Employment Tax Basics: Accounting for Small Business

Michael Broida, CPA of Heller, Broida & Eisenberg Accountancy Corp. (www.HBEAC.com), gives tips on employment tax basics for the small business.

  1. Employee- required to have taxes withheld & paid by their employer
  2. Employer must submit W2 & handle employee tax filings
  3. Provide a 1099 to independent contractors to file taxes on their own

One of the biggest tax issues today is whether a person is an independent contractor or an employee. There are 15 or so criteria that the government uses to determine whether the person is an employee and it centers upon control. If you control that person, they’re generally an employee. Employees are required to have taxes withheld from their wages; in addition, you the employer are responsible to pay Social Security taxes, Medicare taxes, and in some cases, state disability insurance.

In addition, you have to be aware that you’re responsible for unemployment taxes, both federal and state. Paying these on time is very important because you can suffer heavy penalties for not doing it. Reporting requirements include filing quarterly tax returns; include filing and preparing W2 forms and the transmittals to the government.

If, in fact, you do have some independent contractors, they will need to be supplied with 1099s at the end of the year, so that they can pick that income up on their tax returns and, again, there’s a transmittal form to the Internal Revenue Service and in many states the State Employment Development Departments.

Employment taxes are followed very closely by both the Federal and the State government. They’re looking for you to do the right thing for your employees and to help them report their incomes as well as you keep track of your deductions.