Irrespective of the form of business in which you operate, if you are going to have employees then you will have to contend with payroll taxes. The brief summary which follows will give you some guidance in the rules and regulations of the various taxing authorities.

Available Publications

Circular E, Publication 15, Employer's Tax Guide, covers the payroll tax reporting and deposit requirements and can be obtained from the Internal Revenue Service, Austin, TX 73301 or by calling (800) TAX-FORM (800-829-3676). Excerpts can be obtained online at www.irs.gov.

Tax Deposit Requirements

Federal withheld income and FICA taxes (employer and employee portion).

1. Employers are classified as either monthly depositors, or semiweekly depositors. All new employers are monthly depositors in the year in which they become employers. Monthly depositors must deposit federal withholding and employment taxes on wages during a calendar month by the 15th day of the following month before 2:00 p.m. Semiweekly depositors must deposit the taxes within 3 business days of the date the payroll was paid. Deposits are transferred electronically after registration forms are completed which authorize the bank to transfer funds directly from a designated bank account. The phone authorization for the electronic transfer must be completed 24 hours before the federal tax deposit is actually due. Electronic transfer (EFT) becomes mandatory after 1998.

2. Exception. If at the end of the calendar quarter your total accumulated employer taxes are less than $2,500, you may pay the taxes when you file Form 941, Employers Quarterly Federal Tax Return.

Federal Unemployment Taxes

To determine your quarterly liability for FUTA, multiply that part of the first $7,000 of each employee's annual wages that you paid during the quarter by .008 (0.8%). If the resultant liability for the quarter is $100 or less, there is no requirement to deposit it currently; you merely add it to your liability for the following quarter.

If your liability for any calendar quarter (plus any undeposited taxes for an earlier quarter) is more than $100, you are required to make an electronic deposit (EFT) by the last day of the month following the end of the quarter.

If the tax reported on your Federal Unemployment Tax Return, Form 940, less deposits for the year:

1. Is more than $100, you must deposit all of the tax by January 31; or,

2. Is less than $100, you may pay the taxes when you file Form 940.

Supplemental Wages

If supplemental wages--such as bonuses, commissions, overtime pay--are included in the same payment with regular wages, tax to be withheld is determined as if the total of the supplemental and regular wages were a single payment for the regular payroll period.

If supplemental wages are not paid on the same payment as the regular wages, the employer may:

1. Withhold at a flat rate of 20% for federal and 3% for New Mexico; or,

2. Combine the supplemental wage with the last regular wage, determine the tax on the

total wage and subtract the amounts already withheld on the regular wage payment.

Fringe Benefits

Gross income does not include any fringe benefits that qualify as one of the four categories listed below. Fringe benefits that qualify for the exclusion are exempt from income tax and/or Social Security tax withholding (FICA and payment of Federal Unemployment Tax (FUTA)). Conversely, benefits which do not qualify are subject to these taxes. An example of a common non-qualifying benefit subject to tax is the automobile allowance.

No additional cost service. This is a service provided to an employee that is excludable if the service is offered for sale to the public in the ordinary course of the line of business of the employer in which the employee is working and the employer does not incur substantial additional cost. For example, if employers furnish airline travel or hotel rooms to employees working in these lines of business in such a way that the non-employee customers are not displaced, they incur no substantial additional cost in providing those services to the employees.

Qualified employee discount. Any employee discount is an excludable qualified employee discount if: (1) in the case of property, it does not exceed the gross-profit percentage of the price at which the property is being offered to customers; (2) in the case of service, it does not exceed 20% of the price at which the service is being offered.

Working condition fringe. Any employer-provided property or services are excludable benefits to the extent that they are deductible as ordinary and necessary business expense had the employee paid for them. Under certain conditions, the fair market value of a qualified automobile demonstration used by a full time auto salesperson is an excludable working condition fringe.

De minimis fringe. Property or services not otherwise tax-free are excludable if their value is so small as to make accounting unreasonable or administratively impractical. An operation of any eating facility for employees is an excludable de minimis fringe if it is located on or near the employer's business premises and the revenue derived normally equals or exceeds the direct operating costs of the facility.

Other Tax Requirements

Whenever a wage payment is made, the employer must provide the employee with a statement of the gross wages and specific deductions (if any). Use the W-4 Form submitted by the employee and the tax tables provided in the employer's tax guides to determine the correct income tax to withhold. If the employee fails to submit a W-4 Form, the employer must withhold at the rate applicable to a single person who has no withholding exemptions. A continuing requirement exists for employers to submit, with their quarterly payroll tax returns, a copy of any W-4 Form on which an employee is claiming an equivalent of 10 or more withholding exemptions.

When making a reimbursement or payment of moving expenses to or for an employee, the employer must complete and furnish the employee with a Form 4782 for each move.

The employer must also furnish a Form W-2 to each employee showing remuneration and withheld taxes for each calendar year. Flat rate expense account allowance, disability insurance paid by the employer, and moving expense reimbursements are among the items to be included as other compensation on a W-2 Form. Upon request, a W-2 Form must be furnished to a terminated employee within 30 days after the request or the final wage payment whichever is later. All other W-2 Forms should be given to the employees by January 31, of the following year.

The payroll tax requirements and the work related to compliance are quite cumbersome and complicated. Once a business employs more than a few people, we recommend that a qualified payroll service be used. It has generally been our experience that the cost of the service is far outweighed by the personnel and management time required to operate the payroll system in house.

An owner of a non-corporate business (i.e., a sole proprietor, partner or LLC member) does not issue a Form W-2 to himself. Cash withdrawn for his personal use is called a distribution, not wages. Partners or LLC members may also be paid "guaranteed payments." The owner pays Self-Employment Tax for himself, based on the net profit of the business plus his guaranteed payments, instead of paying FICA or Medicare Tax. Self-Employment Tax is reported on Schedule SE with his Individual Income Tax Return (Form 1040) as discussed in Chapter 6.

Tax Rates

The tax rates and the taxable wage basis for employers and employees are as follows:

Social Security Tax (FICA)