
Paying a wage to an employee seems like it should be pretty straight forward. For the most part it is however there are few things you, as a small business owner should be aware of.
First off, in order to pay an employee a wage you need to apply for an EIN with the IRS. Think of your EIN, Employer Identification Number, as your account number with the IRS. It is no different than having an account number with your phone company. You will also need accounts at the state level as well. For Montana, you will need a withholding account with the department of revenue, and an account number with the Department of Labor and Industry for Unemployment Insurance.
Employee Documents:
You have your accounts, you have an employee so now you are ready to run payroll. Wait? Did you have your employee fill out their employment documents? In order to run payroll for your employee correctly, you need to have them fill out a W-4. The W-4 establishes the amount of federal income tax that the employee desires to have withheld from their paycheck. This is accomplished by having the employee identify the number of dependants they have. And through magic (ok, tax tables) the correct amount of withholding tax is withheld. State income tax withholdings are based on the W-4 as well.
I see some eyes have glazed over, with talk of withholding taxes and state income tax! A quick lesson:
Wait everyone always complains about payroll being expensive to employers, but what you have shown is employee’s paying their own taxes through withholdings. As all good infomercials say, “but wait! There’s more!”
Payroll Taxes:
The following is a list of the typical payroll taxes and where the money comes from to pay it:
This list only includes Federal and State level taxes. Remember, there can be other withholdings, deductions, child support, health insurance payments, union dues and benefits (some are paid by the union member, some by the employer), and etc.
But Wait—There’s Still More:
Ok, so we are withholding money on the employee’s behalf, and then you say we have to pay these taxes also, so how does the money get to where it needs to go?
Typically, all new employers are on what is called a monthly depositor schedule. What this means is, you have until the 15th of a month to pay or “deposit” the taxes you owe “payroll liabilities” with the necessary taxing authority, for the prior month’s payroll activity. So you run payroll in May, you have until June 15th to make your deposits. Fail to do so, and you may incur penalties and interest.
Let’s simplify it even further!
Federal Income Tax withholding
Social Security Company
Social Security Employee
Medicare Company
Medicare Employee
The above items are all paid at the same time; the payment is called: a 941 Deposit. This payment is made to the United States Treasury.
There you have it. An overview of how to pay an employee and pay your payroll taxes, too! This can be a complicated subject which is why Robert at Mill Creek Accounting Services is here to help. Having the help of a professional accountant may allow you to focus on other areas of your business—and give you peace of mind in knowing your business finances are in good hands.
Contact Robert at: [email protected] Phone: 406-926-1057
Mill Creek Accounting Services, LLC was founded with the mission to provide a resource for accounting services to Missoula and its surrounding area organizations. Mill Creek Accounting Services have seen it over and over again, when institutions focus purely on their production and service needs, while they neglected their accounting systems. The results spoke for themselves: unreliable financial information, slow invoicing and payment collections, strained relationships, and crushing stress on owners and staff. There is a better way to do business!
Click here to learn more: www.millcreekaccounting.com. You can schedule a complimentary consultation for your small business in Missoula, MT.
First off, in order to pay an employee a wage you need to apply for an EIN with the IRS. Think of your EIN, Employer Identification Number, as your account number with the IRS. It is no different than having an account number with your phone company. You will also need accounts at the state level as well. For Montana, you will need a withholding account with the department of revenue, and an account number with the Department of Labor and Industry for Unemployment Insurance.
Employee Documents:
You have your accounts, you have an employee so now you are ready to run payroll. Wait? Did you have your employee fill out their employment documents? In order to run payroll for your employee correctly, you need to have them fill out a W-4. The W-4 establishes the amount of federal income tax that the employee desires to have withheld from their paycheck. This is accomplished by having the employee identify the number of dependants they have. And through magic (ok, tax tables) the correct amount of withholding tax is withheld. State income tax withholdings are based on the W-4 as well.
I see some eyes have glazed over, with talk of withholding taxes and state income tax! A quick lesson:
- Federal Income Tax Withholding = the employee’s money withheld from their paycheck to pay towards their income tax liability on the federal level.
- State Income Tax Withholding = the same as above, but at the state level.
Wait everyone always complains about payroll being expensive to employers, but what you have shown is employee’s paying their own taxes through withholdings. As all good infomercials say, “but wait! There’s more!”
Payroll Taxes:
The following is a list of the typical payroll taxes and where the money comes from to pay it:
- Federal Income Tax – paid by employee
- Social Security – paid by employee and employer
- Medicare – Paid by employee and employer
- Federal Unemployment Tax – Paid by employer
- State Income Tax – paid by employee
- State Unemployment – tax paid by employer
This list only includes Federal and State level taxes. Remember, there can be other withholdings, deductions, child support, health insurance payments, union dues and benefits (some are paid by the union member, some by the employer), and etc.
But Wait—There’s Still More:
Ok, so we are withholding money on the employee’s behalf, and then you say we have to pay these taxes also, so how does the money get to where it needs to go?
Typically, all new employers are on what is called a monthly depositor schedule. What this means is, you have until the 15th of a month to pay or “deposit” the taxes you owe “payroll liabilities” with the necessary taxing authority, for the prior month’s payroll activity. So you run payroll in May, you have until June 15th to make your deposits. Fail to do so, and you may incur penalties and interest.
Let’s simplify it even further!
Federal Income Tax withholding
Social Security Company
Social Security Employee
Medicare Company
Medicare Employee
The above items are all paid at the same time; the payment is called: a 941 Deposit. This payment is made to the United States Treasury.
There you have it. An overview of how to pay an employee and pay your payroll taxes, too! This can be a complicated subject which is why Robert at Mill Creek Accounting Services is here to help. Having the help of a professional accountant may allow you to focus on other areas of your business—and give you peace of mind in knowing your business finances are in good hands.
Contact Robert at: [email protected] Phone: 406-926-1057
Mill Creek Accounting Services, LLC was founded with the mission to provide a resource for accounting services to Missoula and its surrounding area organizations. Mill Creek Accounting Services have seen it over and over again, when institutions focus purely on their production and service needs, while they neglected their accounting systems. The results spoke for themselves: unreliable financial information, slow invoicing and payment collections, strained relationships, and crushing stress on owners and staff. There is a better way to do business!
Click here to learn more: www.millcreekaccounting.com. You can schedule a complimentary consultation for your small business in Missoula, MT.