Employment Taxes for Small Employers
Having employees is a benefit that comes with many responsibilities. While employers gain valuable assistance from their staff, they must comply with time-consuming federal and state employment tax rules.
For example, all employers--regardless of their size--are required to meet employer tax obligations. These requirements include:
- Withholding income taxes and the employee portion of Medicare taxes (FICA) from wages and certain other compensation payments.
- Paying the employer portion of FICA as well as federal unemployment taxes (FUTA).
- Depositing employment taxes.
- Filing returns with respect to employment taxes.
- Meeting state employment tax obligations (which can include withholding income tax from employees' wages and depositing them, paying state unemployment insurance tax, and filing returns).
- Informing employees of eligibility for the earned income credit if they are low-income taxpayers and, where applicable, providing this credit to them on an advanced payment basis (i.e., an addition to wages).
Here is some information that will help to make to the tax process less burdensome.
Paying federal employment taxes
Employers must deposit employment taxes on a schedule--the exact schedule depends on the amount of these taxes. However, small employers--those with quarterly taxes under $2,500--can simply pay them when filing their quarterly returns (explained below).
While small employers are not required to use Electronic Federal Tax Payment System (EFTPS) (www.eftps.gov), a free payment method that debits taxes from business bank accounts, they can opt to do so. Many have already chosen to do because it's fast, accurate, convenient, and secure. To date, six million taxpayers have enrolled in EFTPS, many of which are small employers.
On November 15, 2005, the Treasury launched Simplify (www.simplifyeftps.org), a national campaign to communicate to small businesses the benefits of paying taxes electronically. The government's motivation is revenue savings: The Treasury claims that it is 53¢ cheaper for it to process an electronic payment than one made with a paper coupon. But it can also be a time and money saver for small businesses.
Employers can now pay any remaining federal employment taxes by credit card when filing the employer returns. Official Payments Corp., one of the two IRS-authorized credit card processors for tax payments, now accepts most major credit cards for payments on Form 940 Employer's Annual Federal Unemployment Tax Return (including 940-EZ) for tax year 2005 and Form 941, Employer's Federal Quarterly Tax Return, for tax years 2005 and 2006.
Filing federal employment tax returns
Every quarter, employers must report income tax withholding and FICA to the IRS. Generally, Form 941, Employer's Quarterly Federal Tax Return, is used for this purpose.
Once a year, employers must report federal unemployment tax (FUTA) to the IRS on Form 940. However, small employers may use a simplified return, Form 940-EZ, Employer's Annual Federal Unemployment (FUTA) Tax Return if they timely made unemployment contributions to only one state and all wages were taxable for both FUTA and state unemployment tax.
Caution: You cannot use Form 940-EZ if you are in a "credit reduction state"--a state that has a loan outstanding from the federal unemployment insurance fund. In 2005, New York was a credit reduction state (it did not repay federal funds by November 10, 2005), which means that instead of paying a FUTA rate of 0.8% for 2005, the rate is 1.4% in 2005, and the simplified form cannot be used by small employers in New York.
Special filing break for small employers. As of January 1, 2006, small employers can now file Form 944 (Employer's Annual Federal Tax Return) once a year rather than filing the quarterly Form 941--a simplification expected to help about 950,000 small-business owners. Who qualifies for annual filing? Total employment taxes for the year must be anticipated to be under $1,000, which would mean total wages of no more than about $4,000. The IRS expects to send letters between February 1 and February 15, 2006, to eligible small employers for calendar year 2006. Any small-business owner who does not receive a letter and thinks he/she is eligible to file the new Form 944 should call the IRS by April 1, 2006, at 1-800-829-0115 to find out if they qualify.
Note: In the past, small employers could file returns via telephone using 941TeleFile. This program ended on August 16, 2005.
BARBARA WELTMAN | Columnist
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.