Southern Consumers Alliance

Employee Talk FAQ Section

How do I hire an employee?
Do I have to register my new employee with my state?
What paperwork do I need to get from my new employee before they can start?
How do I know if my new worker is an independent contractor or an employee?
Can you give me an example of how to calculate my employee’s paycheck?
How do I get an EIN for my business?
I am planning on hiring my first employee, do I need to incorporate or form some other form of business?
How do I know how much federal income tax to withhold from my employee’s paycheck?
How much in FICA and Medicare do I need to withhold from my employee’s paycheck?

How do I hire an employee?

If your company will have employees you must have an EIN for your company. If you do not have a separate EIN for the business you can obtain one by complete IRS Form SS-4, Application for Employer Identification Number. You must also verify your new employee’s eligibility to work within the United States. You must complete Form I-9, Employment Eligibility Verification, as maintained by the U.S. Citizenship and Immigration Services. The form requires that you inspect one or two of a number of documents provided by the new employee to verify their eligibility to work, including options such as a social security card or work visa.

You will also need the employee to complete IRS form W-4, Employee’s Withholding Allowance Certificate, which is basically how the employee tells you how much tax to withhold from their paycheck. It is certainly a good idea to maintain a job description, offer letter, acceptance letter and any other correspondence that you have had with the new worker detailing the specifics of the new job, but these items are not required, but you must have the completed Form I-9 and the completed Form W-4. Within 20 days of the first day of work, you must also report your new worker to your state’s new employee reporting process.

Do I have to register my new employee with my state?

The easy answer to this question is, YES. That may not be the answer that you were looking for, but you do need to register your new employee with your state’s employment agency. Although rules vary from state to state, you generally must report your new hire within 20 days of the day they first begin working for your business.

You can find the detail information on specific requirements and on-line filing options by accessing your state’s employment commission website. The following link provided by the U.S. Department of Health and Human Services will provide specific contact information and web addresses for each state to help with your new employee reporting.

http://www.acf.hhs.gov/programs/cse/newhire/employer/contacts/nh_matrix.pdf

What paperwork do I need to get from my new employee before they can start?

You will basically need three pieces of paper from your new employee. First you will need them to complete an I-9, Employment Eligibility Verification. This form is maintained by the Department of Homeland Security and can be downloaded for free at www.uscis.gov or by clicking the link below. You will also need the new employee’s social security number, and making a copy of their card for your employment file is a good idea. Third, you will need them to complete an IRS form W-4 which will tell you how to without taxes from their paycheck. Once you verify their employment eligibility and verify that they have a valid social security number and get them to complete the W-4, then you are all set to go.

How do I know if my new worker is an independent contractor or an employee?

The classification of your new worker as an employee or as an independent contractor will depend on who controls the work product and the working relationship. The first key point is that the classification is not a matter of choice based on convenience or preference but is dictated by the specific facts and circumstances of the actual working relationship. If you, as the company, control the work product, meaning you decide how, when, where, etc. the work is to be performed you most likely have an employer/employee relationship. In this scenario, you tell the worker when to be at work, how the work is to be performed, and you provide the tools necessary to complete the work. You most likely also provide other benefits such as paid holidays, or vacation days, health insurance, sick days, etc.

If on the other hand, you as the company only have control of the end product meaning that the worker decides how to do the job, when to accomplish the tasks, most likely provides their own tools to do the work, then most likely you have an independent contractor relationship with the new worker. An independent contractor does not have benefits such as those mentioned above and generally has other clients besides your company.

If you are unsure, you can ask the IRS to decide for you by completing IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding and sending that form to the IRS. Downloading the Form SS-8 can be helpful even if you do not actually send the form to the IRS. By answering the question on the form, you will get a good understanding of the key factors involved in determining who controls the work product and the working relationships. Again the key point is that the classification of your new worker is not a matter of choice.

Can you give me an example of how to calculate my employee’s paycheck?

Let’s assume that your new employee earns $30,000 per year and you pay them semi-monthly (twice a month). They have completed a Form W-4 indicating that they are single and claiming one exemption. From the charts included in IRS Publication 15, Circular E, Employer’s Tax Guide, you can determine the amount of federal income tax to withhold. Find the chart for “Single Persons” and “Bi-Weekly Payroll” in the back of the publication, in this case beginning on page 42. Your bi-weekly pay amount of $1,250 ($30,000 divided by 24 pay periods) can be found on page 43 about halfway down the left-hand column. Locate the total exemptions of “1” across the top and where the pay amount row and the exemptions column intersect is the federal withholding amount, in this case, $138.

You must also withhold FICA and Medicare tax (Social Security Tax) which for 2012 is 5.65%. For all other years, the amount is 7.65%, but only 5.65% for 2012. For our example, that means an additional withholding amount of $70.63 ($1,250 times 5.65%). The total payroll check for your new employee will be $1,041.37, which is gross pay of $1,250 minus $138 in federal income tax withholding and $70.63 in Social Security Tax withholding.

How do I get an EIN for my business?

There are basically four different ways to obtain a new EIN or Employer Identification Number. Each of these options will require that you complete IRS Form SS-4, Application for Employer Identification Number. Download the form by clicking the link here or by logging on to the IRS website at www.irs.gov. Complete the form first, then you can choose the option for obtaining the EIN that best fits your needs.

You can complete the form SS-4 and mail to the IRS at the address included in the IRS instructions. You can expect to receive notification of your new EIN from the IRS within 4 to 6 week. You can fax the form directly to the IRS, in which case the same notification could be received within 2 to 3 weeks. The fax number within the continental United States is 859-669-5760. You can also call the IRS directly and obtain an EIN in a matter of 10 to 15 minutes. You can call the IRS at 800-829-4933 where they will ask you specific questions about the form SS-4 that you have completed and will then provide you with an EIN that can be used immediately. You may also obtain the EIN directly online at the IRS website at www.irs.gov.

I am planning on hiring my first employee, do I need to incorporate or form some other form of business?

The fact that you will be hiring an employee does not require that you form some other form of entity such as a corporation or an LLC. If you do not already have a separate EIN or Employer Identification Number then you will need that in order to hire your first employee and the new EIN can still be the business tax ID for your sole proprietorship. The EIN is very easy to get straight from the IRS. You will need to fill out an IRS form SS-4, Application for Employer Identification Number which you can download for free from the IRS website at www.irs.gov. You can fax the form to the IRS, call them and get the number right over the phone or actually get the new EIN right on line without waiting.

How do I know how much federal income tax to withhold from my employee’s paycheck?

The good news is that you don’t have to decide how much to withhold. The employee will tell you what you should withhold with the help of the IRS. You should have gotten a form W-4 from your new employee which indicates the employee’s filing status (Single, Married Filing jointly, etc.) and the number of exemptions that they are claiming. There are two other factors that you must take into account both of which are controlled by you. You must know the pay frequency, that is how often you intend to pay them, weekly, by-weekly, semi-monthly, etc. and, of course, how much you will be paying them each pay period. Based on these four factors you can determine how much to withhold for federal income taxes.

The IRS provides us with detailed charts to determine the amount to withhold. The charts are included in IRS Publication 15, Circlular E, Employer’s Tax Guide which can be downloaded free from the IRS website at www.irs.gov or by just clicking on this link below. There are charts for each filing status and pay frequency combined. For example, there is a chart for weekly payroll for single taxpayers, and a monthly payroll for married filing jointly. Find the chart that matches your employee’s filing status and your pay frequency. Each chart will have total wages down the left border and total exemptions claimed across the top border. Find the wages you will pay your employee and the exemptions they have claimed on their Form W-4, and where the two intersect in the body of the chart is the amount to withhold.

How much in FICA and Medicare do I need to withhold from my employee’s paycheck?

The withholding for social security taxes is easier than the federal income tax withholding and is basically the same for all of your employees. The general amount to withhold is 7.65% of wages. That includes the FICA (OASDI) portion of the Social Security Tax of 6.2%, plus the Medicare portion of the tax, which is 1.45%. The IRS and Congress have actually thrown us a curve for 2011 and 2012 by decreasing the employee portion of the FICA tax to only 4.2%, so for 2011 and 2012 only, the calculation is a bit different, in that the total amount to withhold is only 5.65%. But, again the key is that the math is the same. So if you are paying your new employee $100 for the week, the amount of Social Security taxes to withhold will be $5.65. Simply multiply the gross wages times 5.65% and that is the amount to withhold from their paycheck.

Keep in mind that the employer portion of the Social Security Tax is still the same. That means for the same $100 in wages that you have paid your new employee and withheld $5.65 for Social Security, you the employer must still pay an additional $7.65, or 7.65% of wages representing Social Security Taxes.