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 $9,000 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:

1. 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.
2.  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. 
3. 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 15^th of the month following the payroll (i.e. November 15 deadline for October payroll).
4. 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).