Becoming an Employer

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Joining Employers of America

So.  Your company has grown and now it is time to hire an employee.  Congratulations! You’ve moved into an entirely new category of business:  the Employers! Employers represent roughly 28% of all firms.  The remaining 78% have no employees – yet. The US economy needs all the employers it can get!

I’m regularly asked how and when a business owner becomes an employer.  The answer is bigger than a blog post! Here, however, are some tips.

How do you know it’s time to hire an employee?

Perhaps you wonder if you should be hiring contractors or employees.  Employer requirements are different for each.  Know the difference between them.  Once someone who does not have their own company is working for you on an ongoing basis, providng a regular business function, under your direction, with your equipment, that person is going to be considered an employee by the IRS.  Check their rules and guidance.

What is required to hire an employee?

There are four key areas of employment you need to become familiar with.

1.  Employers have to verify that employees are eligible to work in the US.

2.  Employers are responsible for collecting and reporting all wages and withholding taxes for each employee.  In addition, the employer pays  social security and Medicare taxes on behalf of the employee, based on a percent of the employee’s wages.  The employer’s responsibilities include:

a.  Obtaining an Employer Identification Number (EIN) from the IRS

b.  Setting up great record keeping system on employment taxes (and keep them for four years at least)

c.  Obtaining a signed withholding exemption certificate from each employee for federal and state taxes. State forms are available online, as well.

d.  Withholding income tax (state and federal) and Social Security and Medicare taxes

Federal tax rates vary by income level.  Each state has its own tax rates.

–  Both the employee and the employer pay 6.2% of income for Social Security for a total of 12.4% of the employee’s income (up to $113,700 in income).

–  Both the employee and the employer pay 1.45% of the employee’s income for Medicare Tax.  Employers withhold another 0.9% Medicare Tax for employees who are paid more than $200,000.  (only the employee pays the additional Medicare Tax).

–  Federal unemployment taxes

e. Pay and file federal taxes electronically quarterly.

f.  Annually reporting all wages and taxes paid for each employee (W-2 form) to the IRSSocial Security Administration and state governments.

3.  Employers are responsible for carrying worker’s compensation insurance for employees.

4.  Employers are required to understand and post employees rights and employer responsibilities under labor laws.

Plenty of companies handle payroll for both employees and contractors, file all the forms and pay the tax requirements.  If this is not your specialty and you could spend your time more profitably elsewhere, you might be better off to hire one!  Also, check with your CPA and lawyer for further advice on becoming an employer.  They will know the rules associated with your business and locations.
All the best!
Amanda

 

 

 

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