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Skip Navigation LinksManaging Employees: Government Regulations and Taxes :: Step Two: Operating A Business :: Small Business Guide :: Small Business Center :: Home

Step Two: Managing Employees: Government Regulations and Taxes


An important part of managing your employees will take place behind the scene. Make sure you take care of all tax and regulatory requirements related to your employees to keep the engine of your business humming. These requirements exist at the federal, state and local levels. It is very important to follow all laws regarding employees. A form is included at the end of this section to help you keep track of your decisions related to employees. Consult with an attorney, as needed.

Federal Requirements

Employer Identification Number (EIN)

The Employer Identification Number, or EIN, identifies the business to the Internal Revenue Service and the Social Security Administration. It will appear on all business tax returns and all tax correspondence related to your business. Although sole proprietorships with no employees may not need an EIN, the State of North Carolina encourages all businesses to use one since the EIN is often used by state and local agencies as a means of cross-referencing businesses.

If you answer yes to any of the following questions, you will need an EIN:

  • Do you have employees?
  • Do you operate your business as a corporation or a partnership?
  • Do you file any of these tax returns: Employment; Excise; or Alcohol, Tobacco and Firearms?
  • Do you withhold taxes on income, other than wages, paid to a non-resident alien?
  • Do you have a Keogh plan?
  • Are you involved with any of the following types of organizations:
    • Trusts, except certain grantor-owned revocable trusts, IRAs, and Exempt Organization Business Income Tax Returns;
    • Estates;
    • Real estate mortgage investment conduits;
    • Non-profit organizations;
    • Farmers' cooperatives; or
    • Plan administrators.

To apply for an EIN, fill out IRS Form SS-4. You may access instructions for this form here. Application may be made by phone, fax, mail, or on-line. For more information on applying for the EIN, visit the IRS web site: http://www.irs.gov/businesses/small/article/0,,id=97860,00.html or you may reach them by phone at 1 (800) 829-1040.

Employee Eligibility Verification

The U.S. Department of Justice, Immigration and Naturalization Service requires all employers to complete an Employee Eligibility Verification Form (Form I-9) for each employee hired. This form provides proof that the employee is eligible to work in the United States . With increased fears about terrorism, this form has become more important in recent months.

To access a copy of the Form I-9 in PDF format, click here.

Required Posters

Federal regulations require that companies with employees must post certain posters in a conspicuous place so that their employees may read them. Four required posters are listed below. For additional information about these posters or to obtain information about other posters that certain employers may be required to display, you may view the Department of Labor web site at: http://www.dol.gov/compliance/topics/posters.htm.

Minimum Wage Poster Employers subject to the Fair Labor Standards Act's minimum wage provisions must display, and keep displayed, in a conspicuous place a notice related to minimum wage. An approved copy of this poster is included in this guide, and may be accessed by clicking here.
FMLA Poster Employers must post, and keep posted, a poster summarizing the major provisions of The Family and Medical Leave Act (FMLA) and telling employees how to file a complaint. An approved copy of this poster is included in this guide, and may be accessed by clicking here.
EEO Law Poster Employers covered by the non-discrimination and EEO laws are required to display the poster "Equal Employment Opportunity is the Law" in a prominent place. This poster gives information about laws and procedures for filing complaints of violations of the laws with the Office of Federal Contract Compliance Programs (OFCCP). An approved copy of this poster is included in this guide, and may be accessed by clicking here.
Worker Right Poster Employers must display the OSHA poster in a prominent place where all employees may read it. This poster gives information about the rights of employees to a safe and healthy workplace. An approved copy of this poster is included in this guide, and may be accessed by clicking here.

Federal Tax Requirements

(Note: The forms included in this section are current as of summer, 2005. You may check for changes to any of the forms on the Internal Revenue Service web site at http://www.irs.gov .)

There are three different federal tax requirements for employers:

Income Tax
Social Security and Medicare (FICA)
Federal Unemployment Tax (FUTA)

Income Tax

Employers must withhold income tax from each employee's paycheck throughout the year. The amount withheld will vary based on pay rate, frequency of pay, marital status, and exemptions. Each employee must fill out an IRS W-4 form before they begin employment to determine the number of exemptions an employee elects. The tables you use to compute how much tax to withhold begin on page 36 of IRS Publication 15, Circular E, Employer's Tax Guide (Revised January 2004).

Employers must submit a Form 941 (PDF), Employer's Quarterly Federal Tax Return which includes your employees' withheld Federal income tax, social security tax, Medicare tax, and your share of social security and Medicare tax. If you accumulate a liability for these taxes of $2,500 or more per quarter, you must deposit this amount by making payment to an authorized financial institution. Deposits are made either by the Electronic Federal Tax Payment System (EFTPS), or by using a Form 8109B, Federal Tax Deposit Coupon, which must accompany your payment. If you use the coupon, it is very important that it show the correct employer identification number, name, and type of tax and tax period, as this information is used by the IRS to credit your account. Your check or money order should be made payable to the financial institution where you make your deposit, not to the IRS.

New employers who apply for an employer identification number are sent a federal tax deposit (FTD) coupon book. The IRS will keep track of the number of coupons you use and will automatically send you additional FTD coupons when you need them. If necessary, the IRS will assist you in completing blank coupons, which can be used to make a deposit if you do not have preprinted Form 8109. For more information, call the IRS at 1 (800) 829–4933.

You must deposit the 941 taxes based on either a monthly or semiweekly deposit schedule. Which schedule you use for the calendar year 2005 is based on the amount of taxes you reported on Form 941 for the four calendar–quarters from July 1, 2003, through June 30, 2004. This is called the lookback period.

If you reported taxes of $50,000 or less on Form 941 for the lookback period, you are a monthly schedule depositor, and generally must deposit each month's Form 941 taxes on or before the 15th day of the following month. For example, taxes for January must be deposited by February 15th.

If you reported taxes of more than $50,000 for the lookback period, you are a semiweekly schedule depositor. For example, in 2005, the lookback period was July 1, 2003, through June 30, 2004.

Lookback Period for Calendar Year 2005

More information about this process is available on the IRS web site.

Annually, employers must send an IRS W-2 form to each employee showing payments and withholdings no later than January 31 of each following year. By February 28, employers must furnish the Social Security Administration with copies of all of their employees' W-2 forms, as well as the IRS Form W-3 - Summary and Transmittal Form. The Social Security Administration submits the data to the IRS.

Federal Forms Relevant to Income Taxes

  • For a copy of the 8109-B form, click here.
    (provided for informational purposes only. Original 8109 forms must be ordered).
  • For further Instructions on W-2 and W-3 forms and filing, click here.
  • For a copy of the W-2 form, click here.
    (provided for informational purposes only. Original W-2 forms must be ordered).
  • For a copy of the W-3 form, click here.
    (provided for informational purposes only. Original W-3 forms must be ordered).
  • For a copy of the W-4 form, click here.
  • For a copy of the Form 941, click here.
  • For a copy of the Employer's Tax Guide (Publication 15) (January 2004 version), click here. This informative guide contains much information to guide you regarding taxes and your employees.
  • For a copy of the Employer's Supplemental Tax Guide, click here.
  • For a copy of the Employer's Tax Guide to Fringe Benefits, click here.

For more tax information related to businesses, consult the IRS web site at: http://www.irs.gov.

Keep in mind that tax laws change frequently and you may wish to consult an accountant, attorney or tax expert. For recommendations on experts, contact your local community college Small Business Center.

Social Security and Medicare (FICA)

The employer and employee share the Social Security and Medicare (FICA) tax. The employer withholds the employee's share from each paycheck and the employer must also match this amount. For information on Social Security and Medicare Taxes, please refer to page 15 of the IRS Publication 15, Circular E, Employer's Tax Guide.

Small businesses (reporting $50,000 or less in payroll taxes the prior year) must pay federal income and FICA taxes monthly; large businesses pay these taxes twice weekly. The payments are made with Coupon 8109-B directly to a bank. (this download is for informational purposes only. Original 8109-B form must be ordered.) In addition, these taxes are reported on a quarterly Form 941.

Federal Unemployment Tax (FUTA)

Funds from the FUTA and the state unemployment tax provide temporary financial relief to those who become unemployed through no fault of their own. Contrary to popular belief, employees do not contribute to the FUTA: employers are responsible for paying 100% of all unemployment taxes. The FUTA amount is based on an employee's wages. Employers get credit towards the FUTA based on what they pay to North Carolina for state unemployment taxes (see state unemployment tax below).

Employers file the FUTA annually on Form 940. It must be paid at least by January 31 of the following year or quarterly on Coupon 8109 if a higher payroll requires it.

Click here for a copy of the IRS Form 940.

North Carolina Requirements

North Carolina requires businesses to be responsible for four different types of taxes/insurance:

Income Tax

North Carolina law requires withholding of income taxes from:

1) Salary and wages of all North Carolina residents regardless of where earned,

2) Wages of nonresidents for services performed in North Carolina ,

3) Non-wage compensation paid to nonresidents for certain personal services performed in North Carolina , and

4) Pension payments made to North Carolina residents if federal withholding is required on the payments.

To register with the state to receive your withholding number used for reporting and paying the tax, complete Form AS/RP1. This form is also used to register for your sales and use tax number (see below). Once you submit this form, the state will send you a coupon book to use to report and pay income taxes you have withheld from employees' pay. Download AS/RP1 form; Instructions or Fill the AS/RP1 form out online.

Each employee must complete a North Carolina Withholding Allowance Certificate, Form NC-4. Employers must withhold a portion of their employee(s)' income for North Carolina income tax based on the number of allowances the employees elects, the frequency of payroll periods, and amount of income paid per period. Refer to state tax table for details.

If your withholding liability for the month is less than $250, your withholding tax payments are due quarterly. If your withholding liability for the month is $250, but less than $2,000, your withholding payments are due monthly. If your withholding liability for the month is $2000 or more, your withholding tax payments are due semiweekly.

At the end of the year, you will use the NC Annual Withholding Form (form NC-3) to reconcile what you have withheld for all employees to what you have paid to the state. You will need to include a copy of all W-2 forms when you submit this Annual Withholding Form to the state.

To gain more information, please consult the North Carolina Department of Revenue's Income Tax Withholding Publication for information on withholding taxes or call one of the following offices:

Office Location: Asheville
N.C. Department of Revenue
2800 Heart Drive
Asheville , NC 28806
Phone: 1 (877) 252-3052

Office Location: Charlotte
N.C. Department of Revenue
500 West Trade St, Suite 446
Charlotte , NC 28202
Phone: 1 (877) 252-3052

Office Location: Elizabeth City
N.C. Department of Revenue
401 S Griffin St., Suite 300
Elizabeth City , NC 27906
Phone: 1 (877) 252-3052

Office Location: Fayetteville
N.C. Department of Revenue
225 Green St., Suite 800
Fayetteville , NC 28301
Phone: 1 (877) 252-3052

Office Location: Greensboro
N.C. Department of Revenue
5 Centerview Drive
Lenoir Building , Koger Center
Greensboro , NC 27407
Phone: 1 (877) 252-3052

Office Location: Greenville
N.C. Department of Revenue
2995 Radio Station Rd
Greenville , NC 27834
Phone: 1 (877) 252-3052

Office Location: Hickory
N.C. Department of Revenue
112 2nd St Pl. SE
Hickory , NC 28602
Phone: 1 (877) 252-3052

Office Location: Raleigh
N.C. Department of Revenue
1st Floor, South Core, Revenue Bldg.
501 N Wilmington St
Raleigh , NC 27604
Phone: 1 (877) 252-3052
Raleigh Mailing Address:
N.C. Department of Revenue
P.O. Box 27431
Raleigh , NC 27611

Office Location: Rocky Mount
N.C. Department of Revenue
Suite 239 , Station Square
Rocky Mount , NC 27804
Phone: 1 (877) 252-3052

Office Location: Wilmington
N.C. Department of Revenue
33 Darlington Avenue
Wilmington , NC 28403
Phone: 1 (877) 252-3052

Office Location: Winston Salem
N.C. Department of Revenue
8025 Northpoint Boulevard, Suite 250
Winston-Salem , NC 27106
Phone: 1 (877) 252-3052

Unemployment Tax

The unemployment insurance program in North Carolina is part of a national system designed to provide temporary economic benefits to eligible workers. Eligible workers are individuals who (1) lost their jobs through no fault of their own, (2) worked during a specified time period and received a minimum amount of wages during that time period, (3) are able and available for work, and (4) are actively seeking new employment. All benefits and administrative costs of the unemployment insurance program are paid by employers through State Unemployment Tax Act (SUTA) and the Federal Unemployment Tax Act (FUTA) payments. No money is withheld from workers' checks to pay for unemployment benefits .

If you answer yes to any of the following questions, you must pay the unemployment tax:

  • Do you employ one or more employees (or 10 agricultural employees) during twenty weeks or more of the calendar year?
  • Do you have $1500 or more in your quarterly payroll?
  • Have you acquired a business subject to the unemployment tax?
  • Are you subject to the FUTA?
  • Are you a governmental operation or political subdivision?
  • Are you an employee leasing company or temporary help company that, under contract, supplies individuals to perform services for clients or customers?
  • Are you a 501(c)(3) non-profit organization with at least four workers in 20 different calendar weeks during a calendar year?

To apply for a NC unemployment tax number, contact the Employment Security Commission of NC (click here) or e-mail: esc.tax.customerservice@ncmail.net or call: (919) 733-7395 .

For more information, consult the ESC web site: www.ncesc.com. For answers to specific questions regarding unemployment insurance, click here. If you do not have Internet access, you may reach your local ESC office by phone. There are ESC field offices located throughout the state. For the location closest to you, consult your local phone book.

Retail Sales Tax

Businesses in North Carolina must pay a sales tax to the state on gross receipts from retail sales. The tax is noted to consumers and is added to the regular price of purchased goods. Currently the sales tax rate is generally 7.0% of which 4.5% is state tax, and 2.5% is county tax (3% in Mecklenburg County).

The North Carolina Department of Revenue defines retail sales as "sales to a customer or to any person for any purpose other than for resale." The tax may also apply to the lease of personal property and the renting of accommodations.

To determine what is required to be taxed, click here.

To register with the state to receive your withholding number used for reporting and paying the tax, complete Form AS/RP1. Taxes must be paid quarterly if the tax is estimated to be less than $100 per month; paid monthly if estimated monthly taxes are $100 to $10,000, and paid semi-monthly if estimated taxes are over $10,000. Download AS/RP1 Instructions or Fill out AS/RP1 form online. For more information about frequency of payment, click here.

Businesses subject to the sales tax must submit a sales tax report on form E-500, with payment regardless of whether they had taxable sales. You will receive a coupon book with enough forms for the year when you send in the AS/RP1 forms referred to above. The sales tax form and payment should be mailed to: NC Department of Revenue, P.O. Box 25000 , Raleigh , NC 27640-0100 . For a copy of the form E-500 click here to fill it in online.

For more information about sales tax in North Carolina , contact the Department of Revenue at 1 (877) 252-3052.

For frequently asked questions about sales tax, click here.

Workers' Compensation Insurance

Workers' Compensation is not a tax, but a type of insurance that most employers in North Carolina must have. This insurance provides compensation and medical benefits to an employee or his or her dependents if the employee becomes disabled or dies from an accidental injury or disease acquired due to employment.

In general, any employer with three or more regular employees is required to provide worker's compensation insurance. The employee pays no portion of this insurance.

Employers required to have worker' compensation insurance must prominently display the Workers' Compensation Notice.

There are three methods of obtaining insurance:

  1. Purchase and maintain a workers' compensation policy from a company licensed in North Carolina;
  2. Apply to the North Carolina Department of Insurance for approval as an independent self-insurer;
  3. Become a member of a group self-insurance association licensed by the North Carolina Department of Insurance.

Questions concerning the requirements and rights under the Workers' Compensation Act should be addressed to the Industrial Commission, a division of the NC Department of Commerce, at 1 (800) 688-8349 or click here.

NC New Hires Reporting

Under North Carolina State Law, G.S. 110-129.2, and the Federal Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) all public, private, non-profit, and government employers are required to report newly hired, re-hired, and temporary employees in North Carolina to the North Carolina State Directory of New Hires. The form to use is called a NC New Hire Reporting Form. This form may be mailed in or submitted online at the www.ncnewhires.com.

For more information about this reporting. click here or call 1 (888) 514-4568.

Independent Contractor vs. Employee

Employers should be aware of the difference between independent contractors and employees. Classifying an individual as an independent contractor can make a big difference in terms of federal, state and local requirements; and federal, state and local taxes. According to the IRS, the following factors indicate someone is an independent contractor:

  • The worker hires, supervises and pays his/her assistants;
  • The worker is free to work when and for whom he/she wants;
  • The work is done on the worker's premises;
  • The worker is paid by the job or on straight commission;
  • The worker has the risk of profit or loss;
  • The worker does work for several businesses at one time;
  • The worker's services are available to the general public; and
  • The worker can't be fired except for breach of contract.

(Source: IRS)

If you hire an independent contractor, you should have them complete an IRS Form W-9 before you pay them the first check. This form requires that they give you pertinent information under penalties of perjury that you will need to complete the IRS Form 1099 at the end of the year. The 1099 is required if you pay anyone who is not your employee and is not incorporated $600 or more cumulative for the year.

For more information, consult your local IRS field office.

Links Related to Employees

Business Law site
http://www.business.gov/

Links Related to Worker's Compensation

The NC Industrial Commission
http://www.comp.state.nc.us/ncic/pages/bus&ind.htm

Workers comp insurance laws in NC
http://www.comp.state.nc.us/ncic/pages/faq.htm

Training related to workers comp
http://www.comp.state.nc.us/ncic/pages/safety.htm

My Own Business article regarding insurance coverage for small businesses
http://www.myownbusiness.org/s5/index.html#1

Links Related to Unemployment Compensation

NC Employment Security Commission
https://www.ncesc1.com/Business/default.asp?init=true

About unemployment insurance
https://www.ncesc1.com/Business/UI/uiMain.asp

Legal Information Institute: Description of unemployment compensation
http://topics.law.cornell.edu/wex/Unemployment_compensation

Links Related to Federal Employment Laws

Federal laws prohibiting discrimination in employment
http://www.eeoc.gov/facts/qanda.html

Employment laws for workers and small business owners (Dept. of Labor)
http://www.dol.gov/elaws/

Conclusion: Managing Your Employees

To help keep track of your decisions about employees and requirements related to employees, you may click here to access an "Employee Management Form."


Next: Assistance >>>


 

For more information, contact:
 

Pat Killette
Small Business Center Director
(919) 209-2015
pwkillette@johnstoncc.edu
 
 
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