While I no longer prepare payroll or payroll reports, many folks have asked me about this subject. Some folks do not realize that there are several
taxes that have to be paid/withheld when you pay an employee. They are as follows:
- FICA Tax
– This 6.2 percent is held out of your
employee’s check, but you must also match the 6.2 percent out of your
pocket.
- Medicare Tax— the amount is 1.45 percent. This
amount is withheld from your employee’s check and also is matched by you, assuming
no employee goes over $200K ( Obamacare Medicare tax is levied on employees
making more than $200K, no employer match).
- Federal Withholding—this
amount is withheld out of your employee’s check and will depend on how they
filled out their W-4. You use tables or
publications supplied by IRS to figure this.
- State Withholding—not
applicable in TN. In other states, you
use tables supplied by the state government.
These funds are also withheld out of the employee’s check. Keep in mind that it is determined by where
the employee works, not necessarily where he lives--so if you have an employee
that works in Arkansas, but lives in TN, he
still has to have Arkansas
withholding tax taken out. (You have to
get set up with Arkansas
to do this).
- Unemployment—this
tax comes strictly out of your pocket—NOT the employee’s. It is basically 2.7
percent (for the first year of business, then it varies) of your employee’s gross wage, until the wage of $7,000 is
reached. Then you stop paying it on this
particular employee. The rates above are
for Tennessee. Each state is different.
You also have to pay
in at year end a Federal Unemployment
Tax. This tax is .008 x the gross
wage until the employee reaches $7,000, or $56 per employee per year if they
all go over $7000 each. If you do not
pay in your state unemployment taxes, this rate will double!!
Folks often ask me about how much they should estimate for the
cost of an employee. I normally say around
eleven percent plus their wages...6.2% for
FICA, 1.45% for Medicare, 2.7% percent for State Unemployment, and then just a
little bit for the Federal Unemployment tax.
Now that you know the basics, here is what you will need to do: - If you haven’t
already received your EIN number, go to the irs.gov website. There you will find a link to a SS-4. This is for your Federal ID Number (EIN)
which you will need when you file wage reports, W-2’s, etc. It will only take a couple of minutes to fill
it out-be sure to check the correct box that identifies whether you are a
sole-proprietor, corporation, etc. Please note:
an LLC doesn’t mean anything to the IRS, you are either a sole-proprietor
LLC, a partnership LLC, or a corporation LLC. Follow the instructions given and send it in.
In a very short time (usually just a couple minutes) they will send you your
EIN Number. This service is free. Remember that this number is like a Social
Security Number. It is yours forever,
guard it carefully.
- Google or use the
IRS.gov website link to W-4’s. Print
out and give to your employees to fill out.
I suggest folks file either
Married or Single then zero, which should get them some back when they file,
and encourage them NOT to fill out the top part of the W-4. That almost always causes people to owe
IRS.
- Also at the IRS.gov
website (or you can just google it), click on EFTPS. This is an electronic payment system to pay
in your tax deposits. You must get set up with this system if your tax liability
(employee’s plus your share of the FICA, Medicare, plus the employee’s federal
withholding amount) is over $2,500 for the quarter. If it is not, then you can submit the amount
owed with your quarterly payroll report (explained below). The EFTPS process is free and very
simple. You will fill out the required
information, and they will mail you a 4-digit code. You will then either phone or e-file your
deposit amount using your EIN number and that code. They will draft the amount out of your bank
account on a specified day, but the payment must be made before the 15th
of the month following the payroll (i.e. November 15 deadline for October
payroll).
- Google TN
Department of Labor and Workforce Development. Click Employers, then Employer Services. There is a chart there, look to the top right
and click on Frequent Questions Employer Accounts. Question 2 (How does my business register…)
will tell you to fill out a “Report to Determine Status” and different options
for filing it. This step is important as
now you will have your number to file unemployment reports (a different number
than the EIN). Your unemployment report
is due quarterly, but you still need to do this asap. They will send you a letter telling you that you are subject to the tax (which you already
knew), but that account number is what is important.
Every state unemployment agency requests a form called a
“New Hire” report* for all newly hired or returning-to-work employees. Simply make a copy of their W-4, fill out the
bottom part where it asks for employer’s name, address, and EIN and mail to: Tennessee
New Hire Reporting
PO Box 17367 Nashville, TN 37217 or fax to 1-877-505-4761 *They want these forms
to catch folks not paying child support or student loans, etc.
These quarterly reports are due as follows: - April 30
- July 31
- October
31
- January 31
- Form 941. This is the federal tax report that
reconciles what your deposit is with what you paid in (through EFTPS, for
example). If you have faithfully
deposited the correct funds with EFTPS, this form should zero itself
out. If you did not use EFTPS, then
you will owe the applicable payroll tax.
If you owe more than $2,500, you will have a penalty unless this is
the first quarter you went over. One
word of warning applies here: Not paying in your payroll taxes is a
very serious offense with the IRS.
It is considered fraud and/or embezzlement as part of these funds
do not belong to you, they belong to the employee.
- State Unemployment forms—either
paper filed or e-filed. You will
owe a balance on this form unless your employee reached $8,000 in the
previous quarter. If your employee
reaches $8,000 in the current quarter, then the wage amount over $8,000
will not be taxed. Note: The $8,000 wage base applies to TN, other states have different wage bases.
- Federal Unemployment Form (Form 940)—filed
annually. Usually a small balance
due on this form.
- W-2’s and a W-3. The
W-3 is just a “top copy” for the W-2’s. These forms are separated out and one
set is given to the employee, another page is kept by you, while another
page (the top page) and the W-3 is sent to SSA (not the IRS, they’ll get a
copy from the SSA).
Is your head swimming yet????
|