Your Payroll Tax Responsibilities as an Employer

6a0133f3fc5805970b0147e3fff57c970b-320wiAt first it may seem like a simple idea.

You want to hire someone to help you in your family child care business for a few hours a week. You want your helper to fill in when you must conduct some personal errands or be away at the dentist. Or you want someone to help you during the summer months.

You know you must treat this person as your employee; not as an independent contractor. See my article, “Are Helpers Your Employees or Independent Contractors?”

But since you won’t be paying your helper much money, how hard can it be to fill out the proper paperwork?

Unfortunately – harder than you think.

Here’s a summary of the federal and state payroll tax rules:


You must obtain an Employer Identification Number (EIN).

You must fill out Form I-9 (Employment Eligibility Verification) to verify that your employee is eligible to work in the U.S. You don’t file this form with the IRS; instead keep it in your files.

You must have your employee fill out IRS Form W-4 (Employee’s Withholding Allowance Certificate) to determine how much you must withhold in federal income taxes from the employee’s pay. You don’t file this form with the IRS; instead use it with IRS Publication 15 (Circular E) Employer’s Tax Guide to look up how much to withhold.

You must withhold Social Security and Medicare taxes from your employee’s paycheck. As an employer you must withhold 7.65% out of the employee’s pay. In addition, you must contribute an another 7.65% of the employee’s pay out of your pocket. For example, if your employee earns $100 in a week, you must withhold $7.65 and pay in another $7.65 (total: $15.30). If you pay less than $4,000 in wages for the year, file the annual IRS Form 944 (Employer’s Annual Federal Tax Return). If you pay more than $4,000 file the quarterly IRS Form 941 (Employer’s Quarterly Federal Tax Return).

If you pay an employee $1,500 or more in any calendar quarter or had any employee work for you in 20 different weeks during the year, you must pay federal unemployment taxes (FUTA). The tax is 0.6% of your employee’s pay and comes out of your pocket. File the annual IRS Form 940 (Employer’s Annual Federal Unemployment Tax Return).

At the end of the year you must file IRS Form W-2 (Wage and Tax Statement) that summaries your Social Security and Medicare tax withholding for the year. Give a copy to your employee and send it to the IRS by January 31st.

At the end of the year you must also fill out IRS Form W-3 (Transmittal of Wage and Tax Statements) and send it to the Social Security Administration by March 1st.

If you hire more than one unrelated person, you must pay at least the federal minimum wage of $7.25 per hour (2015). See the Fair Labor Standards Act, Title 29: Labor, Part 552.105. If your state minimum wage is higher you must pay the state minimum wage. State law may require you to pay the state minimum wage even when hiring only one person.


Your state may require you to withhold state income taxes, and pay state unemployment taxes. State laws may also require you to purchase workers’ compensation insurance.

State payroll tax laws vary, so check with your state Department of Labor for details.

Ouch! Can all of this really be true?

Yes. These rules apply regardless of how little you pay your employee or how few hours she works for you. You may want to seek help with these forms: talk to a tax professional or a local bookkeeper service.

This is the fourth in a series of articles about hiring workers for your business.

See also:  “To Hire a Relative or Not?”“Are Helpers Your Employees or Independent Contractors?”“What is an Independent Contractor?”, and“When Hiring Your Husband Makes Sense.”

Tom Copeland –

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2015 Tax WorkbookFor details on how to fill out all federal payroll tax forms, see my annual Family Child Care Tax Workbook and Organizer. This book describes how to fill out each form, line-by-line.

Categories: Employees, Record Keeping & Taxes

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10 replies

  1. I am almost in tears. I have figured the payroll for our business for 35 years. Now, the IRS is requiring that I file the quarterly 941 form online. I filled it out, saved it as a PDF and cannot figure out how to get it to the IRS. I have read and clicked every article on the IRS website. I pay monthly using EFTPS. I feel so inadequate. Is there a SEND button I am missing?

  2. I’m so sorry for your frustration. I don’t know the answer. I recommend you call the IRS immediately at 800-829-1040.

  3. My accountant said that since we employ less than 25 employees, we can just mail ours in as usual.

  4. Yes, you can mail in your quarterly Form 941.

  5. Okay so this says have “more than one employee…so are you yourself an employee? Or are you the owner/CEO and you can hire one employee which would be one employee plus the owner (if you do not pay yourself a wage).

  6. If you hire one employee (you are not counted as an employee unless you have incorporated as an S or C Corporation) you do not have to pay federal minimum wage, but you may still have to pay a state minimum wage. All the other responsibilities (Social Security tax, unemployment taxes, etc. are still there even with one employee.

  7. If there was a breach in contract from an employee, they were paid for training promised they were staying with the company and quit without required 2 week notice.
    I feel I should not pay for their training, and subtract that from their last payck. Can I legally do this?

  8. If you have a written contract, then I think you can subtract the training fee from the last paycheck. Since each state has its own labor laws, you may want to contact your state department of labor to see if you can do this.

  9. So if I understand this if I pay an employee $10 an hour 40 hours a week then she would pay 122.40 in social security and I would pay the same . And I would pay 960 in FUTA and that doesn’t even include the state. Doesn’t seem right that I would pay almost as much in taxes as I would pay my employee.

    • $10 an hour x 40 hours = $400 x 7.65% employee share of Social Security/Medicare taxes = $30.60. You then pay $30.60 out of your own pocket and send in $61.20 to the IRS. FUTA is $400 x .6% = $2.40 for a total weekly amount of $433 ($400 + $30.60 + $2.40).

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