Employees must complete an array of tax forms before getting paid. The Ascent walks you through the forms you and your new employees need to fill out.
A new employee’s first day on the job is full of handshakes (unless we’re doing away with that after COVID-19), questions, and new-hire paperwork.
Whether you’re bringing on your first or 50th employee, make sure to collect all the tax forms you need to run payroll.
4 employee tax forms to complete during the onboarding process
You'll need to complete the first step before onboarding your first employee. HR software can walk your new employee through the I-9, W-4, and state withholding forms.
These tax documents pertain to employees, not independent contractors. Companies generally don’t withhold taxes from their contractors, but it’s always required for employees.
1. EIN application
To hire an employee, your business must have an employer identification number (EIN). It’s like a Social Security number (SSN) for your business. The EIN number appears on quarterly payroll tax filing Form 941, the employee’s annual Form W-2, and your business tax return.
All business types -- including sole proprietorships -- are eligible for EINs, and they’re free to get. You can apply on the IRS website during regular business hours.
You’ll need to get an EIN before your workers fill out new employee forms.
2. Form I-9
U.S. Citizenship and Immigration Services (USCIS) requires that employees submit Form I-9 to their employers before starting work. The document verifies that a person is legally eligible to work in the U.S.
You’ll have to collect not only the form but also supporting documentation to verify the employee’s status in the country. U.S. passports or permanent resident cards suffice as proof of workplace eligibility.
You don’t have to submit the documentation anywhere, but you’re responsible for reviewing it and making sure it’s completed with reasonably truthful information. Hold on to an employee’s I-9 for three years or one year after their employment ends, whichever is later.
3. Form W-4
Form W-4 tells you how much in federal income tax to withhold from each employee paycheck. The employee must fill out, sign, and submit to you the most current version of the document.
The IRS redesigned Form W-4 for 2020, making it somewhat easier to figure an individual’s withholding. Those employed before 2020 don’t need to fill out a new Form W-4, but they will need to use the new form to change their withholding.
The best way to fill out Form W-4 accurately is to use the IRS withholding estimator. Based on the employee’s answers, the IRS pre-fills most parts of the document.
Input the information provided by your employee to your payroll software.
4. State withholding certificate
Most employees will also fill out a state withholding certificate, the state equivalent to IRS Form W-4. States with no income tax or a flat income tax -- like Pennsylvania, with a flat 3.07% state income tax -- don’t require state withholding certificates.
The information an employee provides on a state withholding certificate goes right into your payroll software.
When you employ someone in a new state, your payroll software will need to open a state payroll tax account for your business. Sometimes your software won’t be able to make state tax deposits on the first few payroll runs as it opens the account, so look for a notice asking you to make manual payments during your new worker’s first month of employment.
3 employee tax forms to fill and file every year
You’ll be filling out tax forms until the very end. Make sure to file the following ones before filing your small business taxes.
1. Form 941 or Form 944
Most businesses must make a quarterly tax filing with the IRS to report federal income withholding and Federal Insurance Contributions Act (FICA) tax deposits. Their payroll software will automatically file Form 941 at the end of each quarter, leaving a copy for your review in the document management system.
Payroll software usually deposits payroll taxes after each payroll run. Form 941 summarizes federal withholding and FICA deposits to ensure that you don’t owe any more or less than what you paid.
Businesses whose federal tax withholding and FICA tax liabilities add up to less than $1,000 only file the return annually. They use Form 944 and must remit the form and tax payment by January 31 of the following year.
2. Form 940
As a business owner, you’re responsible for paying Federal Unemployment Tax Act (FUTA) taxes based on employee wages. The FUTA rate is 6% of each employee’s first $7,000 in wages for the year. Nonprofit organizations are exempt from FUTA.
When you pay on time, you’re eligible for a FUTA tax credit, which can effectively reduce your FUTA tax rate to as low as 0.6%.
Businesses report FUTA taxes paid using Form 940, which is due by January 31 of the following year.
3. Form W-2
Every January, you’re required to generate and submit to the Social Security Administration (SSA) a Form W-2 for each employee who worked at your company in the previous year. The form summarizes employee compensation, including wages, bonuses, and fringe benefits.
If you file by paper, you’re also required to submit a Form W-3. Electronic filers don’t need to create a Form W-3 because the SSA does it automatically. Tax software can help you with this step.
Keep a copy of this form for your records
You probably know that your copies of tax documents don’t go directly to the shredder after filing. Establish a document management system that complies with federal and state recordkeeping requirements.
Check out our guide to payroll recordkeeping to make sure you’re storing tax forms for the correct amount of time.
