Businesses with Employees

If you plan to start a business with employees or you are currently operating a business with employees, you need to know your tax responsibilities as an employer. This section briefly discusses a variety of topics that businesses who have employees and/or employers should know. The list should not be construed as all-inclusive. Other steps may be appropriate for your specific type of business.

Employer Identification Number (EIN)

If you are required to give tax statements to employees or annuitants or report employment taxes, you need an EIN. For additional information refer to, EIN.

Who Are Employees?

A general rule is that anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.

Before you can know how to treat payments that you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the service may be:

  • An independent contractor
  • A common-law employee
  • A statutory employee
  • A statutory nonemployee

For additional information on the different types of employees and information on independent contractors, refer to Independent Contractors vs… Employee.

Hiring Employees

You must verify that each new employee is legally eligible to work in the United States. Have the employees you hire fill out Form I-9, Employment Eligibility Verification and Form W-4, Employee’s Withholding Allowance Certificate. If your employees qualify for and want to receive advanced earned income credit payments, they must give you a completed Form W-5, Earned Income Credit Advanced Payment Certificate.

You are required to get each employee’s name and Social Security Number (SSN) and to enter them on Form W-2. (This requirement also applies to resident and nonresident alien employees.) For additional information and outside resources on hiring employees, refer to Hiring Employees

Employment Taxes

If you have employees, you are responsible for federal, state, and local taxes. Employment taxes include the following:

  • Federal income tax
  • Social Security and Medicare taxes
  • Federal Unemployment Tax Act (FUTA).

Federal Income Taxes/Social Security and Medicare Taxes
You generally must withhold federal income tax from your employees wages. To figure how much to withhold from each wage payment, use the employee’s Form W-4 and the methods described in Publication 15, Employer’s Tax Guide and Publication 15-A, Employer’s Supplemental Tax Guide.

Social security and Medicare taxes pay for benefits that workers and families receive under the Federal Insurance Contributions Act (FICA). You withhold part of these taxes from your employee’s wages and you pay a matching amount yourself. Report federal income taxes, social security and Medicare taxes on Form 941, Employer’s Quarterly Federal Tax Return and/or Form 943, Employer’s Annual Federal Tax Return for Agriculture Employees (For use by farm employers).

Federal Unemployment (FUTA) Tax
The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. You report and pay FUTA tax separately from social security and Medicare taxes and withheld income tax. You pay FUTA tax only from your own funds. Employees do not pay this tax or have it withheld from their pay. Report FUTA taxes on Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax return or if you qualify, you can use the simpler From 940-EZ instead. For additional information, refer to Employment Taxes for Small Businesses.

Depositing Taxes

In general, you must deposit income tax withheld and both the employer and employee social security and Medicare taxes (minus any advance EIC payments). You can make your deposits either electronically, using the Electronic Federal Tax Payment System (EFTPS), or by taking your deposit and Form 8109-B, Federal Tax Deposit Coupon to an authorized financial institution or a Federal Reserve bank serving your area. However, some taxpayers are required to deposit using the Electronic Federal Tax Deposit System ( EFTPS). For additional information, refer to our Federal Tax Deposit (FTD) page.

To encourage prompt payment of withheld income and employment taxes, including social security taxes, railroad retirement taxes, or collected excise taxes, Congress passed a law that provides for the TFRP. These taxes are called trust fund taxes because you actually hold the employee’s money in trust until you make a federal tax deposit in that amount. For additional information, refer to Trust Fund Taxes.

Recordkeeping for Employers

Keep all records of employment taxes for at least four years. Also, keep good records for your business to help you monitor the progress of your business, prepare your financial statements, identify source of receipts, keep track of deductible expenses, prepare your tax returns, and support items reported on tax returns. For additional information on keeping records, refer to recordkkeeping.

Retirement Plans

The advantages of a retirement plan are numerous. There are economic, business and tax advantages for your business, for your employees and for you.

A retirement plan may give you an important competitive edge in attracting and keeping the best employees – and help you plan for your own retirement years. Information to help you choose the type of plan that is right for your business and get that plan into operation. For additional information, refer to Retirement Plans.