Employer Tax Guide with Common Forms for Reference - Z-Tax & Accounting, A Complete guide by Z-Tax & Accounting

Form W-7  (Application for Individual Taxpayer Identification Number)

An ITIN is a 9-digit number issued by the U.S. Internal Revenue Service (IRS) to individuals who are required for U.S. federal tax purposes to have a U.S. taxpayer identification number but who do not have and are not eligible to get a Social Security number (SSN). A form W-7 is used to apply for and obtain an EIN number.

Form W-4 (Employee's Withholding Certificate)

Form W-4, Employee's Withholding Certificate, is completed by employees and given to their employer so their employer can withhold the correct federal income tax from the employee's pay. 

Form W9 (Request for Taxpayer Identification Number)

Form W-9 is used by U.S. persons to provide correct taxpayer identification number (TIN) to payers (or brokers) who are required to file information returns with IRS. 

Social Security and Medicare Withholding Rates:

Medicare 1.45% for Employer and 1.45% for Employee or 2.9% total Medicare Tax is submitted based upon the required schedule. Social Security is 6.2% for the employer and 6.2% for the employee or 12.4% total is submitted based upon the required schedule. These two Taxes combined are known as FICA with a total of 15.3% of wages including employee and employer portion.

Employers are required to withhold Additional 0.9% Medicare Tax on wages in excess of 200,000.00 from the employee. There's no employer match on Additional Medicare Tax. There is no base base limit for Medicare tax.

Only the Social Security tax has a wage base limit and the limit is adjusted annually. Base rate for 2024 was $168,600.00. 

W2 Form, Wage and Tax Statement - Form W-3

W-2 is Filed with SSA annually for every employee showing the wages paid and taxes withheld for the year. Form W-3 is filed to transmit copy A of form W-2. The totals for amounts reported on related employment tax forms (Form 941, Form 943, Form 944, or Schedule H (Form 1040) for the year should agree with the amounts reported on Form W3. 

Form W-2 and W-3 must be filed by January 31st. Special due dates apply if business is terminated. W-2 must be furnished to the employee by January 31st. Employers filing ten or more information returns including W2's must file electronically. 

If an error is discovered on an Employee's Form W-2 after sending it to the SSA, a Form W-2c, Corrected Wage and Tax Statement is submitted to make the correction. a Form W-3c, Transmittal of corrected Wage and Tax Statement is submitted along the W-2c.

Lock-in Letters

An Employee receives this letter because the IRS has determined that they're not entitled to claim exempt status or more than a specified number of withholding allowances. Generally, the employer bases the amount of withholding for federal income tax on your Form W-4, Employee's Withholding Certificate PDF. However, the IRS can review whether an employee is entitled to claim exempt status or a certain number of withholding allowances. The Employee must fill out a new W-4 and submit it to their Employer. If the Employee does not agree, they can send back up information to the IRS to reconsider. If the Employee disregards the Lock-in letter, the Employer is advised to withhold Tax as Single person from the Employee's paycheck. 

Employer Identification Number (EIN)

An EIN is a federal tax ID number for businesses, tax-exempt organizations and other entities. You need an EIN if you:

• Have employees

• Will need to pay employment, excise or alcohol, tobacco, and firearms taxes

• Withhold taxes on income, other than wages, paid to a non-resident alien

If you don’t need an EIN for federal tax purposes, you can still request one for banking or state tax purposes. EINs are not intended for other activities, such as state tax lien auctions, sales or lotteries.

You also need an EIN to operate any of these entities:

• Partnership

• Limited liability company (LLC)

• Corporation

• Tax-exempt organization

• Estate

• Trust PDF (except certain grantor-owned revocable trusts)

• Retirement plan or individual retirement account (IRA)

• Real estate mortgage investment conduit

• Farmers' cooperative

Find more in Understanding Your EIN, Publication 1635 PDF.

Household Employees

You have a household employee if you hired someone to do household work and that worker is your employee. The worker is your employee if you can control not only what work is done but how it is done. If the worker is your employee, then it does not matter whether the work is full time or part time nor that you hired the worker through an agency or from a list provided by an agency or an association. It also does not matter whether you pay the worker on an hourly, daily, weekly or by the job. There are special rules for withholdings are reporting for Household Employees.

Schedule H is used to report household employment taxes if an Employer paid cash wages to a household employee and the wages were subject to social security, Medicare, or FUTA taxes, or if an Employer withheld federal income tax. 

Federal Unemployment Tax Act (FUTA) & FUTA tax credit (Form 940) 

Form 940 is used to report your annual Federal Unemployment Tax Act (FUTA) tax. Together with state unemployment tax systems, the FUTA tax provides funds for paying unemployment compensation to workers who have lost their jobs.

Most employers pay both a federal and a state unemployment tax. Only employers pay FUTA tax. Employers Do not collect or deduct FUTA tax from your employees' wages.

Form 941 and Form 944 (Semiweekly, Monthly & Quarterly Deposit)

Employers use Form 941 to:

• Report income taxes, Social Security tax, or Medicare tax withheld from employee's paychecks.

• Pay the employer's portion of Social Security or Medicare tax.

Form 944 is designed so the smallest employers (those whose annual liability for social security, Medicare, and withheld federal income taxes is $1,000 or less) will file and pay these taxes only once a year instead of every quarter. 

Form 943

File this form if you paid wages to one or more farmworkers and the wages were subject to Social Security and Medicare taxes or federal income tax withholding. 

New Employer Deposit Rule

If you're a new employer, your taxes in the lookback period are considered to be zero for any quarter before you started or acquired your business. Therefore, in the first year of business, you're a monthly schedule depositor unless the $100,000 next-day deposit rule applies. 

Employers of H-2A Visa Workers

Foreign agricultural workers temporarily admitted into the United States on H-2A visas are exempt from U.S. Social Security and Medicare taxes on compensation paid to them for services performed in connection with the H-2A visa. This is true whether they are resident aliens or nonresident aliens. In addition, compensation paid to H-2A agricultural workers for services performed in connection with the H-2A visa is not subject to mandatory withholding of U.S. federal income tax unless backup withholding applies. 

TIPS, Recordkeeping and Reporting, Withholding taxes from tip wages

Employees who receive cash tips of $20 or more in a calendar month while working for you, are required to report to you the total amount of tips they receive. The employees must give you written reports by the tenth day of the following month. Employees who receive tips of less than $20 in a calendar month aren't required to report their tips to you but must report these amounts as income on their tax returns and pay taxes, if any.

Cash tips include tips received directly from customers, tips from other employees under any tip-sharing arrangement, and charged tips (for example, credit and debit card charges) that you distribute to the employee. Both directly and indirectly tipped employees must report tips received to their employer.

Employees can find information in Publication 531, Reporting Tip Income under “How to keep a daily tip record.” You may also provide other means for your employees to report tips to you, for example, a system for electronic tip reporting by employees. 

When you receive the tip report from your employee, use it to figure the amount of Social Security, Medicare and income taxes to withhold for the pay period on both wages and reported tips. You're responsible for paying the employer's portion of the Social Security and Medicare taxes. 

Non Tip Wages

Service charges added to a bill or fixed by the employer that the customer must pay, when paid to an employee, won't constitute a tip but rather constitute non-tip wages. These non-tip wages are subject to Social Security tax, Medicare tax and federal income tax withholding. In addition, the employer can't use these non-tip wages when computing the credit available to employers under section 45B of the Internal Revenue Code, because these amounts aren't tips. Common examples of service charges (sometimes called auto-gratuities) in service industries are:

• Large party charge (restaurant),

• Bottle service charge (restaurant and night-club),

• Room service charge (hotel and resort),

• Contracted luggage assistance charge (hotel and resort), and

• Mandated delivery charge (pizza or other retail deliveries).

Allocated Tips

If you operate a large food or beverage establishment, you must file Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips for each calendar year and may be required to allocate tips to your employees. You operate a large food or beverage establishment if tipping is customary, you provide food or beverages for consumption on the premises, and you normally employ more than ten people who collectively work more than an average of 80 hours on a typical business day. If you have more than one large food or beverage establishment, you must file a separate Form 8027 for each establishment. Form 8027 is due on the last day of February of the next year (March 31 if filing electronically). If you meet the criteria for filing Form 8027 but don't file, the law provides for penalties for each failure to timely file a correct information return, including failure to file electronically, if required. 

Form 8027

Employers use Form 8027 to:

• Annually report to the IRS receipts and tips from their large food or beverage establishments.

• Determine allocated tips for tipped employees.

Independent Contractor vs employee

An independent contractor is a worker who often owns their own business and usually enters into contracts with employers to perform a specific project, typically on a short-term basis. In contrast, employees agree to work on a regular basis for a single employer. In some situations, the line between an independent contractor and employee is pretty clear. For instance, if you contract with an IT professional to set up your business’s new computer network, this person would probably be an independent contractor. In other situations, the line can be fuzzy. Say you are bringing on a temporary worker to help cover a big project that your business has been working on for a few months. This person could be considered an employee, but the classification of employee versus contractor would depend on several factors. However there are mainly three tests: 

(1) Behavioral control: Employees typically work specific hours as directed by their employer, and at a location that is determined by the employer. They use the company’s tools and resources to perform their job. The work must be performed by a particular person; employees don’t generally have the authority to hire someone to assist them. Also, if a company’s evaluation system measures the details of how work is performed, it suggests an employer-employee relationship. 

(2) Financial Control: Employees are paid an hourly or salary wage set by the employer. Taxes withheld from their payments and paydays are set up on regular intervals—generally biweekly or monthly. Employees do not invoice their employers. 

Unlike employees, contractors have invested in their own business, for example by paying their own expenses. Because of this, they have a financial stake in its success. Additionally, contractors’ payment terms can vary. Unlike salaried employees, contractors usually invoice for time and/or deliverables.

(3) Relationship: Employees can expect to perform work that is essential to the business and for the relationship to continue indefinitely. If you own a restaurant, your cooks are likely part-time or full-time employees. After all, you need people who will prepare the food in order to be open for business!

Contractors perform short term, specialized functions. For instance, you might hire a grant writer to help your non-profit to apply for a specific grant opportunity, or an interior designer to decorate your office space. 

Independent Contractors are issued 1099 whereas an employee is issued a W-2 to report earnings to the Internal Revenue Service.