Tax Requirements for Employees

If your personal assistant is an independent contractor, you aren’t responsible for any form of federal and state tax withholding. Your only obligation is to prepare an annual 1099 form showing all monies you paid your assistant and give copies to the IRS and your assistant. The independent contractor is responsible for all tax obligations, unless state law indicates otherwise.

If your assistant is an employee, you are responsible for withholding income taxes and the employee’s share of FICA — Social Security payments and Medicare contributions — from all wages, bonuses, and commissions you pay. You alone are responsible for paying federal unemployment tax; the employee makes no contribution.

Ask your new employee to complete Internal Revenue Service Form W-4 (downloadable from the IRS Forms and Publications page) so you can calculate how much money you should withhold. To determine income tax, use the withholding tables in the IRS’ handy Circular E, Employer’s Tax Guide. According to the latest information, for FICA, you withhold 4.2 percent of the employee’s wages and tips received before March 1, 2012. The employee tax rate for social security jumps to 6.2 percent for wages and tips received after Feburary 29, 2012. You match Medicare at 1.45 percent — a total of 2.9 percent. And you must pay federal unemployment tax, which is 0.8 percent of first $7,000 of the employee’s wages, or $56.

Computing FUTA tax.   For 2012, the FUTA tax rate is 6.0%. The tax applies to the first $7,000 you pay to each employee as wages during the year. The $7,000 is the federal wage base. Your state wage base may be different.   Generally, you can take a credit against your FUTA tax for amounts you paid into state unemployment funds. The credit may be as much as 5.4% of FUTA taxable wages. If you are entitled to the maximum 5.4% credit, the FUTA tax rate after credit is 0.6%. You are entitled to the maximum credit if you paid your state unemployment taxes in full, on time, and on all the same wages as are subject to FUTA tax, and as long as the state is not determined to be a credit reduction state. See the Instructions for Form 940 to determine the credit.   In some states, the wages subject to state unemployment tax are the same as the wages subject to FUTA tax. However, certain states exempt some types of wages from state unemployment tax, even though they are subject to FUTA tax (for example, wages paid to corporate officers, certain payments of sick pay by unions, and certain fringe benefits). In such a case, you may be required to deposit more than 0.6% FUTA tax on those wages. See the Instructions for Form 940 for further guidance.

Tax rates and the social security wage base limit.   Social security and Medicare taxes have different rates and only the social security tax has a wage base limit. The wage base limit is the maximum wage subject to the tax for the year. Determine the amount of withholding for social security and Medicare taxes by multiplying each payment by the employee tax rate. There are no withholding allowances for social security and Medicare taxes.   The employee tax rate for social security is 4.2% on wages paid and tips received before March 1, 2012. The employee tax rate for social security increases to 6.2% on wages paid and tips received after February 29, 2012. The employer tax rate for social security remains unchanged at 6.2%. The social security wage base limit is $110,100. The 2012 employee tax rate for Medicare is 1.45% (amount withheld) each for the employee and employer (2.9% total). There is no wage base limit for Medicare tax; all covered wages are subject to Medicare tax.

You must deposit the amounts you withhold from your assistant and your own contribution to a designated bank account on a regular schedule — generally monthly. The IRS will supply you with Federal Tax Deposit coupons, showing your Employer Identification Number, to make deposits. States also may require regular deposits of state income tax payments that were withheld.

If all this sounds too overwhelming, you do have some options. Ask your broker if the company’s accounting department will handle the paperwork for you for a small fee. Another option is to hire an assistant through a temporary personnel agency; then it becomes the agency’s responsibility to handle payroll and withholding. Or consider outsourcing this activity to your accountant or to a company that specializes in payroll administration.

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