You enter another realm of tax reporting and record keeping when you hire employees. Nowhere are good records more important than when it comes to your employee payroll records, not only for your own benefit, but also for the benefit of your employees.
Here are some of the records you will need to keep.
Form W-4, "Employee's Withholding Allowance Certificate." Ask all new employees to fill out this form, sign it, and return it to you. The Form W-4 shows their filing status and how many withholding allowances they claim. Have them double check their social security number by verifying it with their social security card.
If a new employee fails to return the Form W-4, withhold income tax as if he or she is single with no withholding allowances.
Form W-5, "Earned Income Credit Advance Payment Certificate." The earned income credit provides extra help for low-income employees. The advance credit allows them to receive part of the credit in advance by including it with their pay during the year. Eligible employees who want advance payments must fill out Form W-5 and submit it to you.
Records. Keep detailed employment tax records. See Publication 15 Circular E, Employer's Tax Guide, for more information.
Tips. Tip income your employees receive from customers is generally subject to withholding. Employees must report cash tips to you by the 10th of the month after the month the tips were received.
Withholding. Keep track of withheld Federal income tax, social security and Medicare taxes, state and local taxes, and the net amount paid to each employee (including earned income credit advance payments) during the year.
Form W-2, "Wage and Tax Statement." This is the annual statement you give to employees showing their earnings and withholdings for the year. Generally, you must give it to them by January 31 of the following year. Copy A of Form W-2 is due to Social Security on the last day of February, although electronic filers have until the last day of March.
Form 941, "Employer's Quarterly Federal Tax Return." This is your quarterly report of wages paid, tip income received by the employee, income tax withheld, social security and Medicare taxes and tips, and advanced earned income credit paid to the employee. Make a copy for your records. If you file by telephone, keep a copy of the "941 TeleFile Tax Record."
Form 940, "Employer's Annual Federal Unemployment (FUTA) Tax Return." Generally, you must figure Federal unemployment tax on the first $7,000 of each employee's earnings. Keep close track of the dates and amounts of each check you paid to your employees so you'll be able to figure out the FUTA tax and determine when deposits are due. Normally, you must file your FUTA tax return (Forms 940 or 940-EZ) annually by January 31 of the following year. If you file electronically, keep a copy of the tax record. If you mail in Form 940 or 940-EZ, keep a copy.
Federal Tax Deposits (FTDs). If you are not making deposits electronically, the FTD coupon (Form 8109, "Federal Tax Deposit Coupon") should be delivered or mailed to an authorized depository. This will inform the IRS of the type of taxes being deposited, the amount, and the period to which they should be applied. Make your FTD payments through EFTPS.
Form 1099-MISC, "Miscellaneous Income." Use this form to report certain payments you make in your business. For example:
- Payments of $10 or more for royalties, interest, or dividends;
- Payments of $600 or more for rents, prizes, and awards for services rendered; and
- Payments of $600 or more to workers who were not your employees.
Keep your employment tax information organized and in a safe place. Not only will you be able to take full advantage of all your deductions for payroll taxes, you ll also be able to avoid costly penalties and interest for late payments or errors on returns.
See IRS Publication 15 Circular E, Employer's Tax Guide."
Information courtesy of the Internal Revenue Service.
