What are the tax impacts of hiring more employees?
Hiring employees is a natural extension of growing your business. In addition to training your new hire to perform their role and familiarizing them with the workings of the company, you’ll need to adjust your payroll to include their income and withholdings. Understanding how to handle taxes with new employees falls within your purview as the employer.
In order to maintain compliance with IRS regulations, you’ll need to have a system in place through which you report all employee wages and meet the deadline for payroll, Social Security, and Medicare taxes as they’re assessed throughout the year. All new employees will need to complete a W-4 form that includes their filing status and determines the amount withheld toward taxes every month.
Keep in mind that if the IRS notices that an employee isn’t having enough tax withheld, the onus falls upon you to correct the situation.
Paperwork and execution
As the employer, it’s your responsibility to correct your employee’s federal income tax withholdings when the IRS determines that he or she has been underpaying their taxes. This is accomplished by issuing a letter notifying the employee as to the maximum number of withholdings that they’re allowed. The employee is then required to complete a new W-4, and once the new withholding rate is set, they must get approval from the IRS to make any changes.
Is all of this paperwork, reporting, and withholding necessary if your new hire is part time or temporary? Regardless of whether you’re hiring long-term employees, part timers, or seasonal workers, you and your employees are still required to report and deposit taxes in the same manner.
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But you’re not done yet
Ensuring that you meet the deadlines to deposit income, Social Security, and Medicare taxes as required throughout the year is only part of the picture. Employers must also report and deposit Federal Unemployment Tax (FUTA) to the IRS.
FUTA is a separate tax, paid for by employers only, and is not part of employee withholdings. All employers are required to make FUTA and the other federal tax deposits via the electronic funds transfer system (EFTPS).
This may all sound overwhelming, particularly if this is your first time hiring employees. One way to simplify the process is to work with a consulting firm that specializes in tax and accounting services for business.
With offices both in San Diego and Ontario, the CPA’s and business advisors at GYL have extensive knowledge and experience with providing tax services to numerous types of businesses. We also specialize in providing employee benefit plan advice or auditing needs.