Taxes and Employees
If you've hired employees, it's a sign that your business is growing, which is excellent. But with employees comes plenty of paperwork including tax obligations. The following tax and other deductions list the major issues, first in the United States, and then in Canada.
Withholding FIT and FICA
First, you're responsible for withholding an appropriate portion of the employee's wages for income taxes. You need to have new employees fill out a Form W-4 that claims the number of withholding allowances. You determine the amount of tax to withhold based on the tables in IRS Publication 15, Circular E, or a percentage basis as described in Circular E.
You also need to withhold Social Security and Medicare taxes from your employee's paycheck. You report employee compensation and taxes withheld, as well as your employer's share of FICA, on Form 941: Employer's Quarterly Federal Tax Return.
As an employer, you pay the federal unemployment tax based on a portion of your employee's earnings. Your state will also have unemployment tax, so the federal system gives you credit for the payment you need to make to the state. The FUTA tax return is filed once a year on Form 940 or 940-EX, and is due January 31 after the end of the reporting year.
If your withholding taxes are less than $50,000 for the year — and they likely will be — you need to deposit withheld taxes monthly, no later than the fifteenth of the following month.
The system works in a similar way in Canada: you have to withhold income tax, Canada Pension Plan/Quebec Pension Plan, Employment Insurance, and possibly Worker's Compensation amounts from your employees' paychecks and remit those amounts (along with any employer's contributions) to the appropriate government entity. Each year, you'll provide your employees with a T4 slip that lists the deductions so that they can fill out their individual tax returns.
For information, obtain from CRA the Payroll Deductions (Basic Information) guide and the Payroll Deductions Tables for your province or territory. If you're having trouble figuring it out, call your local tax services office: They'll even send someone by to give you a hand to get started.