taking the money out and sending it to the tax men. In addition, employers have to kick in more payroll taxes on top of the ones they deduct from employee paychecks.
Whether you use payroll software or process payroll manually, it’s important to use the most recently published tax tables. Most accounting software will remind you to update them regularly, usually through an Internet download (though some will send you a CD if you ask). If you’ve taken the manual route, contact your tax agencies to find out whether there have been any changes, and request the latest set of tables.
As the employer, you have to account for two sets of taxes: withholding taxes and employer taxes. The withholding taxes are the employees’ own income taxes, taken directly out of their paychecks and sent to the tax ofﬁce (by you). The employer taxes are additional taxes that you have to pay on behalf of your employees, and they include Social Security and Medicare as well as any state and federal unemployment insurance.
The paycheck math is pretty simple. Start with the employee’s gross pay, deduct all the withholding taxes, and make out a check for the rest (a.k.a. net pay). There could be other deductions (as you’ll see later in this chapter), and applying the right tax rates can be tricky, because they change a lot. Once you get the hang of it, though, it will become as routine as recording a cash sale.
The First Forms
Before you can hire your ﬁrst employee, you have to register as an employer with the IRS. You can do that by ﬁling Form SS-4, which is simply an application for an employer identiﬁcation number (EIN). This number will appear on every one of your federal ﬁlings that involves employees (and some other ﬁlings as well). The form is pretty easy to ﬁll out—it mainly asks for basic information, including the name of your business, some contact information, entity type, and how many employees you expect to have in the upcoming year.
After you mail or e-mail that form to the IRS, you will receive your EIN, usually within a week or two. Your company’s EIN will be a nine-digit number that looks like this: 11-1111111. Even if your company operates under different names (for example, JKS Company, dba John’s Carpentry), you still need only the one EIN.
In addition to your federal EIN, you need to get identiﬁcation numbers (sometimes called account numbers) from any applicable state and local tax authorities. These state and local numbers will be used for reporting and depositing payroll taxes, and possibly some other taxes as well, such as sales tax. A lot of states will have you use your federal EIN for state tax ﬁlings, giving you fewer numbers to keep track of.
To get your state ID number, contact your state department of revenue to ﬁnd out which forms you have to complete and submit, and where to send them. Once the department accepts your request, it will send you the forms or coupons you need to start making tax deposits.
Don’t wait! Get your EIN as soon as you can, even before you open your doors for business (if possible). That way, you will have your assigned number before you need it for your first filing. You can’t make tax deposits without it, and late tax deposits can be subject to hefty fines.
What You Need from Employees
To start paying your employees, you need some information from them, all contained on IRS Form W-4. Every new employee must ﬁll out one of these forms and sign it, preferably on the ﬁrst day on the job.
The W-4 holds two key pieces of information: the employee’s Social Security number and how many allowances she’s claiming for tax purposes.
Those allowances affect how much federal and state income tax will be deducted from her take-home pay.
If an employee wants to change her withholding, she has to complete a new W-4 form. Why would someone ﬁll out a new form? There are lots of reasons, but the most common are marriage, divorce, and having a baby.
Still More Forms
The forms you have already dealt with have to do with setup: getting identiﬁcation numbers and collecting employee information. From here on out, you will ﬁll out and ﬁle after-the-fact forms that spell out the details of the prior period’s payroll. These forms are usually sent along with payments.
On the federal front, you have to complete and submit Form 941 (usually quarterly) to report withholding taxes and your matching Social Security and Medicare contribution. Then there’s Form 940 (also available in EZ form for smaller employers), used to report your federal unemployment tax responsibilities (usually ﬁled annually). At year-end, you have to prepare a Form W-2 for each employee, just like the ones you would get at year-end if you were someone else’s employee. The IRS also gets a Form W-3, which is a summary of all the W-2s you have handed out.
State and local forms tend to follow the federal model, for both the information you include and the timing. Of course, your state or local government may ask for speciﬁc items not included on federal forms, or have a different ﬁling schedule. You can ﬁnd out exactly what you have to do to satisfy these requirements by checking out your state’s Web site (local tax information is usually posted there as well) or by calling your state tax col- lector’s ofﬁce.
Of the states that do have their own income taxes, there are only three that do not follow the federal wage-table model for figuring out with- holding amounts. In North Dakota and Arizona, you withhold a straight percentage of each employee’s federal withholding. In Pennsylvania, you simply multiply each employee’s gross pay by the state’s fixed percentage.