Filing Employee Taxes at the Federal Level

Once you are ready to hire employees, you must register that you are now an employer with the Internal Revenue Service (IRS) in order to receive a Federal Tax Identification Number.  This is often referred to by the acronyms TIN (Tax ID Number) or FIN (Federal ID Number).

Complete the application (Form SS-4) which may be obtained from any IRS or Social Security office.  The identification number you receive is important because it must be shown on your tax returns and your earning reports (which will be filed on a monthly basis).  After you register for your employer ID number (TIN/FIN), you should receive a booklet in the mail explaining the procedures for filing your taxes and providing you with Federal Tax Deposit Coupons (Form 8109).

Each pay period, you withhold a certain amount from your employee's earnings to cover federal taxes (including Medicare and Social Security*).  In addition, you as an employer must match the amount withheld (I told you having employees could be hard!).  The total of these taxes must be paid each month to any commercial bank that does federal money transfers by the 15th of the month for the month prior (i.e.  you will pay taxes for the month of January by February 15th).  The coupons that I mentioned above (Form 8109) will be used to make your payments each month.

You must let the IRS know that you have, in fact, paid your monthly employer taxes.  This is done by filing Form 941 (Employer's Quarterly Federal Tax Return) directly to the IRS.  As the name suggests, you file this on a quarterly basis with the form being due by the last day of the month following the end of the quarter (confusing!)  Refer to the following schedule:

  • Quarter I (Jan, Feb, March) - Form 941 is due by April 30
  • Quarter 2 (April, May, June) - Form 941 is due by July 31
  • Quarter 3 (July, Aug, Sept) - Form 941 is due by October 31
  • Quarter 4 (Oct, Nov, Dec) - Form 941 is due by January 31

In addition, the Federal government also requires that employers (only) pay a Federal Unemployment Tax (FUTA).  This usually does not amount to that much money, but the  rules and regulations make things more confusing.  FUTA is paid on the first $7,000 of an employee's salary.  You pay FUTA on a quarterly basis (to the bank again, according to the schedule above) only if the tax owed is $100 or more.  If your deposit is less than $100, you can carry it over to the next quarter.  This "carrying over" can actually be done for the whole year if you remain under $100.  In this case, you must pay the total FUTA tax for the year by January 31 of the following year.  The accompanying Form 940 (Employer's Annual Federal Unemployment Tax Return) is also due by January 31.  If you have paid your total tax before January 31(and it is received by this date), you are allowed to file Form 940 up until February 10.  Note that your State government (see below) will also charge an Unemployment Tax and so we are not done with this topic quite yet.

Medicare and Social Security taxes combined are referred to as FICA (Federal Insurance Contributions Act).

On a personal note: the process of filing federal taxes is confusing.  Don't worry if you mess up.  While working at a previous job, I was responsible for the office payroll. I paid the office's federal employer tax on a quarterly basis.

When I hired my first employee for my own business, I assumed that the same rules applied. To my surprise, I received a notification from the IRS one day telling me that I owed several hundred dollars for each of the months that my taxes were not paid. Each month? I was surprised to learn that the payment was due monthly. They notified me of my lapse seven months into it.

As you can imagine that the amount I owed was steep. I did the only thing I could as a small business owner with a limited budget. I contacted the IRS, admitted my mistake and begged for forgiveness. They fees were waived!

So don't be too hard on yourself if you make tax mistakes. We all do it at some time or another.  And if you do make a mistake, let the IRS know. They are more forgiving than you might imagine.

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