13. Employment Taxes
What's New for 2008
Federal unemployment (FUTA) tax rate. Beginning in 2008, the FUTA tax rate is scheduled to decrease from 6.2% to 6.0%. As this publication was prepared for printing, legislation had been introduced that would postpone the decrease. See Publication 553, Highlights of 2007 Tax Changes.
Substitute Forms W-4. After October 10, 2007, you cannot accept substitute Forms W-4 developed by employees. However, continue to honor any valid employee-developed Forms W-4 you accepted before October 11, 2007.
Wage limit for social security tax. The limit on wages subject to the social security tax will increase to $102,000 for 2008. There is no limit on wages subject to the Medicare tax.
Reminder
Electronic deposits of taxes. You must use the Electronic Federal Tax Payment System (EFTPS) to make electronic deposits of all depository tax liabilities you incur in 2008 and thereafter if you deposited more than $200,000 in federal depository taxes in 2006 or you had to use EFTPS in 2007. See Electronic Federal Tax Payment System (EFTPS) under Reporting and Paying Social Security, Medicare, and Withheld Federal Income Taxes.
Important Dates
You should take the action indicated on or before the dates listed. See By February 15 and On February 16 for Form W-4 information. Due dates for deposits of withheld federal income taxes, social security taxes, and Medicare taxes are not listed here. For these dates, see Publication 509, Tax Calendars for 2008.
Note. If any date shown below for filing a return, furnishing a form, or depositing taxes, falls on a Saturday, Sunday, or legal holiday, the due date is the next business day. A statewide legal holiday delays a filing due date only if the IRS office where you are required to file is located in that state. For any due date, you will meet the “file” or “furnish” date requirement if the form is properly addressed and mailed First-Class or sent by an IRS-designated delivery service by the due date. See Private delivery services in Publication 51 (Circular A).
Fiscal year taxpayers. Generally, the due dates listed apply whether you use a calendar or a fiscal year. However, if you have a fiscal year, refer to Publication 509 for certain exceptions that may apply to you.
By January 31.
File Form 943, Employer's Annual Federal Tax Return for Agricultural Employees, with the Internal Revenue Service. If you deposited all Form 943 taxes when due, you have 10 additional days to file.
Furnish each employee with a completed Form W-2, Wage and Tax Statement.
Furnish each recipient to whom you paid $600 or more in nonemployee compensation with a completed Form 1099 (for example, Form 1099-MISC, Miscellaneous Income).
File Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. But if you deposited all the FUTA tax when due, you have 10 additional days to file.
File Form 945, Annual Return of Withheld Federal Income Tax, to report any nonpayroll income tax withheld
during 2007.
By February 15. Ask for a new Form W-4 or Formulario W-4(SP) from each employee who claimed exemption from federal income tax withholding last year.
On February 16. Begin withholding federal income tax for any employee who previously claimed exemption from federal income tax withholding but has not given you a new Form W-4 for the current year. If the employee does not give you a new Form W-4, withhold as if he or she is single, with zero withholding allowances. The Form W-4 previously given to you claiming exemption is now expired.
By February 28. File Forms 1099 and 1096. File Copy A of all Forms 1099 with Form 1096, Annual Summary and Transmittal of U.S. Information Returns, with the IRS. For electronically filed returns, see By March 31 below.
By February 29. File Forms W-2 and W-3. File Copy A of all Forms W-2 with Form W-3, Transmittal of Wage and Tax Statements with the Social Security Administration (SSA). For electronically filed returns, see By March 31 below.
By March 31. File electronic Forms W-2 and 1099. File electronic Forms W-2 with the SSA and Forms 1099 with the IRS. See Social Security's Employer W-2 Filing Instructions and Information webpage at www.socialsecurity.gov/employer for more information about filing Forms W-2 and W-2c electronically.
By April 30, July 31, October 31, and January 31. Deposit FUTA taxes. Deposit FUTA tax due if it is more than $500.
Before December 1. Remind employees to submit a new Form W-4 if their withholding allowances have changed or will change for the next year.
On December 31. Form W-5, Earned Income Credit Advance Payment Certificate, expires. Employees who want to receive advance payments of the earned income credit for the next year must give you a new Form W-5.
Introduction
You are generally required to withhold federal income tax from the wages of your employees. You may also be subject to social security and Medicare taxes under the Federal Insurance Contributions Act (FICA) and federal unemployment tax under the Federal Unemployment Tax Act (FUTA). This chapter includes information about these taxes.
You must also pay self-employment tax on your net earnings from farming. See chapter 12 for information on self-employment tax.
Topics - This chapter discusses:
Farm employment
Family employees
Crew leaders
Social security and Medicare taxes
Federal income tax withholding
Advance payment of earned income credit
Reporting and paying social security, Medicare, and withheld federal income taxes
FUTA tax
Useful Items - You may want to see:
Publication
- 15 (Circular E), Employer's Tax Guide
- 15-A Employer's Supplemental Tax Guide
- 15-B Employer's Tax Guide to Fringe Benefits
- 51 (Circular A), Agricultural Employer's Tax Guide
- 926 Household Employer's Tax Guide
Form (and Instructions)
W-2
Wage and Tax StatementW-4
Employee's Withholding Allowance CertificateW-5
Earned Income Credit Advance Payment CertificateW-9
Request for Taxpayer Identification Number and Certification940
Employer's Annual Federal Unemployment (FUTA) Tax Return943
Employer's Annual Federal Tax Return for Agricultural Employees8109
Federal Tax Deposit Coupon
See chapter 17 for information about getting publications and forms.
Farm Employment
In general, you are an employer of farmworkers if your employees do any of the following types of work.
Raising or harvesting agricultural or horticultural products on a farm.
Operating, managing, conserving, improving, or maintaining your farm and its tools and equipment.
Services performed in salvaging timber, or clearing land of brush and other debris, left by a hurricane (also known as hurricane labor).
Handling, processing, or packaging any agricultural or horticultural commodity if you produced more than half of the commodity (for a group of up to 20 unincorporated operators, all of the commodity).
Work related to cotton ginning, turpentine, or gum resin products.
For more information, see Publication 51 (Circular A).
Workers are generally your employees if they perform services subject to your control. You are not required to withhold or pay employment taxes for independent contractors who are not your employees. For more information, see Publication 15-A.
If you employ a family of workers, each worker subject to your control (not just the head of the family) is an employee.
Special rules apply to crew leaders. See Crew Leaders, later.
Employer identification number (EIN). If you have employees, you must have an EIN. If you do not have an EIN, you may apply for one online. Go to the IRS website atwww.irs.gov/businesses/small and click on the “Employer ID Numbers (EINs)” link. You may also apply for an EIN by calling 1-800-829-4933 (hours of operation are Monday - Friday, 7:00 a.m. to 10:00 p.m. local time), or you can fax or mail Form SS-4 to the IRS. Employee's social security number (SSN). An employee who does not have an SSN should submit Form SS-5, Application for a Social Security Card, to the Social Security Administration (SSA). Form SS-5 is available from any SSA office or by calling 1-800-772-1213. It is also available from the SSA's website at
www.socialsecurity.gov. The employee must furnish evidence of age, identity, and U.S. citizenship or lawful immigration status permitting employment with the Form SS-5. An employee who is age 18 or older must appear in person with this evidence at an SSA office. Form I-9. You must verify that each new employee is legally eligible to work in the United States. This includes completing the Form I-9, Employment Eligibility Verification. Form I-9 is available from the U.S. Citizenship and Immigration Services (USCIS) offices or by calling the Bureau of Citizenship and Immigration Services Forms Request Line at 1-800-870-3676.
Form I-9 is also available from the USCIS website at www.uscis.gov. You can also contact the USCIS at 1-800-375-5283 for more information.
New hire reporting
You are required to report any new employee to a designated state new hire registry. Many states accept a copy of Form W-4 with employer information added. Call the Federal Office of Child Support Enforcement at 202-401-9267 or visit their Employer Services webpage at www.acf.hhs.gov/programs/cse/newhire/employer/home.htm for more information.
Family Employees
Generally, the wages you pay to family members who are your employees are subject to employment taxes. However, certain exemptions may apply to wages paid to your child, spouse, or parent.
Exemptions for your child
Payments for the services of your child under age 18 who works for you in your trade or business (including a farm) are not subject to social security and Medicare taxes. However, see Nonexempt services of a child or spouse, later. Payments for the services of your child under age 21 employed by you in other than a trade or business, such as payments for household services in your home, are also not subject to social security or Medicare taxes. Payments for the services of your child under age 21 employed by you, whether or not in your trade or business, are not subject to FUTA tax. Although not subject to social security, Medicare, or FUTA tax, the child's wages still may be subject to federal income tax withholding.
Exemptions for your spouse
Payments for the services of your spouse who works for you in your trade or business are subject to federal income tax withholding and social security and Medicare taxes, but not FUTA tax. Payments for the services of your spouse employed by you in other than a trade or business, such as payments for household services in your home, are not subject to social security, Medicare, or FUTA taxes.
Nonexempt services of a child or spouse
Payments for the services of your child or spouse are subject to federal income tax withholding as well as social security, Medicare, and FUTA taxes if he or she works for any of the following entities.
A corporation, even if it is controlled by you.
A partnership, even if you are a partner. This does not apply to wages paid to your child if each partner is a parent of the child.
An estate or trust, even if it is the estate of a deceased parent.
Exemptions for your parent
Payments for the services of your parent employed by you in your trade or business are subject to federal income tax withholding and social security and Medicare taxes. Social security and Medicare taxes do not apply to wages paid to your parent for services not in your trade or business, but they do apply to payments for household services in your home if both the following conditions are satisfied.
You have a child living in your home who is under age 18 or has a physical or mental condition that requires care by an adult for at least 4 continuous weeks in a calendar quarter.
You are a widow or widower; or divorced and not remarried; or have a spouse in the home who, because of a physical or mental condition, cannot care for your child for at least 4 continuous weeks in the quarter.
Crew Leaders
If farmworkers are provided by a crew leader, the crew leader may be the employer of the workers.
Social security and Medicare taxes
For social security and Medicare tax purposes, the crew leader is the employer of the workers if both of the following requirements are met.
The crew leader pays (either on his or her own behalf or on behalf of the farmer) the workers for their farm labor.
The crew leader has not entered into a written agreement with the farmer under which the crew leader is designated as an employee of the farmer.
Federal income tax withholding
If the crew leader is the employer for social security and Medicare tax purposes, the crew leader is the employer for federal income tax withholding purposes. Federal unemployment (FUTA) tax. For FUTA tax purposes, the crew leader is the employer of the workers if, in addition to the earlier requirements, either of the following requirements are met.
The crew leader is registered under the Migrant and Seasonal Agricultural Worker Protection Act.
Substantially all crew members operate or maintain mechanized equipment provided by the crew leader as part of the service to the farmer.
Social Security and Medicare Taxes
All cash wages you pay to an employee during the year for farmwork are subject to social security and Medicare taxes if you meet either of the following tests.
You pay the employee $150 or more in cash wages during the year for farmwork (the $150 test).
You pay cash and noncash wages of $2,500 or more during the year to all your employees for farmwork (the $2,500 test).
If the $2,500 test for the group is not met, the $150 test for an individual still applies.
Exceptions
Annual cash wages of less than $150 you pay to a seasonal farmworker are not subject to social security and Medicare taxes, even if you pay $2,500 or more to all your farmworkers. However, these wages count toward the $2,500 test for determining whether other farmworkers' wages are subject to social security and Medicare taxes. A seasonal farmworker is a worker who:
Works as a hand-harvest laborer,
Is paid piece rates in an operation usually paid on this basis in the region of employment,
Commutes daily from his or her permanent home to the farm, and
Worked in agriculture less than 13 weeks in the preceding calendar year.
Religious exemption
An exemption from social security and Medicare taxes is available to members of a recognized religious sect opposed to public insurance. This exemption is available only if both the employee and the employer are members of the sect. For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.
Cash wages
Only cash wages paid to farmworkers are subject to social security and Medicare taxes. Cash wages include checks, money orders, and any kind of money or cash. Only cash wages subject to social security and Medicare taxes are credited to your employees for social security benefit purposes. Payments not subject to these taxes, such as commodity wages, do not contribute to your employees' social security coverage. For information about social security benefits, contact the SSA at 1-800-772-1213 or online
at www.socialsecurity.gov.
Noncash wages
Noncash wages include food, lodging, clothing, transportation passes, and other goods and services. Noncash wages paid to farmworkers, including commodity wages, are not subject to social security and Medicare taxes. However, they are subject to these taxes if the substance of the transaction is a cash payment. Report the value of noncash wages on Form W-2 in box 1, Wages, tips, other compensation, together with cash wages. Do not show noncash wages in box 3, Social security wages, or in box 5, Medicare wages and tips (unless the substance of the transaction is a cash payment).
Tax rates and social security wage limit
For 2008, the employer and the employee will each pay both the following taxes.
6.2% of cash wages for social security tax (old-age, survivors, and disability insurance).
1.45% of cash wages for Medicare tax (hospital insurance).
Wage limit
The limit on 2008 wages subject to the social security tax will increase to $102,000 for 2008. There is no limit on wages subject to the Medicare tax. All covered wages are subject to the Medicare tax. Paying employee's share. If you would rather pay the employee's share of social security and Medicare taxes without deducting it from his or her wages, you may do so. It is additional income to the employee. You must include it on the employee's Form W-2 in box 1, but do not count it as social security and Medicare wages (boxes 3 and 5 on Form W-2) or as wages for federal unemployment (FUTA) tax purposes.
Example —
Jane operates a small family fruit farm. She employs day laborers in the picking season to enable her to timely get her crop to market. She does not deduct the employees' share of social security and Medicare taxes from their pay; instead, she pays it on their behalf. When her accountant, Susan, prepares the employees' Forms W-2, she adds each employee's share of social security and Medicare taxes paid by Jane to the employee's wage income (box 1 of Form W-2), but does not include it in box 3 (social security wages) or box 5 (Medicare wages and tips).
Jane paid Mary $1,000 during the year. Susan enters $1,076.50 in box 1 of Mary's Form W-2 ($1,000 wages plus $76.50 social security and Medicare taxes paid for Mary). She enters $1,000 in boxes 3 and 5.
Federal Income Tax Withholding
If the cash wages you pay to farmworkers are subject to social security and Medicare taxes, they are also subject to federal income tax withholding. Although noncash wages are subject to federal income tax, withhold income tax only if you and the employee agree to do so. The amount to withhold is figured on gross wages without taking out social security and Medicare taxes, union dues, insurance, etc.
Form W-4. Generally, the amount of federal income tax you withhold is based on the employee's marital status and withholding allowances claimed on the employee's Form W-4. In general, an employee can claim withholding allowances on Form W-4 equal to the number of exemptions the employee will be entitled to claim on his or her tax return. An employee may also be able to claim a special withholding allowance and allowances for estimated deductions and credits. Do not withhold federal income tax from the wages of an employee who, by filing Form W-4, certifies that he or she had no federal income tax liability last year and anticipates no liability for the current year. You should give each new employee a Form W-4 as soon as you hire the employee. For Spanish-speaking employees, you may use Formulario W-4(SP) which is the Spanish translation of Form W-4. Have the employee complete and return the form to you before the first payday. If the employee does not return the completed form to you, you must withhold federal income tax as if the employee is single and claims no withholding allowances. New Form W-4 for 2008. You should make the 2008 Form W-4 available to your employees and encourage them to check their income tax withholding for 2008. Those employees who owed a large amount of tax or received a large refund for 2007 may want to file a newForm W-4. After October 10, 2007, you cannot accept substitute Forms W-4 developed by employees. However, continue to honor any valid employee-developed Forms W-4 you accepted before October 11, 2007.
How to figure withholding
You can use one of several methods to determine the amount to withhold. The methods are described in Publication 51 (Circular A), which contains tables showing the correct amount of federal income tax you should withhold. Publication 51 (Circular A) also contains additional information about federal income tax withholding.
Nonemployee compensation
Generally, you are not required to withhold federal income tax on payments for services to individuals who are not your employees. However, you may be required to report these payments on Form 1099-MISC, Miscellaneous Income, and to withhold under the backup withholding rules. For more information, see the Instructions for Form 1099-MISC.
Advance Payment of Earned Income Credit
An employee who is eligible for the earned income credit (EIC) and who has a qualifying child is entitled to receive EIC payments with his or her pay during the year. To get these payments, the employee must give you a properly completed Form W-5, Earned Income Credit Advance Payment Certificate. You are usually required to make advance EIC payments to employees who give you a properly completed Form W-5, but you are not required to make these payments to farmworkers paid on a daily basis.
The EIC payment is added to the employee's pay each payday. It is figured from tables in Publication 51 (Circular A). You reduce your liability for federal income tax withholding, social security tax, and Medicare tax by the total advance EIC payments made. For more information, see Publication 51 (Circular A).
Notification
You must provide notification about the EIC to each employee who worked for you at any time during the year and from whom you did not withhold any federal income tax. However, you do not have to notify employees who claim exemption from federal income tax withholding on Form W-4. You meet the notification requirement by giving each employee any of the following.
Form W-2, which contains the EIC notification on the back of Copy B.
A substitute Form W-2 with the exact EIC wording shown on the back of copy B of Form W-2.
Notice 797, Possible Federal Tax Refund Due to the Earned Income Credit (EIC).
Your own written statement with the exact wording of Notice 797.
Notice 1015, Have You Told Your Employees About the Earned Income Credit (EIC).
Reporting and Paying Social Security, Medicare, and Withheld Federal Income Taxes
You must withhold federal income, social security, and Medicare taxes required to be withheld from the salaries and wages of your employees. You are liable for the payment of these taxes to the federal government whether or not you collect them from your employees. If, for example, you withhold less than the correct tax from an employee's wages, you are still liable for the full amount. You must also pay the employer's share of social security and Medicare taxes.
Form 943
Report withheld federal income tax and social security and Medicare taxes on
Form 943. Your 2007 Form 943 is due by January 31, 2008 (or February 11, 2008, if you made deposits on time in full payment of the taxes due for the year).
Deposits
Generally, you must deposit both the employer and employee shares of social security and Medicare taxes and federal income tax withheld (minus any advance earned income credit payments) during the year. However, you may make payments with Form 943 instead of depositing them if you accumulate less than a $2,500 tax liability during the year (line 11 of Form 943) and you pay in full with a timely filed return. For more information on deposit rules, see Publication 51 (Circular A). Electronic Federal Tax Payment System (EFTPS). You may have to deposit taxes using EFTPS. You must use EFTPS to make deposits of all depository tax liabilities (including social security, Medicare, withheld federal income, excise, and corporate income taxes) you incur in 2008 if you deposited more than $200,000 in federal depository taxes in 2006. If you first meet the $200,000 threshold in 2007, you must begin depositing using EFTPS in 2009. Once you meet the $200,000 threshold, you must continue to make deposits using EFTPS in later years even if subsequent deposits are less than the $200,000 threshold. If you must use EFTPS but fail to do so, you may be subject to a 10% penalty. If you do not have to use EFTPS because you did not meet the $200,000 threshold, you can voluntarily make deposits using EFTPS. If you are using EFTPS voluntarily, you will not be subject to the 10% penalty if you make a deposit using a paper coupon. For information about EFTPS or to enroll in EFTPS, visit www.eftps.gov or see Publication 966, The Secure Way to Pay Your Federal Taxes, or call 1-800-555-4477. Form W-2. By January 31, you must furnish each employee a Form W-2 showing total wages for the previous year and total federal income tax and social security and Medicare taxes withheld. However, if an employee stops working for you and requests the form earlier, you must give it to the employee within 30 days of the later of the following dates.
The date the employee requests the form.
The date you make your final payment of wages to the employee.
Trust fund recovery penalty
If you are responsible for withholding, accounting for, depositing, or paying federal withholding taxes and willfully fail to do so, you can be held liable for a penalty equal to the withheld tax not paid. A responsible person can be an officer of a corporation, a partner, a sole proprietor, or an employee of any form of business. A trustee or agent with authority over the funds of the business can also be held responsible for the penalty. Willfully means voluntarily, consciously, and intentionally. Paying other expenses of the business instead of the taxes due is acting willfully.
Consequences of treating an employee as an independent contractor
If you classify an employee as an independent contractor and your have no reasonable basis for doing so, you may be held liable for employment taxes for that worker. See Publication 15-A for more information.
Federal Unemployment (FUTA) Tax
You must pay FUTA tax if you meet either of the following tests.
You paid cash wages of $20,000 or more to farmworkers in any calendar quarter during the current or preceding calendar year.
You employed 10 or more farmworkers for some part of at least 1 day during any 20 or more different calendar weeks during the current or preceding calendar year.
These rules do not apply to exempt services of your spouse, your parents, or your children under age 21. See Family Employees, earlier.
Alien farmworkers
Wages paid to aliens admitted on a temporary basis to the United States to perform farmwork (also known as “H-2(A) visa workers”) are exempt from FUTA tax. However, include your employment of these workers and the wages you paid them to determine whether you meet either test above.
Commodity wages
Payments in kind for farm labor are not cash wages. Do not count them to figure whether you are subject to FUTA tax or to figure how much tax you owe.
Tax rate and credit
The gross FUTA tax is 6.2% of the first $7,000 cash wages you pay to each employee. However, you are given a credit of up to 5.4% for the state unemployment tax you pay. The net tax rate, therefore, can be as low as 0.8% (6.2% - 5.4%). If your state tax rate (experience rate) is less than 5.4%, you may still be allowed the full 5.4% credit. If you do not pay the state tax, you cannot take the credit. If you are exempt from state unemployment tax for any reason, the full 6.2% rate applies. See the Instructions for Form 940 for additional information. Beginning in 2008, the FUTA tax rate is scheduled to decrease from 6.2% to 6.0%. As this publication was prepared for printing, legislation had been introduced that would postpone the decrease. See Publication 553, Highlights of 2007 Tax Changes .
More information
For more information on FUTA tax, see Publication 51 (Circular A).
Reporting and Paying FUTA Tax
The FUTA tax is imposed on you as the employer. It must not be collected or deducted from the wages of your employees.
Form 940
Report FUTA tax on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. The 2007 form is due January 31, 2008 (or February 11, 2008, if you timely deposited the full amount of your 2007 FUTA tax).
Deposits
If at the end of any calendar quarter you owe, but have not yet deposited, more than $500 in FUTA tax for the year, you must make a deposit by the end of the following month. If the undeposited tax is $500 or less at the end of a quarter, you do not have to deposit it. You must add it to the tax for the next quarter. If the total undeposited tax is more than $500 at the end of the next quarter, a deposit will be required. If the total undeposited tax at the end of the 4th quarter is $500 or less, you can either make a deposit or pay it with your return by the January 31, 2008, due date.
Electronic deposit requirement
If you are subject to the electronic deposit requirement, you must use EFTPS to deposit FUTA tax. See Reporting and Paying Social Security, Medicare, and Withheld Federal Income Taxes, earlier, for a discussion of the requirement for making deposits electronically.
