Employee Checklist

As a business grows, eventually the need arises to hire and pay employees. Unincorporated sole proprietors may be able get by without employees by filing quarterly estimated taxes and paying the self employment tax at the end of the year with their form 1040. With an incorporated business entity, or when hiring other workers besides the owner, there are specific requirements for tax withholding and information reporting that must be filed.

Employees or Independent Contractors

You may be tempted to classify the people that work for you as independent contractors. Unlike employees, you are not responsible for withholding taxes, making Social Security contributions, or paying unemployment tax for independent contractors.

However, the IRS has a very strict 20-point test that must be satisfied before an individual can be considered an independent contractor rather than an employee. For example, an independent contractor typically owns his or her own tools, and sets his or her own working hours.

If you classify a worker as an independent contractor, and the IRS later determines that the person should have been an employee, the officers of the company can be personally liable for the taxes that should have been withheld, along with penalties and interest.

The best advice is to consult with a certified public accountant or financial planner that is familiar with the law, and current standards being used by the IRS to classify workers. He or she will be able to provide the best, informed advice.

Hiring Your First Employee

Before you hire your first employee — even if that employee is yourself, which it is likely to be if you own your own corporation — there are several things you may need to do to prepare. Here is a brief checklist:

Obtain a Federal Tax ID Number

You probably obtained a Federal Tax ID as part of setting up your company. (See our Small Business Getting Started Checklist for more information). You will use this ID number for reporting federal income tax and Social Security Withholding, and for paying the Federal Unemployment Tax.

Obtain a Georgia Unemployment Tax ID Number

The Georgia Department of Labor is responsible for administering the state’s unemployment tax system. New employers typically pay 2.7 percent of each employee’s gross wages, up to a limit of $8,500 per employee. The rate collected may vary based on a company’s unemployment claim history.

Prior to hiring employees, employers should file DOL form 1-A, which sets up an account with the Department of Labor. The department also publishes an employer handbook that provides useful information on the process. You can get both from the Georgia Department of Labor Forms and Publications page.

Arrange for Worker’s Compensation Insurance

If your company will have three or more employees (including officers), you are required to obtain Worker’s Compensation insurance. You may also be required to provide Worker’s Comp for independent contractors. This insurance is provided by traditional insurance companies, and is overseen by the Georgia State Board of Workers Compensation. Consult with your accountant, financial advisor, or insurance agent to determine who must be covered under this program.

Make Sure You Follow the Law when Hiring Employees

Prior to hiring an employee, there are specific forms that must be completed, and then kept on file. IRS Form W-4 must be completed by the employee, and indicates the number of dependents the employee claims for federal income tax purposes. The employee should also complete the matching Georgia Form G-4 to determine state tax allowances.

The employer is responsible for completing Federal Form I-9 from the Immigration and Naturalization Service. This form confirms that the employer has examined documents provided by the employee to confirm identity and eligibility to work. Georgia also has a New Hire Reporting Program that requires employers to provide information on all new or re-hired employees within ten days of employment.

Georgia New Hire Reporting Program

Georgia has a program call the Georgia New Hire Reporting Program.  The Georgia law was passed to aid the state in ensuring two predominant issues:

• To assist in locating fathers who were either late or not paying their required child support
• To preclude and prevent employees from claiming unemployment who should not be

The law is a fairly straightforward one that requires Georgia employers to register with the state.  Employees are then also required to register all new hires so that the state may be consistently updated on all of the new employees in Georgia.  Other departments of the state government may then use this information as needed to assist in the effective enforcement of Georgia law.

Summary

The reporting and withholding requirements for employers can be daunting. Withholdings and taxes must be deposited with the Federal and state governments within specific time limits, and reporting forms must be filed by specific dates. Failure to accurately and completely submit this information can result in substantial penalties.

HIS CPA, Inc. has helped many companies in metro Atlanta, Gwinnett County, and Georgia prepare for hiring employees, and with filing returns properly. If you have any questions about what you see on this page, feel free to contact us for more information.