The Small Business Employment Tax Guide Roanoke Regional Small Business Development Center 210 S. Jefferson Street, Roanoke, Virginia 24011 www.roanokesmallbusiness.org Roanoke Small Business Development Center 2017
About this manual: This manual is divided into several sections. Section 1 Payroll Section 2 Independent Contractor Requirements Section 3 Estimated Taxes Appendix Listing of forms Note: This guidebook should be used as a guide to understanding taxes for your small business. Tax laws, rates and schedules change regularly so be sure to check with your accountant for current requirements. SECTION 1 - PAYROLL Hiring Employees: If your business will be hiring employees, there are certain tax and filing requirements you need to be aware of. Owner(s) of an S-Corporation are considered employees (even if there are no other employees) and the business is required to follow all the requirements set forth as any other company hiring employees. Before hiring a new employee, you must at a minimum have the employee complete the following: W-4 (Employee s Withholding) page 10. VA-4 (Virginia Withholding) page 11. I-9 (Employment Eligibility Verification) page 12-13. Current federal forms can be downloaded from www.irs.gov and Virginia State forms from www.tax.virginia.gov. To find the latest version of the I-9 form, go to www.uscis.gov/i-9. If you wish to verify the accuracy of the applicant s information, you may use the E-Verify system. This online verification system will immediately inform you if the documentation the applicant has presented to you is accurate. To register for this service (it is free and voluntary) go to www.uscis.gov/e-verify (page 9) One of the first steps you need to do before hiring employees is to obtain an Employer Identification Number (EIN). To get an EIN you will need to file Form SS-4 with the Internal Revenue Service, or file online at https://sa2.www4.irs.gov/modiein/individual/index.jsp *Special Note to S-Corporation owners. If you are an owner of an S-Corporation you are considered an employee of the company for payroll purposes and required to complete all payroll requirements including registering and paying unemployment. As an owner of an S-Corporation you are able to receive income from the company as either payroll or distribution. Payroll is subject to FICA taxes and unemployment. Distributions are not subject to FICA or unemployment. According to IRS rules, an owner is required to be paid Reasonable Compensation before taking distributions. For further explanation, please visit www.irs.gov or ask your accountant. Federal Tax Payments Using the EFTPS To make federal tax payments you need to register with the Electronic Federal Tax Payment System (EFTPS). Go to www.eftps.gov (see page 8) to register. This process takes several weeks, so do not wait until the last minute to register. When you request an EIN, you should automatically be registered in 1
the system if you stated you would be hiring employees, if not you will need to register. After registering you will receive a PIN by mail. Do not lose this PIN as you will need this number to access your account in order to make payments. All federal payments for taxes will need to be made through the EFTPS system. Virginia New Hire Requirement: When an employer hires or re-hires a full, part-time, or temporary employee, the employer must report this information within 20 days of hiring. Go to: http://va-newhire.com (see page 9). Virginia State Taxes: If you have never registered in the state of Virginia for business taxes, you will first need an Employer Identification Number (EIN). You have several ways to file and pay taxes in Virginia. However; if you will be hiring employees you will need to register and use the Virginia ifile System in order to report to the Virginia Employment Commission (VEC). ifile system this allows your company to key payroll and sales tax reports and pay online. The ifile system also allows you to review past reports and payments and schedule future payments. This service is required if you will be filing VEC reports electronically. eforms system this service allows your company to key payroll and sales tax reports and then pay online. No registration is required and is a simple approach to filing and paying. With eforms you do not have the advantage of looking at past reports or payments. (Cannot use for filing VEC reports electronically). To register for business taxes in Virginia go to www.tax.virginia.gov/business and register using ireg or complete form R-1 and return to the Virginia Department of Taxation. You will also want to register for ifile so you can file and pay online and complete the registration with the Virginia Employment Commission. You will not be able to register with the VEC until you have paid employees (cannot do a pre-registration). Payroll: When you are ready to pay employees, you will need to be sure each employee s Net Pay is figured correctly. The following information is needed. Employee s income (wages, bonuses, salary, commissions, etc.) Is there tip income (see tip income below) From the employee s W-4 and VA-4, you need the following: What is the filing status of the employee (state and federal) Any additional withholding Any other non-taxable deductions (retirement plan, healthcare, etc.) Other benefits to include Vacation, Sick-Pay, PTO, etc. If you are using a software program (such as QuickBooks Payroll) the tax amounts are properly calculated provided the employee and payroll system is setup correctly. The following are taxes required with all Virginia Employees: Employee Social Security 6.2% (up to wage cap of $127,200 (2017) per employee) 2
Employer paid portion of Social Security 6.2% (up to wage cap of $127,200) Employee Medicare 1.45% (no wage cap) Employer paid portion of Medicare 1.45% (no wage cap) Virginia Withholding taxes (based on employee VA-4) Federal Withholding taxes (based on employee W-4) Virginia State Unemployment Tax (paid by employer) Federal Unemployment Tax (paid by employer) If you do not have a payroll program or provider you will need to use the payroll tables available at the IRS and Virginia Department of Taxation website or use an online payroll calculator. There are web based payroll calculators available. One Free Payroll Calculator can be found at http://quickbooks.intuit.com/r/paycheck-calculator. This free calculator allows you to enter gross pay, deductions, etc. and determine proper net pay for each employee. Another is http://www.esmartpaycheck.com/freecalculator/free_calculator.aspx. This company also offers other inexpensive payroll solutions. There are many online payroll solutions to include your bank, local payroll vendors and be sure to check with your accounting firm. Note: Federal and State tax laws are subject to change. Check with the state, IRS, or your accountant to be sure these rates have not changed. Tip Income If an employee receives tips, they are required to report these tips to their employer no later than the 10 th of the month for tips earned in the previous month (do not need to report tips less than $20 received in a month). Tips to report include cash, credit card or checks. Employees are not required to report noncash tips such as gifts, free tickets, etc. (even though they are taxable to the employee). The employee can keep track of their tips on IRS form 4070A, but must report tips earned each month to their employer on IRS Form 4070. You may wish to have the employee report tips on the same schedule as your payroll rather than on the 10 th of each month. The employer is required to include the tip reported income into the employee s income and take out the appropriate Social Security, Medicare, State and Federal Withholding. If the employer pays the employee in cash for credit card tips, the employee must also include these tips on the monthly IRS Form 4070. If the employer has an allocated tips program, be sure to include these tips in the employee s income and take out the appropriate taxes. Failure on the part of the employee to report tips can result in penalties up to 50% to the employee and penalty to the employer for all unpaid FICA taxes. Annual Reporting Requirements: Certain restaurants have annual tip filing requirements because they are considered a large food or beverage establishment. To be considered a large food or beverage establishment all of the following must apply: Food or beverage is provided for consumption on the premises Tipping is customary practice 3
More than 10 employees who are employed on a typical business day. All employees count, not just tipped employees. (Owners who own 50% or more and work in business are not counted towards the 10). If this applies to your business, your business is required to file IRS Form 8027 by February 28 th of each year unless you are filing electronically in which the deadline is March 30th. If these items do not apply to your business, no annual reporting is required, but you are still responsible for reporting all employee tips and paying appropriate taxes. Note: If total tips reported do not equal 8% of total sales, you will be required to make up the difference by paying the additional amount as allocated tips. The 8% amount is a minimum and does not mean your employees do not have to report more than 8%. Note: To learn more about tip income responsibilities for employees and employers, refer to IRS Publication 531, Instructions for Form 8027, Form 4070 and Form 4070A, and Publication 1244. Taxes: Once you have determined what the correct net pay is for every employee you will need to be sure the withheld taxes are paid according to your filing status. Step 1: Federal Withholding Payments: When to deposit your business will either be a monthly or semi-weekly depositor. Determination is made each year based on tax liability reported on your Form 941 during the look back period. Look back period is the 4-quarters beginning on July 1 st and ending on June 30 th of each year. If your business reported $50,000 or less in tax liability for the entire 12-month period, your business is designated as a monthly schedule depositor. Monthly depositors must deposit by the 15th for the previous month withholding. If you reported more than $50,000 in tax liability your business will be designated as a semiweekly depositor. Semi-Weekly deposit must be made by Wednesday for any payroll made on the previous Wednesday, Thursday or Friday. All payments MUST be made electronically using the EFTPS (Electronic Federal Tax Payment System). Note: New businesses are considered monthly depositors for the first calendar year of operation. Step 2: Virginia Withholding Tax: (must be done electronically) When to deposit. Virginia employee tax withholding must be filed to the Virginia Department of Taxation based on the following schedule: Quarterly Filing Business: If the average monthly Virginia withholding amount is less than $100, your business is a quarterly filer. Use form VA-5 to make payments. Payments must be made by the last day of the month following the end of the quarter. Filing and Payment must be made by EFT (Electronic Funds Transfer using the ifile system or eforms). Also required to file VA-6 by January 31 st of each year. Monthly Filing: If the average monthly Virginia withholding amount is more than $100, but less than $1000 your business is a monthly filer. Use form VA-5 to make payments. Withholding must be made by the 25 th day of the month following the end of the preceding month. Filing and Payment must be made by 4
EFT (Electronic Funds Transfer using the ifile system or eforms). Also required to file VA-6 by January 31 st of each year. Semi-Weekly Filing: If the average monthly liability is greater than $1,000 your business is a semiweekly filer. Deposits must be made within three banking days of the withholding date using form VA-15 (Electronic Funds Transfer using the ifile system or eforms). At the end of the quarter Form VA- 16, quarterly reconciliation, must be filed by the last day of the month following the end of the quarter. Also required to file VA-6 by January 31 st of each year. Seasonal: When registering for taxes if you registered as a seasonal filer, you will need to complete the same requirements. Note: Regardless of your filing schedule, even if you have no withholding, a return must be filed on the correct due dates or you will be accessed a penalty. Reporting Requirements: Making tax deposits is only the first step to properly accounting for employment taxes. On a quarterly and annual basis, certain reports are required. If you are not using a payroll software program to file your reporting requirements, there are several internet based companies that charge you a minimal expense for the filing of these returns. You may also manually send in forms (Virginia requires online submission and payments), but electronic payments are required by the IRS for Federal payments. Step 1 Federal Reporting Requirements At the end of each quarter you are required to complete and file form 941 Employer s Quarterly Federal Tax Return. Form 941 includes the total number of employees, total wages paid in the quarter and the total of taxes both withheld and employer matched. If your regular deposits are being made there should be no payment required with this form. (see page 14-15). Note: See Annual Filing Requirements to see if you are required to make Quarterly 940 Payments. Step 2 Virginia Withholding Reporting Requirements If you are a semi-weekly filer then at the end of the quarter Form VA-16, quarterly reconciliation, must be filed by the last day of the month following the end of the quarter. If you are a monthly filer or quarterly filer, then no other further reporting requirements are necessary other than your regular deposit requirements. Step 3 Virginia Employment Commission Reporting Requirements Every business (note exceptions at end of section), is required to pay into the Virginia Unemployment Tax Fund (SUTA) and the Federal Unemployment Tax Fund (FUTA). At the end of the quarter, VEC form FC-21 must be completed, filed and paid by the end of the month following the end of the quarter (January 31 st, April 30 th, July 31 st, October 31 st ). This form reports each employee s wages and determines the unemployment tax owed. (see pages 18-19) Your unemployment tax rate is based on the business s historical unemployment claims (Experience Rating). This number is assigned by the Virginia Employment Commission on an annual basis. Startup businesses are assigned a rate of approximately 3% (adjusts annually). 5
Businesses are taxed only on the first $8,000 of wages of each employee. Once an employee reaches $8,000 in wages in a calendar year, there will be no additional unemployment taxes for that employee. NOTE: Churches are exempt from both SUTA and FUTA taxes. Non-Profit 501 c(3) are exempt from FUTA, but are required to pay SUTA if the organization has more than 3 employees for more than 20 weeks in a year. If your organization is exempt from paying into the fund, the employees will not be able to collect unemployment benefits. Annual Requirements Step 1 Federal Requirements Form 940, Employer s Annual Federal Unemployment (FUTA) Tax Return, must be filed by January 31 st of each year reporting data from the previous year. (see page 16-17) FUTA deposits must be made quarterly by the end of the month following the end of a quarter if your liability is more than $500. If liability is less than $500, you may wait until the end of the next quarter to deposit. FUTA rate is.6% on the first $7,000 of each employee s income. W-2s Must be given to employees no later than January 31 st of each year. Must be completed and submitted with a W-3 by January 31 st of each year. NOTE: The total on your W-2s must match the totals on the total of your 941s. Step 2 Virginia State Requirements Form VA-6, Employer s Annual Summary of Virginia Income Tax Withheld, must be filed by January 31st of each year. This form lists your monthly or quarterly deposits in an annual summary and must match the amount that is on your W-2s. W-2s Must be given to employees no later than January 31 st of each year. Must be completed and electronically submitted to the state by January 31 st or each year. SECTION 2 Independent Contractors The Internal Revenue Service (IRS) has defined as to whether someone is an independent contractor or employee. Be sure you understand the difference as you can be held liable for taxes in the event you misclassify an individual. Listed below is the basic information about Independent Contractor. To get more information download IRS Publication 1779. Behavioral Control - These facts show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done as long as the employer has the right to direct and control the work. The worker is an independent contractor if the business has no rights to direct or control worker. Financial Control: 6
Significant Investment does the person have a significant investment in the work being done (not just a paycheck)? If so, most likely an independent contractor. Is this the only business that the person is working for and is and ongoing relationship? If so, then most likely the worker is an employee. Expenses If you are not reimbursed for your expenses since they are included in the job price. Then the worker may be an independent contractor. Opportunity for Profit or Loss If the person has an opportunity to realize a profit, or to incur a loss. Then most likely an independent contractor. Relationship of the Parties Employee Benefits A true independent contractor would not be receiving benefits from the hiring business Written Contract Is there a written contract between the parties. If so, then more likely an independent contractor. Requirements If you hire an individual as an independent contractor there are several requirements (this includes rents to landlords or payment for other services such as accountants, attorneys, etc.) Have the individual or company complete a W-9 Request for Taxpayer ID Number (page 20). You will need this in order to complete the 1099 filing requirements. If you pay any independent contractor $600 or more in a calendar year, you are required to send them a 1099-MISC. The 1099-MISC must be sent to individual or company by January 31 st of each year. The 1099-MISC along with Form 1096 to the IRS by January 31 st of each year. The 1099 must also be sent to VA Department of Taxation along with W-2s and VA-6. Note: If the Independent Contractor is taxed as a corporation there is no need to send a 1099. SECTION 4 Estimated Taxes If your business is taxed as a sole proprietor or partnership (even if legally setup as an LLC) or an S- corporation (either LLC, or Corporation) then you may be required to file individual estimated taxes. Payments must be made by April 15th, June 15th, September 15th and January 15 th. Payments must be made to the IRS using form 1040ES (page 21) and using either the appropriate voucher, or pay by EFTPS (see instructions above for info on EFTPS). Note: Pass through entities file individual estimated taxes, not business taxes, so be sure you use the owners SSN not the business s EIN. You will also be required to pay Virginia estimated taxes on the same schedule using form 760ES. Payments can be made by mail using the correct voucher, or by using the Virginia e-file system. Dates are May 1 st, June 15 th, September 15, and January 15 th. For individuals (if sole proprietor, partner or owner in S-Corp) you would file form 760ES. Do you need to file and pay estimated taxes? 1) You expect to owe at least $1,000 in tax year. 2) You expect your withholding to be less than the smaller of a) 90% of the tax on your next tax return b) 100% of the latest tax return you filed. 7
Even if you are a startup business, you are still required to file and pay estimated taxes based on the above criteria. Note: Be sure to keep track of your estimated taxes paid so when you file your tax return you can credit these payments towards the amount already paid. The IRS will not send you a notice of your estimated payments made. 8
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