Hiring Employees – Fun with Taxes!
Did you see yesterday’s news on the blog, Twitter, Facebook, and Instagram? Team VBC is growing! We started laying the groundwork for this expansion about a month ago when we began researching the rules and regulations related to running a business that has actual employees. The Virginia Beer Company is registered as a limited liability corporation. As a result, Robby and I (as co-founders) are not counted as employees of the business; we are considered member-managers of the LLC and are subject to different laws and tax regulations than a standard employee.
Let’s just say that hiring our first employee has been an incredible amount of work. As we plan to hire many, many more, we are choosing to believe that the process gets easier over time. The challenges associated with being an employer are not brewery-specific; the number of small businesses in operation is truly incredible given the administrative work that is required. Before starting a small business, think long and hard about how you will go about paying employees. If you currently work for a large company, you are probably familiar with payroll companies like ADP or PayChex. For a rather large fee these companies will handle all payroll-related activities, including calculating payroll, depositing paychecks into employees accounts, remitting all tax payments, and filing required tax returns. It is well worth paying for their services if the fees fit into your business’ budget.
I say that because employment taxes are incredibly complex. Let’s start with Federal Income Tax Withholding and Federal Insurance Contributions Act (FICA, i.e. Social Security & Medicare) taxes. The number of exemptions an employee claims on Form W-4 determines the amount of income tax withheld, while FICA taxes are standard for all employees (6.2% for Social Security and 1.45% for Medicare – employers also pay the same rate for a total of 12.4% and 2.9%, respectively). For companies with a limited overall tax liability, the IRS requires that deposits be made on the 15th day of every month to cover the previous month’s tax liability. Companies with a larger overall tax liability can be required to remit payroll taxes semi-weekly! The penalties associated with missing a tax payment can be massive – up to 100% of the actual tax liability. To verify that all taxes have been correctly calculated and paid, the IRS then requires that a Quarterly Wage & Tax Statement (Form 941) be filed by the last day of the first month following each quarter-end. Federal Unemployment Insurance Tax (FUTA) is fully paid by the employer at a rate of 6% (which can be reduced to 0.6% after applying a 5.4% credit awarded for paying State Unemployment Insurance Taxes in a timely manner) on the first $7,000 of each employee’s wages. The IRS only requires a deposit by the last day of the first month following the quarter-end in which the overall tax liability reaches $500. Form 940 is filed on an annual basis (by January 31st) to report total tax liability for the previous year.
In addition to Federal regulations, every state has its own tax laws and required filings. The Commonwealth of Virginia requires income tax withholding based on the number of exemptions the employee claims on Form VA-4. The employer (depending on total liability) is required to remit all tax payments to the Virginia Department of Taxation (VATAX) by the 25th day of each month to cover the previous month’s tax liability. Form VA-5 must also be filed at that time to verify proper tax calculation and collection. Virginia’s State Unemployment Insurance Tax (SUTA) is fully paid by the employer at a rate of 2.92% on the first $8,000 of each employee’s wages. The Virginia Employment Commission requires that all employers remit payment and file Forms VEC-FC-20 and VEC-FC-21 by the last day of the first month following the quarter-end.
On an annual basis, in addition to Form 940 (FUTA) the IRS requires that all employee W-2s (and 1099s, if the business uses independent contractors) be issued by January 31st. In combination with a Form W-3, the aforementioned W-2 forms then need to be filed with the Social Security Administration by the end of February. The Commonwealth of Virginia requires that Form VA-6 and all employee W-2s be filed with VATAX by January 31st.
Seems like a lot of administrative work, right? I didn’t even get into Workers’ Compensation Insurance (required in Virginia when a company has 3 or more employees, including LLC member-managers), Health Insurance, Dental Insurance, Retirement Plans, employee handbooks, and all of the other applicable labor laws! Don’t be deterred by the amount of work involved with becoming an employer. We found that allocating time to learn the rules and regulations, working with a payroll provider, and seeking the advice of our CPA and attorneys made the process much easier to understand. We can’t wait to put our newfound knowledge to good use when we expand again!