What government accounts do I need for employees? (Employee Series)
Welcome back to our series on hiring employees!
This article is going to focus on what you need to set up with the government in order to hire employees. Once you set up and open these accounts for your company, you’ll need to continue filing regularly until you take the steps to “close” the account if you no longer have employees. It’s not really a hard close of the accounts, but they go into an inactive status in case you hire employees again in the future.
The IRS, Federal government
All employers in the US are going to need to have an account with the IRS. The main thing you need to have here is what’s call an “Employer Identification Number.” This is frequently referenced as EIN. This is the identification number for your company (the “employer”).
Depending on how you’ve set up your company, you may or may not have this number already. If you have filed a Partnership, Corporation or Nonprofit tax return, then you will already have an EIN since it’s required for you to file. If you’re filing as a sole proprietor, Sch C, on your individual tax return, then you may not have this number already. You can apply on the IRS website and usually obtain your EIN immediately after submitting the application. There is no fee for this.
Once you have an EIN, we do recommend clients set up an electronic payment account with the federal government to ensure you have a method to make federal tax payments in case something doesn’t work with your payroll software. The setup can take up to 2 weeks, so we recommend this be set up in advance for if you need it. You can enroll with the Electronic Federal Tax Payment System (EFTPS) as soon as you have your EIN. You’ll receive a letter in the mail with codes that you’ll need to use to log in and finish the enrollment, so once you’ve enrolled, keep an eye out for this documentation and remember to complete it. The codes will expire after a certain point.
The IRS taxes are going to be the federal withholding on the employee’s wages, social security and medicare from the company and the employee, and federal unemployment tax.
That’s all you need to do with the IRS in order to start payroll!
State Department of Revenue
Depending on where you and your employees work and live, you may need to register with multiple state departments in order to withhold and remit proper income tax withholding. You’ll also need to know if those states have income tax requirements. These states don’t have income taxes on wages, so there’s no withholding requirement:
Alaska
Florida
New Hampshire
Nevada
South Dakota
Tennessee
Texas
Washington
Wyoming
For all other states, you’ll need to register your company with the department of revenue and set up a withholding account. Depending on the state, you may also need to register for other tax accounts. For example, if you’re registering for a withholding account in Minnesota, you’ll also be required to set up a Sales & Use Tax account that will need to be filed annually.
If your employee lives in a different state than your company but works in your state, then you need to find out if your state and their state have a “reciprocity agreement.” This agreement basically means that the “worked in” state doesn’t get the funds for the work, the “lived in” state does.
This is what you need to know:
No reciprocity = you withhold state taxes based on the state worked in
Reciprocity = you withhold state taxes based on the state lived in
This will determine if you need to apply to more than one state for income tax withholding.
If your employee lives and works in a different state than your company, then you’ll need to apply for their state department.
If you don’t have any employees living/working in your home state, then you don’t need to register in your home state.
State Unemployment Division
State unemployment is a tax that generally employers pay (although in some states, the employees pay as well) into the state. These funds are then used when individuals are eligible to receive unemployment benefits. It’s usually called a tax, but it functions a bit like insurance so you may have heard it called that as well. It’s administered through the state departments, though, so we usually call it a tax.
Unemployment is generally going to be paid to the state where the employee works if they are usually working in one state. If they work in multiple states, there are additional tests to perform to know where to submit the unemployment tax.
All states have unemployment tax, so this is likely going to be one you will need to register for. States do have different definitions of wages, and exemptions, so be sure to research those before you apply.
For example, in MN corporation owners who own 25% or more of a company (directly or indirectly) are not subject to MN unemployment and their wages are exempt. If your company is a corporation and it’s only the 25%+ owners being paid wages, you don’t need to register for MN unemployment.
Local Jurisdictions & Miscellaneous
There are roughly 15 states that also have some variation of a local income tax withholding on wages. These can be called a variation of things from simply “Income Tax” or “Wage Tax” to “Occupational Privilege Tax” (literally for the privilege of having an occupation).
These can also be school district taxes. Sometimes it’s one or the other, and sometimes it’s both. If you’re hiring an employee in any of those states, be sure to diligently do your research. This is the best website we have found to get started: Tax Foundation (2023).
Sometimes your payroll software will withhold and remit these for you, other times it will not. It’s an important thing to note when choosing a software. The software may also alert you to taxes that you may need to withhold.
In addition to these local taxes, the state or locality may have additional items to be withheld from the employee or a tax incurred by your company. These can be things like state disability insurance, family leave insurance, and others that are too specific to add individually. For the majority of these you will be notified by the state when you register for withholding or unemployment, or your payroll software will notify you of the additional withholding or tax. But it’s still important to do your own research.
New Hire Reporting & Employment Eligibililty Verification
The last things that we’ll mention are the New Hire Reporting requirements and Employment Eligibility Verification (Form I-9) process.
The New Hire reporting requirement is often a different state agency that you may need to register with. New Hire reporting ensures that if an individual is hired, the state is notified so they can cross-reference if there are any garnishments necessary on their wages. This can be things like child support, or unpaid income taxes or fines, or other items. You’re required to report all new hires generally within a few days of hire.
Some payroll softwares will automatically send in the New Hire reports for you when you enter them into the system, so that’s another thing to look for in your payroll system.
The Employment Eligibility Verification process, that uses Form I-9 is to ensure that the employee is eligible to work in the United States. The employee must fill out the I-9 Form and provide it to your company with one or two forms of identification. Your company must then verify this information in person and sign off on the form. This form is just kept in your records.
Now with hiring remote employees, the US Citizen and Immigration Services has created a portal called E-Verify to complete the process online, where you don’t physically handle the forms of identification. There is an application and training your company must go through before being able to use E-Verify to complete the I-9 remotely.
We wish the world of hiring an employee and processing payroll were easy, but it’s definitely not! We hope these guides will help to make it easier for you to navigate these new waters of being not only a small business owner, but also an employer.
No assurance is given that the information provided in this blog is comprehensive in its coverage or that it’s suitable in dealing with each individual’s particular situation. This blog article exists to provide general information only and does not constitute tax or legal advice, and cannot be used or substituted for tax or legal advice. Savvy Bird Consulting, LLC is not responsible for the implementation or outcomes this material may have.