If you decide to hire employees, you unleash a swarm of legal requirements that apply specifically to employers. Not only will you have to pay a number of employment taxes, but you’ll also need to register with certain government agencies, pay for certain types of insurance, and comply with various laws, such as those requiring you to keep a smoke-free workplace, and to post certain notices at your business premises.
Here is an overview of the major requirements that apply to businesses with employees. However, this article can't cover everything you need to know so you’ll have to consult additional resources to make sure you comply with the many state and federal laws governing employers.
In general, owners of businesses with one or more employees are required to take the following steps:
• Report all new hires to your state’s employment department within 20 days of the employee’s first day of work.
• Obtain workers’ compensation insurance, and follow the rules on notifying employees of their rights to workers’ compensation benefits. You may purchase this insurance from a state fund or, in most states, from a private insurance company.
• Comply with state and federal job safety laws, administered by the federal Occupational Safety and Health Administration (OSHA) and the agency in your state that governs workplace safety. This includes filing an illness and injury prevention plan, reporting work-related injuries and illnesses that result in lost work time, and keeping a log of all work-related injuries and illnesses. For more information, visit the OSHA website at www.osha.gov.
• Withhold federal income taxes and FICA taxes (which basically consist of Social Security and Medicare taxes) from employees’ paychecks, and periodically report and send these withheld taxes to the IRS. See IRS Publication 15 (Circular E), Employer's Tax Guide, for more information
• Report wages and withholding to each employee and to the IRS with Form W-2.
• Pay the employer’s portion of Social Security and Medicare tax for each employee, based on the employee’s wages.
• Withhold state income taxes from employees’ paychecks, and periodically deposit them with your state income tax agency.
• Pay federal unemployment taxes. It’s the sole responsibility of the employer to pay the Federal Unemployment Tax (FUTA) directly to the IRS; you may not deduct it from employees’ paychecks. The general rule is that you must pay FUTA taxes if you paid a total of $1,500 or more in wages in any calendar quarter or if you had one or more employees for at least some part of a day in each of 20 or more calendar weeks (not necessarily consecutive) during the year. The FUTA tax is reported annually on IRS Form 940, Employer’s Annual Federal Unemployment Tax Return, available online at www.irs.gov.
• Pay state unemployment taxes, in many states. Most states require employers to pay unemployment taxes, which go toward a state unemployment insurance fund. Generally, you can take a credit against the federal unemployment tax for amounts you paid on time into state unemployment funds. A list of state unemployment tax agencies is available in IRS Publication 926, Household Employer’s Tax Guide, available from the IRS’s website at www.irs.gov.
• Pay or withhold other employment-related taxes that may be required by your state, such as disability insurance
• Confirm employee eligibility to work in the United States by completing U.S. Citizenship and Immigration Services (USCIS) Foorm I-9, available at the IRS website at www.irs.gov.
Make payroll taxes a top priority expense. The owner of a cash-strapped small business might be tempted to put off paying payroll taxes for a quarter, or a year. “This happens all the time, but it is a huge mistake. It can lead to jail time,” says David Rothenberg, a CPA. You must include payroll taxes in your cash flow planning and then pay those taxes regularly.
Thinking twice about becoming an employer? There’s no way around it: Adding employees to your business will greatly complicate your life. (And this is even without considering many other possibilities, such as providing other benefits, including health insurance and 401(k) plans.) If there’s a way to meet your needs with independent contractors rather than employees, it may be a much more practical road to take. At the very least, you shouldn’t jump into hiring employees without having a clear reason to do so.
For more information on being an employer, you'll need to check several government agencies, including the IRS, OSHA, USCIS, and your state employement department and income tax agency. The Employer’s Legal Handbook, by Fred S. Steingold, is an indispensable, comprehensive reference for employers that covers the legal rules on hiring, firing, taxes, workplace safety, and much more.
Excerpted from The Small Business Start-Up Kit: A Step-by-Step Legal Guide, by Peri Pakroo (Nolo).