Small Business Tax Tips for First-Time Employers

By Taylor Sisk, Staples® Contributing Writer

Your business is off to a solid start. The hard work’s paid off. Now you’re thinking about expansion, and are considering hiring a staff. Bringing in help is an awfully big step. Make sure you’re well prepared.

“Small business owners should first ask themselves whether they need to hire an employee in the first place,” says Neil Keller, a partner in Naperville, IL–based professional services firm Sikich LLP’s tax practice. “Can they outsource the work instead?”

OK, so you’ve thought it through and determined that the best decision is, in fact, to bring someone new on board. You’ve made your hire. Now comes the paperwork. This includes W-2 and W-4 forms, an I-9 Employment Eligibility Verification form and related state forms. You’ll also need to file either quarterly or yearly taxes for having hired independent contractors.

Becky Hendriksen, marketing manager at Scottsdale, AZ–based Symmetry Software, specialists in payroll-withholding software, says that any conduct, health and benefits policies you offer should be completed and signed as part of the onboarding process.

“Many enrollment periods for benefit packages are within 30 days of the date of hire,” she says. “If you’re exempt from the Affordable Care Act, you should advise your employee of the online exchanges and individual mandate clause.”

Hendriksen also points out that you must provide information about your state’s new-hire Web site. This information is typically used to enforce child support withholding orders.

“It sounds overwhelming,” Keller says, “and it can be. That’s why small business owners should speak with an HR consultant or payroll specialist to ensure they’re on track with the right forms and filing deadlines.” Your accountant can also provide good counsel.

An Orderly Process

A common mistake small business owners often make is not taking advantage of the tax rules available to them. “I don’t expect any business owner to be a master of the nuances of tax law,” Keller says, “but they must have an experienced tax accountant acting as their trusted advisor.” (Learn how to choose a CPA.)

Knowing the rules and how they apply to a specific business, he says, can save you tax dollars that you can then invest back into your business: “I often see many small business owners failing to maintain accurate financial records. Business owners get so caught up in the day-to-day workings of their business that they don’t take the time to set up a reliable process for maintaining these records. In the long run, this lack of important information makes it difficult to plan for the long-term needs of the business and also makes it difficult to file a complete and accurate tax return.”

Proceed with Care

Elizabeth Potts Weinstein, a small-business lawyer and founder of EPW Small Business Law PC in San Francisco, says it’s important to confirm that your payroll tax payments are actually paid.

“The owner of a business is personally liable for payroll taxes being deposited with the IRS and the state, even if the business is incorporated,” she explains. “I have seen cases where accountants did not actually make those deposits, and the owner was left to pay it back years later. Business owners need to check that the money comes out of the company bank account and is actually deposited with the government.”

Be on Time

And perhaps most important of all: Pay those payroll taxes, and pay ’em on time. “The biggest and most costly mistakes that employers make are not filing on time and not paying on time,” says John O'Brien, an attorney and business owner in Chicago. “The latter is quite costly, and all too common.”

O'Brien says that many small business owners who are tight on cash will pay their employees and defer paying taxes until they can find the money to do so.

That’s a bad idea.

“This is quite dangerous,” he explains. “When you withhold money from employees’ wages, it’s not like other debts. This money is viewed as trust funds by the government — meaning that it’s considered to be the government’s money but in the employer’s possession until paid.” Late-payment penalties and interest can be steep, and the government can seize your business account.

So before you make that initial hire, be as certain as possible that you’re as prepared for their first day of work as you want them to be.

DISCLAIMER: This information is only provided for general informational purposes, and should not be considered as offering individualized tax advice. Tax laws are complex; please consult your tax advisor on specific issues related to your tax situation.  

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