Step Seven Assess Employment Needs And Prepare To Pay Taxes
10 Steps to Starting A Business
If your business will hire employees you need to comply with the tax laws and the labor laws. Taxes first, you may need to file an Application for an Employer Identification Number (EIN), Form SS-4, which is available free at www.irs.gov. All corporations, limited liability companies (LLCs), and partnerships must apply for EINs, as well as sole proprietors who will hire employees. You must also register with the state.
Employers are required to report all employee wages to EDD each calendar quarter. With the exception of some employers of household workers, periodic deposits of State Disability Insurance (SDI) and Personal Income Tax (PIT) withholdings are required. The frequency of the employer’s deposit schedule is determined by the employer’s federal deposit schedule and the amount of PIT withheld. An annual reconciliation of state income tax withholding is also required.
New employers in California pay 3.4% of the first $7,000 in wages per employee for Unemployment Insurance (UI) tax and 0.1% (also of the first $7,000 in wages) for Employment Training Tax (ETT). While the UI rate for new employers doesn’t change for the first three tax years, the ETT rate may be 0% (zero) for a new employer after his first year if his reserve account has a negative balance. See DE 231Z, Information Sheet: California System of Experience Rating for information on how UI rates are determined. The SDI rate may change each year.
Registration forms can be ordered on EDD’s Internet Order Form, picked up/mailed/faxed from your nearest Employment Tax Office, or downloaded from EDD’s Website. After registering, the necessary forms and publications, including California Employer’s Guide (DE 44) with the PIT withholding tables, will be sent to you.
In addition to withholding and depositing federal income tax, social security, and Medicare taxes from an employee’s wages, employers are responsible for withholding and paying a matching amount for social security and Medicare taxes. For more information on this, see Section 9, Withholding From Employee’s Wages, of IRS Publication 15, Employer’s Tax Guide.
Publication 15 (Circular E), Employer’s Tax Guide, explains your federal tax responsibilities as an employer. It explains the requirements for withholding, depositing, reporting, and paying federal employment taxes. It explains the federal forms you must give your employees, those your employees must give you, and those you must send to the IRS and SSA. This guide also has tax tables you need to figure the taxes to withhold for each employee for 2001.
Additional employment tax information is available in Publication 15-A, Employer’s Supplemental Tax Guide. Publication 15-A includes specialized information supplementing the basic employment tax information provided in this publication.
Most employers must withhold (except FUTA), deposit, report, and pay the following employment taxes: Income tax, Social security and Medicare taxes, and Federal unemployment tax (FUTA).