Step Two: Managing Employees — Federal Taxes

The forms included on the Small Business Interactive CD are current as of summer, 2005. You will want to check for changes to any of the forms on the Internal Revenue Service web site.

There are four different federal tax requirements for employers:

Income Tax
Federal Forms Relevant to Income Taxes
Social Security & Medicare (FICA)
Federal Unemployment Tax (FUTA)

Income Tax

Employers must withhold income tax from each employee's paycheck throughout the year. The amount withheld will vary based on pay rate, frequency of pay, marital status, and exemptions. Each employee must fill out an IRS W-4 form before they begin employment to determine the number of exemptions an employee elects. The tables you use to compute how much tax to withhold begin on page 36 of IRS Publication 15, Circular E, Employer's Tax Guide (Revised January 2004).

Employers must submit a Form 941, Employer's Quarterly Federal Tax Return which includes your employees' withheld Federal income tax, social security tax, Medicare tax, and your share of social security and Medicare tax. If you accumulate a liability for these taxes of $2,500 or more per quarter, you must deposit this amount by making payment to an authorized financial institution. Deposits are made either by the Electronic Federal Tax Payment System (EFTPS), or by using a Form 8109B, Federal Tax Deposit Coupon, which must accompany your payment. If you use the coupon, it is very important that it show the correct employer identification number, name, and type of tax and tax period, as this information is used by the IRS to credit your account. Your check or money order should be made payable to the financial institution where you make your deposit, not to the IRS.

New employers who apply for an employer identification number are sent a federal tax deposit (FTD) coupon book. The IRS will keep track of the number of coupons you use and will automatically send you additional FTD coupons when you need them. If necessary, the IRS will assist you in completing blank coupons, which can be used to make a deposit if you do not have preprinted Form 8109. For more information, call the IRS at 1 (800) 829–4933.

You must deposit the 941 taxes based on either a monthly or semiweekly deposit schedule. Which schedule you use for the calendar year 2005 is based on the amount of taxes you reported on Form 941 for the four calendar–quarters from July 1, 2003, through June 30, 2004. This is called the lookback period.

If you reported taxes of $50,000 or less on Form 941 for the lookback period, you are a monthly schedule depositor, and generally must deposit each month's Form 941 taxes on or before the 15th day of the following month. For example, taxes for January must be deposited by February 15th.

If you reported taxes of more than $50,000 for the lookback period, you are a semiweekly schedule depositor. For 2005, the lookback period is July 1, 2003, through June 30, 2004.

More information about this process is available on the IRS web site.

Annually, employers must send an IRS W-2 form to each employee showing payments and withholdings no later than January 31 of each following year. By February 28, employers must furnish the Social Security Administration with copies of all of their employees' W-2 forms, as well as the IRS Form W-3 - Summary and Transmittal Form. The Social Security Administration submits the data to the IRS.

Federal Forms Relevant to Income Taxes

Forms marked with an * are for informational purposes only and must be ordered.

*8109-B
Instructions for W-2 and W-3 forms and filing.
*W-2 Form
*W-3 Form
*W-4 Form
Form 941
Employer's Tax Guide (Publication 15) (January 2004 version) — This informative guide contains information to guide you regarding taxes and your employees.
Employer's Supplemental Tax Guide
Employer's Tax Guide to Fringe Benefits
For more tax information related to businesses, consult the IRS web site.

Keep in mind that tax laws change frequently and you may wish to consult an accountant, attorney or tax expert. For recommendations on experts, contact Coastal Carolina Community College Small Business Center.

Social Security & Medicare (FICA)

The employer and employee share the Social Security and Medicare (FICA) tax. The employer withholds the employee's share from each paycheck and the employer must also match this amount. For information on Social Security and Medicare Taxes, please refer to page 15 of the IRS Publication 15, Circular E, Employer's Tax Guide.

Small businesses (reporting $50,000 or less in payroll taxes the prior year) must pay federal income and FICA taxes monthly; large businesses pay these taxes twice weekly. The payments are made with Coupon 8109-B directly to a bank. (this document is for informational purposes only. Original 8109-B form must be ordered.) In addition, these taxes are reported on a quarterly Form 941.

Federal Unemployement Tax (FUTA)

Funds from the FUTA and the state unemployment tax provide temporary financial relief to those who become unemployed through no fault of their own. Contrary to popular belief, employees do not contribute to the FUTA: employers are responsible for paying 100% of all unemployment taxes. The FUTA amount is based on an employee's wages. Employers get credit towards the FUTA based on what they pay to North Carolina for state unemployment taxes (see State Unemployment Tax).

Employers file the FUTA annually on Form 940. It must be paid at least by January 31 of the following year or quarterly on Coupon 8109 if a higher payroll requires it.