Step 7 - Withholding Taxes

10 Steps to Starting a Business

STAGE THREE – HIRING EMPLOYEES

Complying with Employer Requirements

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Step 7 – Withholding Taxes

As previously discussed, the moment a business hires even one employee, it is subjected to an overwhelming barrage of government regulations and requirements.  Stage Three of starting a business covers all the steps necessary (Steps 4 through 9) for complying with these employer requirements.  The previous newsletter discussed Step 6 – complying with the New Hire Reporting Act.  This newsletter continues the discussion of the 10 Steps to Starting a Business, moving on to Step 7 – Withholding Taxes.

7.  Withholding Taxes

Employers are not only required to pay taxes, they are also required to withhold taxes owed by their employees.  Both the Federal and State governments require employers to comply with various withholding requirements with respect to their employees’ wages.  Figuring out which withholding requirements apply and correctly calculating the amount of taxes to withhold from each employee’s wages can be agonizingly complicated, which is only further exacerbated by the fact these laws are constantly changing and employers are regularly subject to new withholding requirements.  For these reasons, the best (and safest) way of complying with these complex withholding requirements is by working with a CPA or other tax professional, or simply outsourcing this task to a payroll service provider.  A brief overview of the Federal and State withholding requirements is set forth below.

Federal Income Tax Withholding (Form W-4)

The Federal government requires employers to keep and maintain a signed withholding exemption certificate (Form W-4) for each employee, which is used for calculating the amount of Federal taxes to withhold from the employee’s wages.  Additionally, employers are required to report wages paid and taxes withheld for each employee by filing a Wage and Tax Statement (Form W-2) with the Social Security Administration.  To learn more about complying with the Federal tax withholding requirements, check out the IRS' Employer's Tax Guide, as well as the Social Security Administration's Employer W-2 Filing Instructions and Information.

State Taxes

Additionally, California also requires employers to comply with a number of State withholding laws – such as requiring employers to withhold from their employees’ wages payroll taxes, disability insurance taxes, and personal income taxes.  Similar to the W-4 Form used to calculate withholdings for Federal taxes, California employers must use Form DE-4 for withholding State income taxes.  To learn more about California’s withholding requirements, check out the EDD’s California Employer's Guide, as well as the California Tax Service Center website.

Step 7 basically consists of setting up systems and procedures to ensure you accurately comply with the various Federal and State withholding requirements.  Assuming you have set up these procedures (or outsourced the task to a CPA or payroll service provider), you should be ready to deal with the next step in setting up your business – carrying and maintaining insurance for your employees.  Accordingly, the next newsletter will discuss Step 8 – Complying with Employee Insurance Requirements…

Step 6 - New Hire Reporting Act

10 Steps to Starting a Business

STAGE THREE – HIRING EMPLOYEES

Complying with Employer Requirements

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Step 6 – New Hire Reporting Act

As previously discussed, the moment a business hires even one employee, it is subjected to an overwhelming barrage of government regulations and requirements.  Stage Three of starting a business covers all the steps necessary (Steps 4 through 9) for complying with these employer requirements.  The previous newsletter discussed Step 5 – verifying the employment eligibility of your employees.  This newsletter continues the discussion of the 10 Steps to Starting a Business, specifically focusing on Step 6 – Complying with the New Hire Reporting Act.  So without further ado...

6.   New Hire Reporting Act
The Personal Responsibilityand Work Opportunity Reconciliation Act of 1996 requires all employers to report newly hired and re-hired employees to the California New Employee Registry within 20 days of their hire or rehire date.  Basically, the employer must use the Report of New Employee(s) DE-34 form to submit the following information:

•  Employee’s name, social security number, address, and start-of-work date.
• Employer’s name, address, California EAN, and Federal EIN.

Visit the New Hires Reporting Requirements page to learn the full details on how to register with California’s New Hire Reporting System.

After completing Step 6 and reporting the hire of your employee(s), you have successfully completed all the steps necessary to ensure that you properly hired your employees.  But now your employees will begin working and earning wages, which exposes the employer to litany of requirements – specifically, withholding taxes and maintaining insurance for employees.  Accordingly, the next newsletter will discuss Step 7 – Withholding Taxes for Employees…

Step 5 - Verify Employment Eligibility

10 Steps to Starting a Business

STAGE THREE – HIRING EMPLOYEES

Complying with Employer Requirements

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Step 5 – Verify Employment Eligibility

As previously discussed, the moment a business hires even one employee, it is subjected to an overwhelming barrage of government regulations and requirements.  Stage Three of starting a business covers all the steps necessary (Steps 4 through 9) for complying with these employer requirements.  The previous newsletter discussed Step 4 – the process of obtaining employer identification numbers (EIN) at the State and Federal level.  This newsletter continues the discussion of the 10 Steps to Starting a Business, specifically focusing on Step 5 – Verifying Employment Eligibility.  So without further ado…

5.       Verify Employment Eligibility (Form I-9)

Federal law requires employers to verify an employee's eligibility to work in the United States by completing an Employment Eligibility Verification Form (I-9).  An I-9 Form must be completed for each employee within three days of hiring the employee, and must be kept on file for three years after the date of hire or one year after the date of termination.  Compliance with these I-9 requirements is governed by the U.S. Citizenship and Immigration Services (USCIS) agency, which conducts routine workplace audits to ensure that employers are properly completing and retaining their I-9 forms, and that employee information on the I-9 Forms matches government records.

E-Verify.  To assist employers in complying with the I-9 requirements, the USCIS agency created an online service called E-Verify, which allows employers to electronically verify the employment eligibility of newly hired employees by comparing the information taken from the I-9 Form with existing government records for any particular employee.  Using E-Verify should virtually eliminate Social Security mismatch letters, improve the accuracy of wage and tax reporting, protect jobs for authorized workers and help maintain a legal workforce.

So Step 5 is really about developing policies and procedures for verifying the employment eligibility of all your employees, completing I-9 forms for each employee, and retaining such forms for the required period of time.  In order to ensure procedural compliance with these requirements, it may be a good idea to use a lawyer or other professional, or simply work with a consultant or compliance specialist, to ensure your compliance with employment eligibility verification.  Assuming you have successfully implemented Step 5, you are now ready to move to Step 6 – complying with California’s New Hire Reporting Program…

Step 4 - Employer Identification Numbers

10 Steps to Starting a Business

STAGE THREE – HIRING EMPLOYEES

Complying with Employer Requirements

This newsletter covers Stage Three of walking through the 10 Steps to Starting a Business.  Now that you have a legally formed business entity and all licenses and permits necessary to conduct business, the next step is hiring employees. 

The moment a business hires even one employee, it is subjected to an overwhelming barrage of government regulations and requirements.  And as discussed below, complying with the litany of Federal and State requirements relating to employees is by far the most complicated, convoluted, and burdensome aspect of setting up a business In California.  Therefore, it is imperative that any business wishing to hire employees put systems in place to ensure compliance with these laws. 

Accordingly, Stage Three, the largest of the four stages, provides a basic overview of the California’s employment laws, breaking down the process of complying with these laws into six steps (Steps 4 through 9):

STAGE ONE

1.       Business Formation

2.       Fictitious Name Statement

STAGE TWO

3.       Apply for Business Permits and Licenses

STAGE THREE

4.       Employer Identification Numbers

5.       Verify Employment Eligibility (Form I-9)

6.       New Hire Reporting Program

7.       Withholding Requirements

8.       Insurance Requirements

9.       Workplace Poster Requirements

STAGE 4

10.    Pay Taxes

Because Stage Three is the most complicated stage, each step within Stage Three will be discussed in its own individual newsletter, starting with Step 4 – Obtaining Employer Identification Numbers.  So without further ado…

4.   Employer Identification Numbers

The first step to hiring an employee is getting employment identification numbers for your business from both the Federal and State governments.

EIN (federal)

The Federal government requires employers to obtain an Employment Identification Number (EIN) by filing Form SS-4 with the U.S. Internal Revenue Service (IRS).  The EIN is necessary for reporting taxes and other documents to the IRS, as well as when reporting information about your employees to various State agencies.  To obtain an EIN, an employer can contact the IRS directly or apply online.  To learn more about obtaining an EIN, check out the IRS’s Guide to theEmployer Identification Number.

EAN (California)

Additionally, California requires employers to register for a California Employer Account Number (EAN), which is used for many of the same purposes as the Federal EIN (e.g. paying and reporting taxes, etc.).  California employers can register for their California EAN by contacting the California Employment Development Department (EDD) directly or by registering online through the EDD’s e-Services for Business.  To learn more about obtaining your California EAN, check out the EDD’s website.

After your business has obtained its Employment Identification Numbers, it is now ready to actually hire employees.  And once you hire an employee, you must verify that the person you hired is eligible to be employed.  Accordingly, stay tuned for Step 5, which discusses the requirement of Verifying Employment Eligibility…