What Small Employers Need to Know about Employment Taxes
If you have any employees (including yourself if your business is incorporated), you'd better comply with employment tax requirements in order to avoid penalties.
Get information on new employees. You must have all new workers complete the following:
- Immigration and Naturalization Service (INS) Form I-9 to verify work eligibility. You can download it from the INS Web site at www.ins.usdoj.gov/graphics/index.htm. You don't file the form with INS but retain it with your payroll records for possible inspection by INS.
- IRS Form W-4 to indicate withholding allowances used to figure how much income tax to withhold from an employee's pay.
Withhold taxes. You must withhold income tax from employee wages as well as the employee share of FICA. The amount of income tax withholding is based on the marital status and number of withholding allowances claimed by an employee on IRS Form W-4. The employee share of FICA in 2000 is:
|Social Security portion||Medicare portion|
|6.2% of wages (up to $76,200)||1.45% of all wages|
Figure employer taxes. You must pay the employer share of FICA (it's the same as the employee share above). You must also pay federal unemployment (FUTA) tax of 6.2% before any state credits on wages up to $7,000 annually. (You may also owe state unemployment tax.)
- Caution: If an employee is eligible for the earned income credit (EIC) and has a qualifying child, then he or she can receive EIC payments of as much as $1,412 throughout 2000 via withholding reductions or additional pay. Employees must complete IRS Form W-5 to certify eligibility.
Deposit employment taxes. You must pay your employment taxes to the government by depositing them electronically or by making deposits by check with an authorized financial institution or Federal Reserve Bank. Large employers must make electronic deposits, but small employers may opt to do so as well (call 800-555-4477 or 800-945-8400 for information about the Electronic Federal Tax Payment System). The IRS will tell you when you must make deposits (the frequency depends on the total taxes you pay).
File employment tax returns. IRS Form 941 is filed quarterly with the IRS to report income tax withholding and FICA taxes. You may be able to file by phone using 941TeleFile (the IRS will notify you if you qualify). IRS Form 940 (or a simplified 940-EZ) is filed annually to report FUTA.
Keep records. Keep all employment tax records for at least four years.
To find out more information about your employment tax obligations, see IRS Publication 15, Circular E, Employer's Tax Guide, which you can download from the IRS Web site at www.irs.gov. Also check with your state tax authority for state employment tax obligations.
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BARBARA WELTMAN is an attorney and a trusted professional advocate for small businesses and entrepreneurs. She is the author with such titles as J.K. Lasser’s Small Business Taxes and Smooth Failing, and she contributes regularly to American Express OPEN and SBA.gov. Her articles have appeared in the Wall Street Journal and U.S. News and World Report. Weltman is also the publisher of Idea of the Day and monthly e-newsletter Big Ideas for Small Business at www.barbaraweltman.com and hosts radio shows and podcasts, including Build Your Business radio. She has been named one of the 100 Small Business Influencers in the U.S. for the third year in a row.
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