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How to Handle Federal and State Payroll Paperwork

Few things are as exciting—or as scary—as hiring your first employee. Whether you’re a small business that is doubling its work force (from one employee to two employees!) or a busy professional hiring your first household employee, it’s a big step to suddenly assume the responsibility of regularly meeting a payroll.

Unfortunately, in addition to all the other issues that you now need to address—whether you can afford new employees, picking the best person for a job, and so on—you also have mounds of new paperwork to deal with.

I can’t describe all this new paperwork, but I can give you an overview of what you need to collect and prepare for the federal and state governments. If you have questions about all this, I suggest you confer with an accountant or a bookkeeper who specializes in helping small businesses prepare their payroll and payroll tax returns.

New Employer Checklist

As a new employer, you need to do the following:

1. Request and receive a Federal Tax Identification number from the IRS. To do this, fill out IRS form SS-4 (call the IRS to request one or visit the IRS web site at www.irs.gov to download one) and return it to the IRS. The IRS will send you a Federal Tax Identification number.

NOTE You can also receive a Federal Tax Identification number over the telephone. Just tell the IRS agent how you filled out the SS-4 form, and he or she will enter it into the IRS computer and give you the number. You still need to send or fax in the SS-4 form, however.

2. Obtain a copy of the Employer’s Tax Guide, commonly referred to as a Circular E, from the IRS. This pamphlet tells you how much federal income tax you need to withhold from a person’s check and what Social Security and Medicare taxes you and the employee pay. (As noted earlier, you can download this document from the IRS web site.)

3. If your state requires it, get an employer identification number from your state for filing state payroll tax returns, such as unemployment taxes, workers’ compensation, and so on.

4. If you intend to withhold state income taxes, obtain your state’s equivalent of Circular E. It tells how much state income tax to withhold from an employee’s payroll check.

5. Obtain federal and perhaps state tax deposit coupons so that you can remit federal and state tax deposits to the IRS and the equivalent state revenue agency. (Ask for these if you don’t get them automatically.)

6. At the end of the first quarter during which you employ people, obtain the appropriate federal and state quarterly payroll tax return forms. For federal payroll taxes, businesses should use the 941 form. You also probably need to file equivalent state quarterly payroll tax returns.

7. At the end of the year, obtain the appropriate federal and state annual payroll tax returns. For federal unemployment tax returns, for example, you need the 940 or the 940EZ form, and again, you probably need the equivalent state form for annual payroll tax returns.

When You Hire a New Employee

Whenever you hire a new employee, the employee must fill out a W-4 form. This form provides you with the employee’s Social Security number, filing status, and personal exemptions. You need both the filing status and the personal exemptions to determine the amount of federal income taxes to withhold, and you need the employee’s Social Security number so you can prepare a year-end W-2 statement.

You will very likely have other requirements, which are not related to income taxes, to meet. For example, you may need to verify to the Immigration and Naturalization Service (INS) that the person you’re employing either is a U.S. citizen or has a valid work permit. Be sure to check for this type of requirement. The IRS’s Employer’s Tax Guide and the equivalent state information guide can supply most of the information you need.

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