The decision of whether or not to hire employees can be a difficult one. There are a number of critical questions you must answer in making this decision, such as:
- Do you have the skills necessary for the operation of your business or do you need to hire someone with those skills?
- If you need to hire someone with necessary skills, should that individual be an employee of your business or should he or she be an outside contractor?
- If you hire employees, do you have the necessary management procedures in place to ensure that hiring and managing your employees conforms to all necessary government regulations?
- Do the expenditures related to hiring employees (salary or wages, benefits, federal taxes and so on) make sense given the projected financial situation of your business?
- Examining these questions and others before you hire employees can help you avoid many potential problems. You also need to understand your legal obligations as an employer. The most important of these obligations are discussed below.
You can download employment tax forms by connecting to E-Smart forms.
Unemployment insurance protects workers who lose their jobs through no fault of their own. The funds used to pay workers who are covered under this type of insurance are accumulated from taxes on the wages of employees during their employment. Both state and federal unemployment taxes are paid by employers. No deductions can be made from an employee's wages to cover these taxes.
Federal Unemployment Insurance (FUTA) is collected by the IRS. When you file your application for a Federal Employer Identification Number (FEIN) with the IRS and indicate you have employees, the IRS will send you a packet of forms.
State Withholding Tax
If you have paid more than $100 in wages to an employee in a given calendar quarter, you are required to withhold taxes for state disability insurance, personal income taxes, unemployment insurance and employment training. You must register for an employer account number. Contact the Employment Development Department of the State of California at EDD for guidelines, information and to register. Check your local telephone directory for the office nearest you, or call (415) 749-7599 for a referral. EDD also offers payroll tax seminars.
Federal Withholding Tax
You are required to withhold income tax, Social Security (FICA), be liable for the employees' portion of Social Security taxes and pay Federal Unemployment Tax, under certain circumstances. Nonpayment of federal employer taxes can result in audits, penalties, difficulties obtaining bank financing and closure of your business. Contact the IRS at 1-(800) 829-1040.
Federal Self-Employment Tax
Everyone must pay Social Security Tax. If you're self-employed, your Social Security contribution is made through the self-employment tax. You will also need to determine how best to report earnings and pay your business taxes. Contact the Internal Revenue Service at 1-(800) 829-1040, or visit any office of the IRS for more information. There are publications, counselors and workshops available to help you set up and understand this very important aspect of your business.
Workers Compensation Insurance
You are required to carry Worker's Compensation Insurance if you have employees. If an employee is injured on the job, this insurance will cover his or her medical bills, for which you would otherwise be liable. You can obtain a policy from many private insurance companies as well as the State Compensation Insurance Fund. Contact the California Industrial Relations Department, which has offices throughout the State.
The Immigration Reform and Control Act of 1986 not only makes hiring or recruiting "unauthorized aliens" illegal, but it also places the responsibility for enforcing the law on the employer. The law applies to all employers, no matter what their size. Under the law, you are required to check the citizenship status of every employee and to have proper documentation for those employees with temporary residency.
Contact the Immigration and Naturalization Service at (408) 291-7876 for more information and the required forms.
Employees vs. Contract Labor
Individuals may provide services to your business as either employees or as contractors. Which status an individual has affects your taxes, liability, benefit costs and many other areas of your business. The question of employee vs. contractor is therefore critical, but it is not simple. There are many different tests the IRS may apply to determine whether an individual is an employee or contractor. Improperly classifying someone whom the IRS considers an employee a contractor can result in very stiff penalties. If you wish to consider using contractors instead of employees in your business, it is important that you consult with a competent tax advisor prior to making a decision or contact the IRS Employment Tax Team at (408) 494-8091.