If your sole proprietorship or contract work business is booming and you can barely keep up, it may be time to hire your own employees. Once your business decides to hire its own employees, there are a slew of rules and regulations that you must follow when it comes to payroll taxes. Most new employers are unaware of these regulations, but failing to follow them can mean serious penalties.
A Brooklyn tax preparer can also help your business get started with its first hire. At EB Tax Consultants, we offer a full range of business services, including payroll and paycheck services. Don’t guess when it comes to taxes—it can hurt you in the long run! Instead, use our quick guide to get you started and then set up an appointment to actually carry out your payroll services.
Before you can hire your first employee, you must have an Employee Identification Number (EIN). This is a number assigned by the IRS for tax reporting purposes. It is the business equivalent of a Social Security Number or other Tax Identification Number for individuals.
You can apply for an EIN online, but it can take some time, so starting early is important. Your Brooklyn tax preparer can also apply for this number on your behalf as well.
The IRS keeps a close watch on employers, so that may mean that you have to keep records that you have never kept before. You also may need to retain these records longer as well. The IRS requires that you keep records of all employment taxes paid for at least four years. If you do not already have a bookkeeping system in place, set one up before you hire your first employee.
There are many other benefits for having a bookkeeping system, including being able to prepare your tax returns much faster on an annual basis. It can also help you keep a close eye on your profits and losses and take full advantage of any deductible expenses that you may be entitled to take.
Every person that you hire must complete Form I-9. This form is used to prove that your employee is authorized to work in the United States. Although you do not have to send this form to the IRS or any other entity, you are still required to keep this form in the employee’s personnel file in case you are randomly audited. You should also keep this form for the later of three years after the employee’s date of hire or one year after the employee’s termination.
The second form you will need is Form W4. This form allows the employee to dictate how much taxes they will need withheld from their regular paycheck. It also provides the IRS vital information about the employee, including their Tax Identification Number and their address. This information will be used to create the employee’s W2 at the end of the year. Forms W4 and W2 are sent to the IRS for their records, and you should retain a copy as well. State taxes may also have specific requirements that you must meet as well.
Employers must withhold federal taxes, state taxes, FICA, Medicare, and usually state disability tax. The employer must also match FICA and Medicare payments dollar-for-dollar. Keep the funds that you withhold in a separate account so you can easily track them.
You must provide these withheld funds and your portion of the funds to the government on a regular basis. The employee portion of these funds is frequently referred to as “trust fund taxes,” and failure to withhold and deposit these funds with the government could result in severe penalties—up to 100 percent of the tax liability in some situations. Employers will generally file a federal tax return quarterly to report wages and tax withholding information.
Employers must also pay workers’ compensation and Federal Unemployment Tax fund payments in some cases, depending on the number of people employed at your business. Many other employment regulations may also come into play after you have a certain number of employees as well.
If you are hiring individuals as independent contractors, the entire process could be affected. Make this decision before you start looking for help.
Making the decision to hire employees can affect your business in many ways. Speaking with an experienced tax professional before you get started will help you avoid some of the most common pitfalls. Contact EB Tax Consultants by clicking on the profile below or using the contact button.
ERNIE BUSTAMANTE