Employment Taxes

Small business owners often have great responsibilities while operating and managing a business. Before you become an employer and hire employees, you need a Federal Employer Identification Number (EIN). If you have employees, you are responsible for several federal, state, and local taxes. As an employer, you must withhold Federal income tax, Social Security and Medicare taxes, and Federal unemployment tax act (FUTA).

As an employer, you are also responsible for timely depositing and withholding federal income, your matching share of social security and Medicare taxes from your employees' wages and any federal unemployment tax act (FUTA) taxes.

Federal Tax Deposits

You can make your deposits either electronically, using the Electronic Federal Tax Payment System (EFTPS), or by taking your deposit and Form 8109-B, Federal Tax Deposit Coupon to an authorized financial institution or a Federal Reserve bank serving your area. Five to six weeks after you receive your employer identification number (EIN) , the IRS will send you the coupon book. If you have a deposit due and there is not enough time to obtain a coupon book, blank coupons (Form 8109-B) are available at most local IRS offices. You cannot use photocopies of the coupons to make your deposits.

If you don't have your EIN by the time a return is due, write "Applied for" and the date you applied in the space shown for the number. Do not use your social security number. Also, for faster service in obtaining an EIN, you may now apply for your EIN using the online EIN application .

For simplicity, consider depositing employment taxes on each payday (which is the day the employer becomes liable), so deposit requirements are met without having to bother with IRS deposit requirement dates.

Employment Tax Requirements

Below are the basic requirements for tax and wage reporting compliance.

1. Determine employer identification number (EIN) requirements, complete and submit EIN Request Form SS-4 (PDF).
2. Determine employee status, verify work eligibility by filing Form I-9 (PDF)
3. Request Form W-4 (PDF), the employee withholding form, verify employee ID information (SSN), and receive if applicable, earned income credit (EIC) eligibility by filing Form W-5 (PDF). See Note 1 below.
4. Calculate and deduct employees' income tax, social security, and Medicare amounts.
5. Make quarterly deposits using Form 940 (PDF) and quarterly returns using Form 941 (PDF). Refer to Note 2 below.
6. File Form(s) W-2 (Wage and Tax Statement).
7. File Form(s) W-3 (Transmittal of Wage and Tax Statement).
8. File Form 945 (Annual Return of Withheld Federal Income Tax).
9. File Form 1096 (Annual Summary and Transmittal of U.S. Information Returns).
10. 1099 Forms - If you received certain types of income, you may receive a Form 1099 for use with your federal tax return. You will not usually attach a 1099 series form to your return, except when you receive a Form 1099-R that shows income tax withheld. You should keep all other 1099s for your records. There are numerous 1099s, so for specific information refer to General Instructions for Forms 1099, 1098, 5498, and W-2G (PDF).
11. File Form 8027 (Employer's Annual Informational Return of Tip Income and Allocated Tips).
12. Check for required information returns and file those applicable to your business.
13. Complete Form W-5 (Earned Income Credit Advance Payment Certificate) This form is retained by the employer.
14. Determine business tax and wage reporting records to be kept, determine period to be kept, and maintain records.

Note 1: Employers should not pay the advance credit out if the employee doesn't qualify. Internal Revenue Code requires that

1. on any tax return claiming the earned income credit (EIC),
2. The husband must have an SSN (not an ITIN);
3. The wife must have an SSN (not an ITIN); and
4. Any qualifying child must have an SSN (not an ITIN).

Note 2: Send in Forms W-4 that meet either of the below conditions each quarter with Form 941 when the employee claims:

1. More than 10 withholding allowances,
2. Exemption from withholding, and his or her wages would normally be more than $200 per week.

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