Employer Tax Requirements

If you hire employees, you will have to comply with various legal requirements and know about state and federal forms and filing procedures. It may be advantageous to use the services of an accounting or business counseling firm to either complete and file the forms for you or to teach you how to do it. While the process appears complex, many business owners handle it easily. Above all, accurate record keeping is essential for timely and correct filing of employer tax.

The nearest federal Internal Revenue Service (IRS) office, for walk-ins only, is located at 5205 Leesburg Pike, #900, Falls Church, VA 22041.

Internal Revenue Service (800) 829-1040; For publications and forms (800) 829-3676.

For information on Virginia taxes and forms, call the Virginia Department of Taxation at (703) 359-6715.

Employer Identification Number

All employers, corporations and partnerships are required to obtain a federal employer identification number (EIN). The EIN identifies your business’s tax accounts on all federal and state tax forms. A sole proprietor without employees does not need to obtain an EIN and may use his or her social security number instead. To apply for your federal EIN, file Form SS-4 which you can obtain from an IRS or Social Security office. No fee is required. Allow several weeks for your identification numbers to be mailed. For more information call (800) 829-1040.

Employees & Independent Contractors

Businesses sometimes prefer to hire a person as an independent contractor because the nature or duration of the work does not justify hiring a person as an employee. If a business hires and pays an independent contractor $600 or more during the year, the business is required to report this information to the IRS using Form 1099. A business is not required to withhold or pay employer taxes for monies it pays an independent contractor. The independent contractor is responsible for reporting his or her income and paying taxes. The distinction between an employee and an independent contractor is important to understand because the IRS may assess taxes and penalties if a worker is improperly treated as a contractor instead of an employee. The difference depends on the working relationship between the employer and the person performing services.

Independent contractors, generally, are persons who offer their services to the general public. The general rule is that a person is an independent contractor if the employer has the right to control or direct the result of the work, but not the methods or means of accomplishing the work. Independent contractors generally supply their own tools, work at times and places of their choosing, and cannot be discharged by the employer. A written contract for work may help define these facts. In contrast, in an employer-employee relationship the employer supplies tools and a place to work, has the right to fire the employee, and generally controls the means of work. There are exceptions to these general rules and sometimes it may be difficult to know the correct decision. Check with your accountant or tax professional if you are unsure. If the IRS concludes that an employer has no reasonable basis for treating a worker as an independent contractor, the employer may be liable for back payroll taxes for the worker.

Employer Tax Withholding

As an employer, the law requires you to withhold federal and state income taxes and Social Security (FICA) taxes from the earnings of each of your employees. In addition, the business is required to make payments from its own funds to Social Security for each employee.

The amount of income and social security taxes to be withheld and paid for each employee will vary depending on the rate of pay, marital status, and number of exemptions claimed by the employee on the Form W-4 (described below). If you are preparing employer tax returns yourself, be sure you have the most recent withholding tax tables since these tables change frequently due to changes in the tax law.

Federal withholding and social security taxes are filed four times a year on Form 941. Small businesses make payments monthly; large businesses make payments twice a week. For this purpose a small business is one which reported $50,000 or less in payroll taxes the prior year. The payments are made via deposits to a bank (called a federal depository) using Coupon 8109. Virginia income tax withholding is reported quarterly on Form VA-5. Payments may be required quarterly, monthly or quarter-monthly depending on payroll size. Each employee must complete and return to you a federal Form W-4 at the beginning of his or her employment and when he or she wishes to change it. The W-4 indicates the number of exemptions (withholding allowances) which the employee claims so that you can properly determine withholding amounts during the year.

If you are a sole proprietor or a partner in a partnership, you are not considered an employee and are not subject to withholding. In lieu of withholding, you may be required to make quarterly estimated tax payments if withholding from your other income, such as salary from another job, is not enough.

To figure and pay estimated taxes to the IRS use Form 1040-ES and to the State of Virginia use Form 760-ES. It is your responsibility to make sure these payments accurately reflect the taxes you will owe and are paid in a timely manner. In general if you expect to owe $500 even after subtracting withholding (and other tax credits), you may have to make estimated tax payments. You do not have to make estimated tax payments if your withholding tax payments for the year either equal last year’s tax liability or equal 90 percent of your current tax liability. The tax laws on this are complex and changing, so check with an accountant or tax expert.

If your business is incorporated, you as the owner are automatically an employee and are subject to withholding on any salary the corporation pays you. Therefore, you would not have to file estimated tax returns as an individual. However the corporation may be required to make estimated tax payments on corporate income, using Form 1120-W.

Unemployment Tax

Virginia and the federal government each require employers to pay an unemployment tax which is based on an employee’s wages. The Federal Unemployment Tax (FUTA) is filed annually on federal Form 940. The FUTA tax must be paid at least annually by January 31 of the following year or quarterly (on Coupon 8109) if a higher payroll requires it. Virginia unemployment taxes are levied on wages of employees who work in Virginia. These taxes go into a state fund from which benefits are paid to claimants. Unemployment insurance offers workers protection from loss of earnings while partially or completely laid off from their jobs through no fault of their own. This tax is filed and paid quarterly by using Virginia form VEC-FC-20. The tax rate varies depending on each business’s experience rating; that is, the amount of unemployment claims against each business. As a new business you can obtain your tax forms and your tax rate by filing form VEC-FC-27. For information and forms call the Virginia Employment Commission at (703) 813-1300.

Worker’s Compensation Insurance

Any employer who has three or more regular employees is required to furnish, at no cost to the employee, worker’s compensation insurance. The insurance may be purchased through a private insurance company or the employer can apply to the Industrial Commission to obtain a certificate of self insurance. The cost of the insurance varies by industry and occupation. Worker’s compensation insurance provides compensation and medical benefits to workers or their dependents if the workers become disabled or die from accidental injury or occupational disease due to their employment. For information call the Virginia Workers’ Compensation Commission at (804) 367-8600 or toll free in VA only (877) 664-2566.

Employment Eligibility

Under the Immigration Reform and Control Act of 1986, all new employees must verify with their employer their eligibility to work. New employees must be American citizens or aliens who are authorized to work in this country.

As an employer, you must verify employment eligibility of anyone hired after November 6, 1986, and complete and retain a one-page Employment Eligibility Verification (Form I-9), or obtain an Employment Certificate from the Virginia Employment Commission. The Immigration and Naturalization Service publishes a Handbook For Employers, Form M-274, which explains the law and how to comply. For more information, call the U.S. Naturalization Services at (800) 375-5283.

Americans with Disabilities Act

The Americans with Disabilities Act (ADA) became federal law in 1990. It prohibits discrimination against individuals with disabilities in employment and mandates their full participation in both publicly and privately provided services and activities. The ADA requirements became effective on July 26, 1992 for employers with 25 or more employees; and on July 26, 1994 for employers with 15 or more employees.

The ADA requires that public accommodations, such as restaurants, retail stores, hotels, theaters, doctors’ offices, pharmacies, private schools and day care centers, may not discriminate against persons with disabilities. Reasonable efforts must be made to remove existing barriers and new construction must be accessible. The law is complex and wide ranging and cannot be briefly summarized here.

For information call any of the following agencies:

• Equal Employment Opportunity Commission (EEOC) (800) 669-3362 (publishes The ADA – Your Responsibilities as an Employer)
• Regional Business Technical Assistance Center (703) 228-4786
• U.S. Department of Justice Hotline (202) 514-0301

Right-to-Work Law

Virginia has a right-to-work law which prohibits a union shop or closed shop. This law means that an employer in Virginia cannot deny a person the right to work on account of membership or non-membership in a labor union or organization; require employees to become or remain members of a union; or require dues to be paid to a union as a condition of employment. The law also regulates other aspects of employee/management relations. For more information, call the Department of Labor & Industry at (703) 392-0900.

Minimum Wage

Federal and Virginia laws require employers to pay employees a minimum wage of $5.15 per hour. Certain employees, including employees who receive tips, are subject to different pay standards. For more information, call the Department of Labor & Industry at (703) 392-0900.

Other State Labor Regulations

The Virginia Department of Labor and Industry enforces other regulations pertaining to:

• Minimum wage
• Equal pay
• Child labor
• Apprenticeship training
• Bulletin board poster requirements

For information, call the Department of Labor & Industry at (703) 392-0900.