First-Time Employer, What Do I Do?

Q. I have a pretty new business in Arizona and will soon be hiring my first employees for a big job.  They will be temporary only.  What do I do?  Should I just call them contractors and give them a 1099?

A. Good question and probably one  of the most frequent questions from new employers.  You need to determine the level of control you will have over the workers to decide if these are contractors or really employees.  In most cases, you have employees.

Some of the items to keep in mind when hiring your first employees.

• You will need a federal Employer ID Number if you don’t already have one. You can apply for this online.
• You will need a withholding/unemployment account set up with the state. In Arizona, that happens here. Click on License a New Business and complete the application. This needs to be done soon but not necessarily before the job.
• Submit a new hire report to the state.  This helps the state locate the individual if they owe child support, www.az-newhire.com
• Run e-verify using I-9 data to ensure verify they are eligible to work in the US. Click E-verify enrollment under Tools on the right side. You do need to register before using this service.
• Each new employee needs to complete a form W-4 (federal withholding)
• (In Arizona) Each new employee needs to complete a form A-4 (Arizona withholding). Many states have an equivalent withholding form.
• I-9 (verification of right to work)
• Get Publication 15 from IRS.  This well-written document gives employers the instructions to properly handle withholding and employees.

There are many labor laws that apply as well depending on your number of employees.  To find answers to questions surrounding overtime and other labor laws, you have two options.

1. The Department of Labor website, http://www.dol.gov
2. Your state Labor Department website.  There is a list of those here.

This is a lot of information to absorb for a small business owner.  One other option you may wish to pursue is to contact a local CPA or payroll firm to help you stay compliant.  Your specialty is the industry that you are in, not running payroll.  Connecting with someone who already knows how to do this via outsourcing can make your task much easier.

Publication 15 is Out!!

Hooray!!  The annual update to the document every employer is anticipating finally occurred. Okay, maybe not all employers were as excited to see this as I was.  Publication 15 should be every employer’s best friend.  This document contains instructions on everything from obtaining an Employer Identification Number (EIN) to withholding, to employer taxes.

How does a business determine if it has employees or contractors? Read page 8 section 2.

What if I want to hire a family member for an employee?  Read page 9 section 3.

How does the IRS define wages?  What is included?  Read page 10 section 5.

How much do I withhold from my employees’ wages?  Read page 39 and 40 if you want to use a formula.  Reference pages 41-60 if you wish to use the charts.  You could also use PaycheckCity.com for this since all the values have already been programmed into all the calculators for the last 10 years.

Have you considered employer costs like FUTA (unemployment)?  Read page 30 section 14.

Do you get the hint yet that this is a very important document?  Some of the most frequent questions I get from employers through the American Payroll Associations member hotline are related to supplemental pay.  This could be bonuses, commissions, overtime pay etc.  There are specific instructions in Publication 15 for the right way to withhold from these types of payments.

Each state that has required withholding will have a similar document.  Employers should also find and download a version of the state document to make sure they understand specific requirements for their state that may be different than the federal information.

Withholding…My Way!

Q.  As a payroll person, I often see highly-compensated employees come to my office with advice from their accountant.   “If you withhold exactly this amount every period, you won’t owe or need to be refunded very much on income taxes.”  Because the accountant may take into account things that would not be known to a payroll system, they think this will be more accurate.  I thought withholding was based on allowances and filing status.

A. The answer to this dilemma for all payroll departments is clear in Publication 15.  Here it is: “The amount of any federal income tax withholding must be based on marital status and withholding allowances. Your employees may not base their withholding amounts on a fixed dollar amount or percentage. However, an employee may specify a dollar amount to be withheld in addition to the amount of withholding based on filing status and withholding allowances claimed on Form W-4.”  What does that mean?  It does NOT say if you are an executive or highly compensated that the accountant can choose my withholding method.  It DOES say to base withholding on the Form W-4 values, filing status and number of allowances.

Here is an example.  Let’s say I make $110,000 per year, am married with two kids under 12 and have a substantial mortgage and some charitable giving.  My accountant says I should have $19,000 in withholding for the year.  Since I am paid semi-monthly, that means 19000/24 or about $791 per check in federal withholding right?  Wrong.  To properly calculate this, visit the free Paycheck Calculator at PaycheckCity.com.  Plugging in the numbers, and playing around with the allowance value and filing status, I see that if I claim single with 2 allowances, I will get around $19,000 in federal withholding for the year.   Thus, I will complete my W-4 with those values.  It’s really a handy tool and it solves the dilemma presented above.

On a side note, just because you are married, you are not required to have taxes withheld using the married filing status.  The object is to get your payments (withholding) and liability (tax return) to match using the tools provided on the Form W-4.