Hiring an employee, even a team of employees, is exciting for your business. As an employer, it’s important to be aware of your new responsibilities. In this article, we identify the key steps when hiring a new employee, including setting up payroll and the necessary tax withholdings.
Step 1: Forms.
On the first day of employment, you will want the employee to complete form W-4. This form helps the employer determine the accurate federal income tax to withhold from their paycheck. Be sure to indicate whether you are hiring an employee or an independent contractor. This status clarifies how you withhold earnings and pay employee taxes. If you hire an employee, taxes are withheld from their paycheck. The employer provides a W-2 each January to its employees. On the other hand, if you hire independent contactors, you do not withhold tax from their earnings. The contractor is responsible for calculating and paying their own tax.
Step 2: Payroll Process.
There are decisions to make when it comes to payroll operations. The first thing to consider is how often you will provide a paycheck. Second, you need to determine how much you will pay in terms of employee wages. Finally, you will need to work through the taxes to withhold for W-2 employees. This process requires that you set-up an Employer Identification Number [EIN] with the IRS. Click here to learn more about the EIN.
Payroll is an extremely important process and a big responsibility so you will want to find a process that makes sense for you whether it’s in-house, off the shelf software, or a payroll service. If you choose to manage payroll, this will require your time and a detail-oriented mentality. If you don’t have much time, you might consider outsourcing the process to a payroll company.
Step 3: Payroll Taxes.
When hiring a W-2 employee, you must remember the federal, state and other local laws surrounding payroll tax. As the hiring entity, you will be responsible for this. A Payroll Service, such as ATBS, can walk you through this part of the equation and ensure you are compliant.
In addition to taxes, you will need to withhold a portion of the paycheck in order to cover income tax, social security, unemployment taxes and Medicare.
Step 4: Reporting.
The earnings and withholdings need to be reported to the IRS and you will want to be sure and report the following:
- Quarterly Payroll Tax Return [Form 941]
- Form W-2 provided to your employee[s]
- Federal Tax Deposits
- Form 940 or 940EZ, the annual Federal Unemployment [FUTA] Tax Return
- Form 945, Annual Withheld Federal Income Tax
Step 4. Maintaining Records.
Proper record keeping is fairly straightforward and you will want to retain the W-4s and W-2s for three years on all current employees and any employee who has left. All tax filings and records of tax deposits should be stored in a safe manner and accessible by the employer for a minimum of four years.
Payroll can be an overwhelming task to take on yourself. Consider partnering with a Payroll Service company who can provide you with professional payroll assistance, record keeping, and tax compliance.
ATBS is the trusted tax and accounting expert for owner-operators — we help you keep your money where it belongs, in your pocket!