Employment Tax 101 - Know Your Withholding, Payment and Reporting Obligations

By Caron Beesley

If your small business recently hired its first employee, or you are an established employer in need of a refresher on employment tax law, it's never too early to talk about employment taxes and how to stay compliant.


What are "employment taxes"?

If you have employees, you are required to withhold certain taxes from their pay checks. These "employment taxes" include income taxes, social security and Medicare (FICA) taxes, and the federal unemployment tax (FUTA). There are also different requirements by individual states for tax considerations such as workers' compensation, disability and unemployment insurance.

With all the different requirements on both the state and federal level, it's no wonder compliance can be a challenge.

In an effort to make things simpler, I've mapped out below seven steps for withholding, paying, and reporting employment taxes. Follow these, and be sure to bookmark the "Small Business Guide to Employment Taxes" on Business.gov.


Step 1: Obtain an Employer Identification Number (EIN)

If you have just hired your first employee, you must obtain an employer identification number (file Form SS-4). The EIN is often referred to as an Employer Tax ID or as Form SS-4 and is needed for reporting taxes, etc. to the IRS and state government.


Step 2: Withhold Federal Income Tax

To determine how much federal income tax to withhold from each employee wage payment you will need to get a signed withholding exemption certificate - Form W-4 - from your employees, on or before their hire date. It is then your responsibility, as the business owner, to submit the form to the IRS. Get more specifics in the IRS' Employer's Tax Guide.


Step 3: Pay Federal Employment Taxes

Once you have withheld employee taxes, it is your responsibility as an employer to send these taxes and FICA contributions to the government. Large businesses typically use the Electronic Federal Tax Payment System (EFTPS), a free payment method that debits taxes from business bank accounts. Many smaller businesses also use the service because it is fast, accurate, convenient and secure.

Alternatively you can deposit employment taxes electronically, or by check, money order, or cash to a financial institution that is an authorized depositary for federal taxes using Form 8109-B. 


Step 4: Report Employment Taxes (Federal Income Tax, Medicare, Social Security)

You've withheld and paid employment taxes, now you must report that fact.

There are various reporting requirements throughout the year and the good news is that there are some administrative breaks for small businesses. These include:

Income Tax Withholding and FICA Quarterly Filing - Each quarter, employers must report income tax withholding and FICA to the IRS using Form 941 (Employer's Quarterly Federal Tax Return). Small employers with an employment tax liability of $1,000, or less, for the year can now file Form 944 annually, rather than filing the quarterly Form 941.
FUTA Annual Filing - Once a year, employers must report federal unemployment tax (FUTA) to the IRS on Form 940. Once more small employers get a break and can use a simplified return, Form 940-EZ, FUTA Tax Return if they have made timely unemployment contributions to only one state and all wages were taxable for both FUTA and state unemployment tax.


Step 5: Report Wages, Tips and Other Employee Compensation (Form W-2)

On an annual basis, employers must file Form W-2 for each paid employee with the Social Security Administration. The deadline is the last day of February, or last day of March if you file electronically. You must also send copies to your employees by January 31 of the year following the reporting period.


Step 6: Don't Forget State Employment Taxes

Depending on the state where your employees are located, you may be required to withhold state income taxes. Consult this online State Tax Guide to view applicable tax laws.


Step 7: Last, but Not Least - Keep Good Records

The IRS requires that each employer keeps records of employment taxes for at least four years. So make a habit of good record keeping across your business.