Employees & Payroll Taxes

If you will be paying employees to work in your business, you need to obtain an Employer Identification Number (EIN) by filing Form SS-4 with the Internal Revenue Service. This number should be obtained before you pay any wages.

You will receive from the IRS a notice of the EIN assigned, as well as a copy of Publication 15 ("Circular E") which explains the withholding and payment of payroll taxes. You will be reporting the wages quarterly on Form 941, which is due the last day of the month following the end of the quarter.

You will be withholding FICA tax, made up of Social Security (currently 6.2% of Social Security wages ... $80,400 for 2001, $84,600 for 2002, $87,000 for 2003 and $87,900 for 2004) and Medicare tax (1.45% of all wages), as well as withholding Federal income tax based on the status and allowances claimed on Form W-4 by the employee, as explained in Circular E. You will also be MATCHING the FICA tax as the employer's share, and remitting the total, plus the Federal tax withheld from the employee, at intervals specified in Circular E. NOTE: It is important that you realize that the FICA and Federal tax withheld from the employee's pay is NOT your money. It is considered a "trust liability" to the Federal government, and must be remitted to them promptly at the designated intervals.

You will also be responsible for paying Federal Unemployment Tax (FUTA) on the first $7,000 of wages paid to each employee each year. Quarterly deposits will be required if your accumulated FUTA liability reaches $100 or more. See Circular E for specifics.

You must also check with your state or locality to see what employer registration, tax withholding, payments and reports may be required. Even if your state does not have an income tax, it may require payments from employers based on other factors.