One of the most complicated elements to running your own business is having employees.  It is difficult to know what agency gets how much and when it needs to be in their hands.  If you have employees or are considering hiring here are some answers to the most frequently asked questions. 

What is Withholding? Withholding is the portion of taxes held back from the employee.  That includes Federal withholding, State withholding, Social Security and Medicare.  As the employer you are responsible for holding out these sums and handing it over to the IRS and state (if your state collections income tax) each quarter.  Depending upon how many employees you have it may be in your best interest to deposit the money with the IRS and Dept of Revenue on a monthly basis. 

How much do I withhold from each employee? The income tax withheld from each employee for the IRS and the state are dependent upon how many exemptions your employee claims as well as how often you pay your employees.  The IRS and state generates a tax table each year to make this process a bit easier.  Social Security and Medicare are 7.65% of the gross amount paid to the employee.

I have heard the company is responsible for a portion of FICA.  What is it and how much is it? In lay terms FICA is Medicare and Social Security.  The company paid portion of Social Security and Medicare is a direct payroll expense for the company.  It is 7.65% of the employee's gross pay.

Do I have to pay for unemployment insurance (UI)? The short answer is yes.  The long answer is a bit confusing. The State rate is based upon experience and is given to you by the State when you notify the UI division of your intent to have employees.  It is paid quarterly.  This rate (a percent) is paid on the first $7000 each employee is paid each year.  Federal UI is paid annually in January for the prior year at a rate of 6.2% of the first $7000 made by each employee minus the amount paid to the state up to 5.4% of the employee's wages.  Unemployment can't be withheld from your employee's pay.  It is a direct payroll expense to the company. 

What happens if I don't notify the state UI division? In the best case, you will have to pay the full rate at the federal level.  Worst case, you will have to pay the state UI plus penalties and interest.  In all but three states, the IRS and state agencies have reciprocal agreements.  That means what the IRS knows the state will soon hear about and visa versa.

Am I responsible for worker's compensation? Ultimately, yes.  However, you have three options. (1) You can be self-insured.  That means you will pay for on-the-job injuries out of your own (company's) pocket.  You need to apply for this status with the State.  (2) You can have private insurance from an insurance agency.  (3) You can participate in the state worker's comp program.  The insurance rates are based on the industry in which your company is engaged and how your employees are classified.  Office workers have a lower rate than construction workers.  The rates vary from 1.5% to 8% and more.  Again, this is a direct expense for the company.  Worker's Compensation is paid to the Department of Labor and Industries.

What else do I need to pay? Research your states codes and rules carefully.  Each has its own quirks.  For example, if you are an employer in the state of California you are responsible for short-term disability insurance (SDI).  This is .9% on the first $46,327 each employee makes during the year. 

Do these rates change? Yes, each agency will send out new publications and documents when changes occur.  Be careful and read the fine print to make sure you are in compliance.

Quick Tip
Before hiring a new employee or using a subcontractor check references AND each past employer listed on his/her resume. You may be surprised to know that as much as 30 percent of all resumes contain false or exaggerated information.

If you have questions or need clarification on anything, please feel free to call (406-216-2224) or email us (suzette@flemmingbusinessservices.com).