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Quick Tax and Payroll References

Quickbooks – A small business accounting system for Windows and the Macintosh from Intuit, Inc. It works like Intuit’s popular Quicken program but is designed to track a whole business. Services include payroll, invoice creation, inventory tracking and credit card processing.

Federal/national, state/provincial, and/or local agencies require employers to perform various payroll functions, such as withholding amounts from employees’ compensation to cover income tax, Social Security, and Medicare.

Payroll Taxes– Payroll taxes are levied by government agencies on employees’ wages, tips, and other compensation. The amounts withheld by employers from employees’ pay for federal income, social security, and Medicare taxes are considered to be trust-fund taxes, because the money is held in a special trust fund for the U.S. government.

Amounts withheld for state and local income taxes are held in trust for the state and local governments.

Payroll Services– Many businesses outsource their payroll functions to a Payroll Service. These can normally reduce the costs involved in having payroll trained employees in-house as well as the costs of systems and software needed to process payroll. Another reason many businesses outsource is because of the ever increasing complexity of payroll legislation. Annual changes in tax codes, PAYE and National Insurance bands as well as more and more statutory payments and deductions having to go through the payroll often mean there is a lot to keep track of in order to maintain compliance with the current legislation.

Hiring Employees – An employer must have all new hires fill out Form I-9 and Form W-4. If employees qualify for and want to receive Advanced Earned Income Credit payments, then they also must complete Form W-5 (See Forms).

Form I-9 – An employer is required to verify that each new employee is legally eligible to work in the United States. Both the employer and the employee must complete the US Citizenship and Immigration Services (USCIS) Form I-9. Employers must maintain completed Form I-9 in their own records for three years after the date of hire or one year after the date employment ends, whichever is later.

Form W-4 – Each employee must fill out Employee’s Withholding Allowance Certificate Form W-4. The employer will use the filing status and withholding allowances shown on this form to figure the amount of income tax to withhold.

An employer must submit a copy of any currently effective withholding exemption certificate for an employee if directed to do so in a written notice from the IRS or under any guidance published by the IRS. Reg. Sec.31.3402(f)(2)-1T.

Form W-5 – An eligible employee who has a qualifying child is entitled to receive advance earned income credit (EIC) payments with his pay during the year. To get these payments, the employee must give the employer a properly completed, Earned Income Credit Advance Payment Certificate Form W-5. An employer is required to make advance EIC payments to employees who submit a completed and signed Form W-5.

Form W-11 – To receive a HIRE tax credit employer needs to obtain completed and signed (under perjury) Form W-11 or a similar statement from a “qualified employee.”

For more information and form, please refer to www.irs.gov.

Common Law Employees – An employer is required to withhold state and federal income taxes, social security and medicare tax (FICA), and state disability tax (SDI). Income tax must be withheld from wages paid to common law employees. An employer will also be required to match and pay the employer’s portion of social security and medicare tax as well as federal and state unemployment tax, such as FUTA, SUI, and ETT

The term “common law employee” also includes an officer, employee, or an elected official.

Statutory Employees – There are four categories of individuals known as statutory employees, who for FICA purposes are treated as employees if they meet certain criteria.

  • Certain agent-drivers or commission-drivers
  • Full – time life insurance salespeople
  • Home workers, and
  • Traveling or city salespeople

Statutory non-employees – There is no provision for withholding of payroll taxes from wages paid to statutory non-employees. Such employees are treated as self-employed and no taxes are withheld on payments made to them. They normally include qualified real estate agents and direct sellers and persons engaged in trade or business of delivering or distributing newspaper or shopping news.

How Long to Keep Records – A business must keep its records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, this means the records that support an item of income or deduction on a return must be kept until the statute of limitations for that return expires.

Employment taxes: A business with employees must keep all employment tax records for at least four years after the date the tax becomes due or is paid, whichever is later.

The business should keep the following records:

1. Amounts and dates of all wage, annuity, and pension payments

2. Amounts of tips reported by the its employees

3. Records of allocated tips

4. The fair market value of in-kind wages paid

5. Names, addresses, social security numbers, and occupations of employees and recipients

6. Any employee copies of Form W-2 and W-2c that were returned as undeliverable

7. Dates of employment for each employee

8. Period for which employees and recipients were paid while absent due to sickness or injury and the amount and weekly rate of payments the employer or third-party payers made to them

9. Copies of employees’ and recipients’ income tax withholdings allowance certificates (Form W-4, I-9, etc.)

10. Dates and amounts of tax deposits that you made and acknowledgement numbers for deposits made electronically by EFTPS

11. Copies of payroll tax returns filed, and

12. Records of fringe benefits and expense reimbursements provided to employees including substantiations.