When you’re hiring for a company, it’s tempting to put most of your time and energy into practical things like crafting the job post and performing background checks. Hiring more personnel has large implications for your company. It’s an additional expense, but an additional liability as well. Before you craft that post, be sure that you understand how that employee’s wages will be taxed, and what that means for your company.
Should You Hire
The first thing you need to look at is whether hiring a new employee will actually help you grow the business. If the employee will produce more than what you pay him for his time, in general it is a good hire. Those contexts are not always so easy to see at first glance. The needs of the department, and their productivity levels must be taken into account.
If you find that you workers are falling behind, is there someway you can revitalize them instead of hiring someone new? Bringing on a new hire is a large expense to your business, and hiring too many people can bring small businesses down quickly.
When Income Tax Applies
As an employer, the types of employees you retain will change the taxes that you must withhold. With independent contractors, for instance, employers pay them out in full and the IRS considers them self-employed. The responsibility of paying taxes on the income of that employee would fall on that person, and you will send a 1099 form at the end of the year for his or her tax preparation. For most full-time employees, you will withhold pay from the employee’s check as part of their taxable contributions. The amount you withhold will be based on the employee’s income level and any specifications he makes on form W-4.
At the end of the year, the employee will receive a W-2 to use for his or her income tax preparation. This form will state total wages earned as well as the amount withheld for tax purposes.
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FICA and You
FICA stands for Federal Income Contributions Act, and it represents the employee’s contributions to Medicare and Social Security. For 2014, the FICA tax rate is 6.2% for Social Security and 1.45% for Medicare. As the employer, you are required to match that contribution up to a certain amount. After the employee hits the wage base of $113,700, Social Security taxes no longer apply. There is also a new tax that must be withheld for households that measure over $200,000 in wealth yearly. For those households, a rate of .09% is effective and must be deducted from the yearly taxable income.
Unemployment Taxes
Employers are responsible for paying the Federal Unemployment Tax Act, or FUTA, which protects employees who lose their jobs. Employees are exempt from this tax. FUTA is your contribution toward a state’s unemployment fund that protects out-of-work employees. The FUTA tax applies to you if you paid $1,500 in payroll or more in a calendar year, and had one or more employees for 20 or more weeks during a calendar year. Like the FICA tax, when an employee’s wages hit a certain threshold you are no longer required to contribute.
Quarterly Taxes
The IRS expects employers to withhold money from an employee’s paycheck and pay those taxes in a timely manner. Employers are required to file with form 941 and 940 for the payroll and FUTA taxes. This requirement must be fulfilled quarterly, and failure to do so may be met with severe penalties. Wherever possible, you should work with accounting and the bookkeepers for your company to be sure that you are noting the correct wages for each employee, and that proper wages are being withheld.
As the HR director, it will be your responsibility to help employees through their W-4s, and answer any questions they may have about their wages and taxes. Needless to say, it is important that you understand what is being withheld and why.
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