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.

A Budget? Oh No!!!

There’s an interesting article today in the American Express Open Small Business section entitled “Creating Your First Small Business Budget.”

The basic tenet is that most small business owners are not financial gurus.  They are experts in whatever industry the business operates.  However, without being able to plan for income and expenditures for the year, there is no way to know how the company is doing.  Is a particular product eating up excessive amounts of cash?  Are your payroll expenses too high in relation to total expenses?

I encourage you to click the link above and read the actual article.  Here are the main points.

• First, the purpose of a budget is to simply consider carefully how you’re spending your money
• Second, a budget plots your financial path to where you want to be
• Third, don’t get bogged down in formality.  One of my colleagues stresses that budgeting uses a very specific technique called guessing.  He uses a crystal ball that is almost always wrong.  Budgeting needs to be a close as you can get, but it will be wrong.
• Fourth, remember that this is a living document.  Things change during the year.  Unexpected expenses arise.  Proper budgeting will have built in extra funds to handle large surprises.
• Finally, seek some help if you’re feeling overwhelmed by all of this. Find yourself one of those financial gurus to help you walk through the process.

The link to the article is here. It’s still early in the year, now is the perfect time to begin this exercise.

Relief For Small Employers

An IRS news release today reminds small employers of an alternate form available to reduce the burden of quarterly payroll tax filing.  It is called Form 944. If you have less than $1000 of annual employment tax liability, you can file this form.  For the rest of employers, Form 941 is required.  This is a newly updated and extended form that must be filed quarterly for companies that are too big for Form 944.  The record keeping requirements are much more onerous.

The problem has been a lack of education on the part of the IRS regarding who can actually file Form 944.  Even more confusion surrounds anyone who wishes instead to stick with the 941.  To have less than $1000 of annual liability, you would need to have taxable payroll of less than $6535.94.  This is an extremely small business who is likely not going to be keeping up with the latest IRS rules.  The IRS must notify the employer that they are eligible for the annual form.  Unless notification occurs, they again are stuck with the 941 anyway.  Why confuse the issue?

I propose completely doing away with the 944 and keeping everyone on the same reporting form.  It is really no easier to complete the 944. It is simply completed once per year instead of 4 times per year.  If there are questions from small businesses relating to payroll procedures, they need to seek out assistance to stay in compliance with employment tax rules.  By adding another form and relying on the IRS to notify employers in a timely manner that they qualify for the annual form, the government is nearly keeping anyone from using it anyway.

Form 944 is yet another reason why employers should be utilizing the services of a professional company for processing of payroll.  Whether this be a small local/regional provider, or the employer’s CPA, it is much too difficult to keep track of regulation changes and obscure tax nuances.  After all, unless you are in the payroll business, it is much more important to stay current with issues and customer needs surrounding your own business.

It’s Small Business Week

Happy National Small Business Week!  This happens to be the illustrious week designated for increased awareness of issues surrounding the small business community.  In honor of this week, I wanted to highlight three very big issues facing small employers.

1. Health Care Costs – The Obama administration is looking to find a way to cover everyone with health insurance.  While arguments could be made either way of the necessity of this proposal, it could take shape as mandatory coverage provided by employers.  It could also look like a removal of pre-tax health insurance benefits with everyone receiving a credit on their tax return for all or part of premiums paid throughout the year.  Because health insurance is one of the biggest expenses in business, owners and managers need to keep close tabs on this one.

2. Taxes – Self-employed business owners need to make sure they are reporting all income and expenses incurred in the operation of the business.  By under-reporting income or exagerating expenses, individuals are cheating the system and not paying their fair share.  A reputable accountant or tax preparer can help with keep things above board by asking the right questions.

3. Human Resources – Issues relating to employee retention, discipline, training and compensation all are equally important.  Being in the payroll industry, it is my opinion that most employers simply don’t take the payroll function seriously enough.  Employers are the first line of “defense” in ensuring that taxes are paid.  By withholding and remitting the proper amounts, employees can make the best tax planning decisions possible.  Employers should be keeping up with tax changes in the appropriate jurisdictions.  They should also be referring their employees to online tools for employees to be educated about their checks.  One good place is PaycheckCity.com which has free paycheck calculators.  I use these frequently in planning my check as well.

I Don’t Need No Stinkin’ Budget

Q. I’m a small business owner on the East Coast.  I’m trying to make sure I’m spending my company’s money right.  We are expanding and I want to avoid laying off the new employees that are coming on board now.  Any tips?

A. To answer your question in detail, it would take up more space than a normal college textbook.  However, because you focused on spending, this edition is going to cover budgeting. These concepts can be applied to personal financial situations as well.

First, you need to be able to get a rough forecast of your income.  That is the driving force behind any budget.  Look at your bank statements for a good starting point.  Bank statements are like a cash-basis financial statement.  You can see income and outgo all in one place.  This gives you a good starting point as you try to identify months where you have more can than average that you can use on months that do not have as much inflow.

Next you need to have a good expense identification plan in place.  Do you use financial software like QuickBooks, Peachtree Accounting or Microsoft Small Business Accounting?  By entering and categorizing every expense, you can begin to see where you spend your money.  Are you seeing increases in inventory costs or benefit costs or supplies?  What about employee salaries?  Are you budgeting enough to handle raises for those who have provided you with the labor needed to run the business effectively.  Without records, you must make an educated guess as to the amount of these expenses.  Over time, you will again see trends and be able to determine where the “fat” is in your organization.

To make an initial educated guess, you should be searching in industry trade publications for expense estimates.   For instance,  service organizations will spend more of there income on salaries and benefits.  Manufacturing and retail would be spending more on inventory and cost of goods to produce a sellable product.

As a small business owner, you may also wish to join up with your local chapter of the NFIB, National Federation of Independent Business.  They have great resources to get owners educated on the issues in business.  They also lobby Washington on behalf of small businesses.  The US Small Business Administration is another good resource for those running smaller businesses.  They provide links to discussion on the many areas that small business owners need to keep in mind.

FUTA and SUTA

Q. As a small business owner looking forward to processing my own payroll, I am curious about FUTA and SUTA and how the calculation works.

A. First, congratulations on taking the step toward hiring employees. It can be both a good thing, because you are growing, and a bad thing, because employees bring new challenges to the business. To get started, let me say that all discussions regarding federal level taxes and withholdings that are the responsibility of the employer can be found in IRS Publication 15. FUTA is also discussed there.

FUTA stands for “Federal Unemployment Tax Act” and is a tax paid on the wages of employees by the employer. The tax is 6.2% of employee wages up to $7000 per employee. That equates to $434 per person per year. There is relief from this rate built in to the calculation. Per Pub 15, “Generally you can take a credit against your FUTA tax for amounts that you paid into state unemployment funds”. The credit is up to 5.4% which leaves your FUTA tax rate at .8% or $56 per employee per year. The credit has some stipulations and your state has to be in the good graces of the federal government for that to work. New York employers lost this credit a couple of years ago. Generally, if you pay your state unemployment tax on time, you get the credit.

SUTA is State Unemployment Tax Authority. It is essentially the state version of the federal unemployment tax. Each state has a wage base. Each new employer will be assigned a new employer rate that will adjust after 1 or 2 years of experience with employees. This is also a tax on wages paid by the employer. For instance, in Arizona, new employers pay 2% of wages up to $7000 or $140 per person per year. After some time has passed, the rate adjusts down if you have no unemployment claims or up if you do. Certain states have special starting rates depending on industry.