8 tax steps to take when hiring employees

If you’re entering a stage of growth as a small business, you’ll likely need one thing to take your business to the next level – help! Remember, when hiring employees for the first time, you’ll consider a range of tax, safety, benefits, and privacy-related legal issues.

In this article, we’ll focus on the employer tax responsibilities for small business owners.

Whether you’re hiring now or planning for the future, here’s what you need to know about taxes when you decide it’s time to start hiring employees.

Employer tax responsibilities

Once you find the right person with the perfect combination of skills and experience, you’ll want to run through this checklist.

1 – Securely collect and maintain employee records

Record keeping should be a high priority for small business owners. Why? Just ask the IRS and various other governmental agencies.

Employee records include each employee’s personal identifying information, and the data necessary to properly collect and pay federal and state taxes.

You must maintain these employment records while you employ the individual for four years. You also need to have the records available for the IRS on demand.

2 – Make sure each employee is eligible to work in the U.S.

Federal law requires every employee starting a new job to complete the U.S. Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. You can get I-9 Forms online, at USCIS offices, or by calling (800) 870-3676.

3 – Get each employee’s Social Security numbers

You must get each employee’s name and Social Security number (SSN) to complete a Form W-2, Wage and Tax Statement, for each person. This requirement also applies to resident and nonresident aliens.

You shouldn’t accept an Individual Tax Identification Number (ITIN) in place of an SSN for employee identification or for work. ITINs are available only to resident and nonresident aliens who aren’t eligible for U.S. employment and need identification for other tax purposes.

4 – Obtain a Form W-4 to withhold income taxes

New employees should fill out IRS Form W-4 so you can withhold the proper federal income tax from their paychecks. Use the information your employee provides on the form to calculate their federal tax withholdings.

State law also requires employers to withhold income tax from your employees’ wages.

Give your newly hired employees the Form W-4, Employee’s Withholding Certificate to fill out and return to you. Your employees will use Form W-4 to figure out their withholdings, but you can also guide employees to the IRS withholding estimator. Or, for a tool that provides a completed form, have them check out H&R Block’s W-4 Calculator.

Then, you will determine how much to withhold when it comes to federal income tax. The amount is based on your employees’ filing status, income, W-4 information and payroll period. This varies based on if your employees are paid weekly, bi-monthly, or monthly.

If a new employee doesn’t give you a completed Form W-4, you should withhold tax as if the employee is single. You may have to withhold additional taxes on wages paid to nonresident aliens.

5 – Withhold Social Security and Medicare taxes

You must withhold Social Security and Medicare taxes from your employees’ wages and pay the employer’s share of these taxes, as well. These are known as Federal Insurance Contribution Act (FICA) taxes.

Generally, all employee wages are subject to these taxes, regardless of age or whether they receive Social Security benefits. Even retirement contributions, that will lower an employee’s taxable wages, are still subject to Social Security and Medicare taxes.

Please note, there’s a limit on the amount of annual wages or earned income subject to taxation, called a tax cap. In 2022, the maximum amount of income subject to the Social Security tax is $147,000. Medicare tax is due on the entire salary.

6 – Deposit all the withheld taxes

As part of your payroll tax duties, you must deposit federal income taxes you withhold from your employees’ pay, as well as the employer and employee portions of Social Security and Medicare taxes. You should make these federal tax deposits electronically.

How to make electronic deposits

Most employers use the Electronic Federal Tax Payment System (EFTPS). It’s a free service that the Department of Treasury provides. You’re automatically pre-enrolled when you request an EIN from the IRS. If you don’t want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make the electronic deposits for you.

There are two deposit schedules: monthly and semi-weekly.

Before the beginning of each calendar year, you must determine which schedule to use. The schedule is based on the total tax liability you reported during the last year. In the first year you have employees, you’ll generally deposit taxes on a monthly basis. Under the monthly deposit schedule, you’ll need to deposit employment taxes by the 15th day of the next month.

You’ll also need to file Form 941, Employer’s Quarterly Federal Tax Return, with the IRS for every quarter that you pay wages subject to income tax withholding (including withholding on sick pay and supplemental unemployment benefits), or Social Security and Medicare taxes. That’s unless you get a notification from the IRS saying that you can file a Form 944, Employer’s Annual Federal Tax Return.

Remember: Don’t ever use federal tax deposits for other purposes.

If you don’t send the government required federal tax deposits, the IRS will pursue the debt, and you can be subject to tax penalties, in addition to the tax bill.

7 – Every quarter pay Federal Unemployment Tax (FUTA)

Only the employer pays FUTA; it isn’t withheld from employees’ wages. For 2022, the FUTA rate is 6% of the first $7,000 of wages you pay to each employee during the year. If your business pays into the state unemployment system, the amount will lower what you pay federally.

You must deposit FUTA by the last day of the first month that follows the end of the quarter. If the due date for making the deposit falls on a Saturday, Sunday, or legal holiday, you can make the deposit on the next business day.

8 – Don’t forget about state tax issues

In addition to all the federal requirements, you must follow regulations from each state whose residents you employ, including withholding for state taxes where applicable. State requirements are usually similar to federal requirements. But states can modify their requirements, so it’s critical to learn the state requirements that may apply to you.

Hiring employees for the first time is complicated – Let us help

As you can see, hiring employees for the first time is complicated – and the stakes are high if you don’t get it right from a tax perspective. That’s why many small business owners seek professional bookkeeping help.

If hiring employees is on your to-do list, make sure your next step is to get help from Block Advisors for small business tax, bookkeeping services, and employer payroll responsibilities – so you can get back to what you love about your business.

See how we can help with your payroll needs and answer your payroll questions.

Schedule a free payroll consultation today.

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