Payroll tax

 Every employer is required to withhold payroll taxes on behalf of their employees. As an employer, you are responsible for withholding federal, state, and local taxes. You must also withhold Social Security and Medicare from your employee's paychecks and you are required to pay at matching amount of Medicare and Social Security. It is also a requirement to pay the unemployment tax as set forth by your state and federal government.

When you hire a new employee, you must have them fill out a W-4. The W-4 will help you determine how much federal and state income tax you need to withhold. Social Security and Medicare taxes are called the FICA taxes. It is a requirement for each employer to pay a matching amount of FICA taxes for each employee. Currently, an employer must withhold 6.2% of an employee's wages and pay a matching amount in social security until the employee hits the wage base for the year. The employer and employee total must equal 12.4% of gross compensation. Once that amount is earned, the employer and employee no longer owe additional Social Security tax for the given year.

Each employer is also required to withhold a Medicare tax if 1.45% of an employee's wages and must match this amount. The total amount to be paid for Medicare is 2.9%. You are always required to pay the Medicare portion of your FICA tax. Another area that is part of payroll taxes is the state and federal unemployment taxes. These are generally called the FUTA or SUTA taxes. The federal unemployment rate is equal to 6.2% of gross compensation, but it usually nets to 0.8%. Each employer can take credit of up to 5.4% of compensation for the SUTA takes they have to pay so this is why the FUTA tax can be lower. The wage base for FUTA is only $7,000 so once the employee's wages reach this amount, you are no longer required to pay the FUTA tax. The SUTA tax varies for each state so you need to check with your state tax department to find out what your tax percentage is. The SUTA tax is generally based on the unemployment claims that are filed by employees that you have laid-off. For most new businesses, the SUTA tax starts at the minimum amount and then declines if you have any unemployment claims filed.

Understanding your payroll taxes

 The best thing you can do as an employer is to pay your payroll taxes on time. If you are ever late paying your taxes, you will get nailed with a costly penalty. In order to determine your payroll tax liabilities, you need to determine how many employees you have that are subject to tax withholding. The IRS has laws in place that distinguish a common law employee from a contract employee. Depending upon the type of duty a contract employee performs, they may be considered taxable by the IRS. When you have your employees properly classified, you can begin determining your payroll tax obligations. If you are unsure of an employee's status, you need to check with your state tax department or contact the IRS.

One way to determine the type of employee you have is to determine the control you have over your employees. The IRS has a listing of 20 different factors that will help you conclude if you have a sufficient level of control over an employee. Here is more information about the 20 factors as stated by the IRS:

Instructions

A worker is one who complies with instructions laid out by you such as when, where, and how they work.

Training

A worker is considered an employee with more training. An independent contractor is an individual who knows what is expected of them and doesn't require training from the person who purchases their services.

Integration

The more important a worker is to the success of a company, the more likely they are considered an employee.

Services rendered personally

A worker is considered an employee if they personally perform the services that you are paying for. An independent contractor can substitute other's services for their own to fulfill their contract.

Hiring assistant

A worker will be deemed an employee if they are not in charge of hiring or supervising their own assistant.

Continuing relationship

A worker will be considered an employee is they perform work for you for significant time intervals.

Set hours

If you have workers who work set hours, they are deemed an employee. An independent contractor can set their own hours.

Full Time

Anyone who is required to work full time is an employee.

Work performed on premises

A worker is deemed an employee when they are required to perform their work at a place you designate.

Order of sequence set

If you set the order of sequence for the work an individual performs, this individual is considered an employee. 

Reports

If you require workers to submit regular reports, they are considered to be an employee.

Payment Method

An employee is someone who is paid by the hour, week, or month. An independent contractor is someone that is paid per job.

Expenses

If you pay for the travel expenses of a worker, they are considered to be an employee. Independent contractors are those who will cover their own expenses.

Tools and materials

If you furnish a worker with tools that are needed to perform their work, they are considered to be an employee.

Investment

The more a worker invests in the equipment they use, the more likely they are a contract worker.

Profit or loss

An individual who can make a profit or suffer a loss for their services is considered a contract worker.

Works for more than one person at a time

A independent contract can work for more than one person at the same time.

Services are available to the general public

An individual who uses marketing to promote their services in an independent contractor.

Right to fire

With an employee, you have the right to fire them at any time; with a contract employee you are limited to a contract obligation.

Right to quit

An employee can quit at any time without being held responsible for anything. A contract employee cannot quit without being held responsible for finishing their contract.

Since the payroll tax laws for employees vary, an auditor could state that some independent contractors are employees and need to be on your payroll. Be sure to look up the official law on contract employees and familiarize yourself with the laws so you can discuss your confusion with the auditor. You and the tax auditor can be looking at the same things and coming up with different conclusions. It is always a good idea to talk with a tax professional when you are setting up your payroll and you think you may have independent contractors. You can always ask the IRS to make a determination on your employees, this way you won't get any tax penalties for misclassifying a worker. The IRS requires that you fill out a Form SS-8 in order to provide you with the classification of an employee.

Once you have your workers classified, you need to set up your payroll. You must contact the IRS and tell that you have a payroll; they will mail you a form that you need to fill out. You must also contact your state and register your payroll with them. Each employee must fill out a W-2 and the I-9 form. A contract employee must fill out a 1099-MISC. For each employee, you will need to withhold taxes and for each contract employee, you will furnish them with a completed 1099-MISC at the end of the tax year.

It is a federal requirement to carry workers compensation insurance so you must purchase this before you begin using your payroll. Each state has different requirements when it comes to filing your payroll taxes. No matter what state you are in, you should never be late when you file your payroll taxes. Failure to pay your payroll will result in a visit from an IRS and state auditor. They have the power to seize your company and personal assets.  You must also remember to fill out a form 941 and submit it to the IRS by the 31st day of the month following the end of the quarter. Your employee's W-2 must reconcile with the form 941. Each employee must also receive a W-2 at the end of the tax year that states their net income, taxes paid, and other withholdings. The deadline to complete and mail your W-2s to your employees is midnight on January 31. If you fail to complete and mail your W-2s by this time, you could face a penalty and possibly be in legal trouble with your employees. If you have contract employees, you must provide them with a completed 1099 form. Once you have completed your W-2s and 1099s, you can then file your form 1099, form 940, and form 945 with the federal and state government.