Making the decision to hire employees is a significant step for any business. As an employer, you must comply with employment rules and regulations and adhere to the requirements and deadlines regarding withholdings, payments, and reporting. We recommend that you utilize the professional guidance of an accountant for tax questions as well as to assure compliance with all tax-related matters. The notes below will help you prepare for hiring employees.
Your Employer Identification Number (EIN)
Employer Identification Numbers, also known as tax ID numbers, are used to report withholding taxes and should be applied for 6-8 weeks prior to hiring. You should apply for an EIN (SS-4) if hiring employees, incorporating or operating a partnership, administering a Keogh plan, opening a bank account in the name of the business, or filing excise, alcohol, tobacco and firearms tax returns. The SS-4 application is available at irs.gov/pub/irs-pdf/fss4.pdf. For detailed instructions on filing the SS-4, go to irs.gov/pub/irs-pdf/iss4.pdf.
Employee Eligibility Verification and Withholding Allowance Forms
As an employer, you are responsible for verifying the legal employment eligibility of each new hire. You should have new employees complete the Form I-9, Employment Eligibility Verification. Additionally, employees must also complete the Form W-4, Employee’s Withholding Allowance Certificate. These forms must be retained as a part of the employer’s records. For additional information and online forms, visit the IRS website at irs.gov/businesses/small.
Difference Between Employees and Independent Contractors
When a business hires employees, the business must generally withhold federal and state income taxes, pay federal and state unemployment, and withhold as well as pay Social Security and Medicare taxes on each employee. In contrast, if a worker is classified as an independent contractor, these responsibilities are eliminated or are shifted to the worker.
Properly classifying a worker as an employee or independent contractor is an extremely important decision. Misclassification of a worker may result in significant financial liabilities. Many businesses assume they can reduce their expense and paperwork burden by arbitrarily classifying their workers as independent contractors. However, proper classification is based on IRS guidelines, not on employer preferences.
The Internal Revenue Service has very strict guidelines as to who can be classified as independent contractors. Review IRS publication 15-A, The Employer’s Supplemental Tax Guide, for more information.
Employers have several responsibilities relating to employee payroll expenses. Therefore, you must be knowledgeable in the areas of federal and state income tax withholding requirements as well as Social Security/Medicare withholding.
Furthermore, as an employer, you are responsible for paying your portion of Social Security and Medicare taxes, federal unemployment taxes (FUTA) and state unemployment taxes (SUTA). Employers must also comply with quarterly reporting requirements as well as the requirements regarding the frequency of payroll tax deposits.
Federal and State Income Tax Withholding
The employer typically withholds federal and state income taxes from each employee’s wages. An employer must follow federal and state guidelines regarding the amount to be withheld from each employee’s pay. IRS Publication 15, Employer’s Tax Guide discusses important information for employers and includes tables for calculating federal wage withholding and advance earned income credit payments as well as information concerning benefits and tips.
The Arkansas Department of Finance and Administration outlines state income tax withholding requirements in this document: Starting a New Business in Arkansas (PDF)
Social Security and Medicare
To comply with the Federal Insurance Contributions Act (FICA), an employer must withhold the employee’s portion of Social Security and Medicare taxes. IRS Publication 15, Employer’s Tax Guide contains information regarding Social Security and Medicare tax requirements.
Employers are required to file a W-2 form with the Social Security Administration for each employee and furnish a W-2 to each employee in order to report wages earned. For more information, review Instructions for W-2 and W-3 published by the IRS.
Federal and State Unemployment Insurance
Employers must comply with the Federal Unemployment Tax Act (FUTA). According to FUTA, employers are responsible for paying taxes to compensate workers who have recently lost their jobs. FUTA taxes are to be paid by the employer and are not to be withheld from an employee’s wages. FUTA is paid and deposited separately from withholding and FICA taxes.
Unemployment insurance must also be paid to the state of Arkansas. Employers must establish a state unemployment insurance account (SUTA). The state unemployment insurance rate varies depending on the company’s history. Information on state unemployment insurance can be found on the Arkansas Department of Workforce Services website.
Applicable Employment Laws
Employers should understand the various regulations and laws pertaining to employees. If you plan to hire employees, learn the rules that apply to your business. Federal laws, depending on your sales volume and number of employees, may supersede state laws. Consult with the state and federal Departments of Labor to learn more. If you are unsure of your obligations, an attorney’s guidance can be useful in assisting you to meet legal requirements.
Workers’ Compensation Insurance
All employers, regardless of the number of employees, should contact the Arkansas Workers’ Compensation Commission to determine if they are legally obligated to provide workers’ compensation insurance coverage for their employees.
Workers compensation insurance is purchased by the employer from an insurance provider. Employers must also comply with workplace posting requirements and must comply with procedural and documentation requirements in the event of an accident in the workplace.
For additional information, visit the Arkansas Workers’ Compensation Commission website, awcc.state.ar.us.
Federal Patient Protection (PP) and Affordable Care Act of 2010 (ACA)
Regardless of your decision to offer health insurance, if you’re planning to hire employees you’ll likely be subject to rules and regulations set forth by the federal Patient Protection and Affordable Care Act of 2010. To avoid penalties for non-compliance, visit healthcare.gov to learn more about your rights and responsibilities under the Affordable Care Act.
Adequate Employee Records
Just as you should keep good records for all operational aspects of your business, plan to practice good recordkeeping tactics with your employees. The IRS recommends employers keep employee records for at least four years. However, some records may be retained indefinitely. For detailed information concerning what records to keep, review the Recordkeeping section of the IRS website.