The number of issues and tax implications to consider when hiring an employee. Below is a checklist that can assist an employer in following the necessary steps needed when hiring employees.
1. Determine if The Hired Person is an Employee or Independent Contractor
In general, a worker is considered an employee if the employer has the legal right to control the manner and means of performing the work. Some factors considered when deciding if a worker is an employee are behavioral control, financial control, and relationship of the parties, if the employer is generally in control of these factors, then the worker is most likely an employee
2. Procure a Federal Employer Identification Number
A federal employer identification number is the corporate equivalent to a Social Security number and is issued to anyone who must pay withholding taxes on employees. This can be obtained from the IRS.
3. Procure a Minnesota Taxpayer Identification Number
A Minnesota taxpayer identification number must be obtained before a business can begin to withhold state taxes. If the business failed to register for a tax ID number prior to withholding Minnesota taxes, it may be subject to a $100 penalty. Minnesota taxpayer identification number can be obtained from the Minnesota Department of Revenue. For new businesses visit, www.revenue.state.mn.us and a Minnesota tax ID can be available immediately.
4. Obtain Workers’ Compensation Insurance
Workers’ compensation insurance is required for all employers if they have employees unless an exception applies. Employers contact a commercial business insurance agent or insurer to obtain a workers’ compensation insurance policy to cover employees.
5. Procure Minnesota Unemployment Insurance Employer Account Number
Unemployment insurance tax provides benefits to workers who become unemployed through no fault of their own. An unemployment insurance employer account number can be obtained online at www.uimn.org.
6. Ensure Compliance with Immigration Law
Employers must complete form I-9 to document verification of the identity and employment authorization of each new employee (both citizen and noncitizen) hired after November 6, 1986 to work in the United States. Employers are responsible for completing and retaining form I-9 and the employer must retain form I-9 for three years following the date of hire or one year after the individual’s employment is terminated, whichever is later.
7. Obtain Employee Withholding Information (Forms W-4, W-4MN)
Employers must obtain and complete copies of completed federal forms W-4 or state form W-4MN. These forms verified that the employer is withholding federal and state income taxes in case the IRS requires confirmation. An employer must send copies of form W-4MN to the Minnesota Department of Revenue if:
- An employee claims more than 10 Minnesota withholding allowances, or
- Claims to be exempt from Minnesota withholding and the employer reasonably expects the employee’s wages to exceed $200 per week, or
- The employee claims fewer Minnesota allowances than federal allowances, or
- The employee requests additional Minnesota income tax withholding to be deducted each pay period.
W-4 and W-4MN forms remain valid until and unless the employee fills out new ones.
8. Account for Employer’s Share of Payroll Taxes
Payroll taxes include the employer’s share of Social Security and Medicare tax, federal unemployment tax and Minnesota unemployment tax. These taxes must be deposited and paid to the IRS and the Minnesota Department of Employment and Economic Development.
9. Deposit Federal Unemployment Tax
Deposits of federal unemployment tax are made to the U. S. Department of Treasury using the Electronic Federal Tax Payment System. Usually federal income tax and FICA must be deposited monthly or semiweekly, on the other hand federal unemployment tax deposits are made quarterly unless the amount of the unemployment tax is $500 or less.
10. Deposit Withheld Minnesota Income Tax
Minnesota tax deposits can be made either electronically, by touchtone phone, or by mailing in form MW–5.
11. File Federal Quarterly Withholding Return or File Employment Taxes Annually
IRS Form 941 can be used for an employer’s quarterly federal tax return however if an employer’s estimated employment tax liability is $1000 or less for the taxable year than they’re eligible to file an annual Form 944.
12. File Minnesota Quarterly Withholding Return
Accordingly, the return must be filed by the employer even if the employer paid no wages subject to withholding, did not withhold tax, or had no employees during the quarter. These returns must be filed electronically with the Minnesota Department of Revenue.
13. File Minnesota Unemployment Insurance Wage Detail
Minnesota Department of Employment and Economic Development require all wage detail reports to be filed electronically on a quarterly basis.
14. File Federal Unemployment Tax Return
The IRS form 940, which is the employer’s annual Federal unemployment tax return, must be filed annually by January 31st of each year.
15. Provide Form W-2 to Employees
At the end of the year the employer must complete a form W-2 to report wages tips and compensation paid to an employee. A copy of this form must be given to the employee by January 31. A copy must be sent to the Social Security Administration by February 28 of each year. Up to 20 W-2s may be filed at one time on the Social Security administration’s website.