What to do when your mom |amp| pop shop adds employees

Have you started your own business and feel like you're working 25 hours a day to get everything done? Hanging out a "help wanted" sign may help you expand operations. Consider these factors before you hire your first employee:

Payroll taxes. You will need a federal employer identification number (use IRS form SS-4) before you begin to withhold and pay various payroll taxes. In Missouri, you also must register with the Missouri Department of Revenue (use form 2643), after which you will receive a permanent registration number.

As an employer, you must withhold and pay federal income tax from the first day you pay wages. Your liability ends when you cease paying employee wages.

Exempt status. An employee with no income tax liability last year and who expects to have none this year may claim exempt from income tax withholding. An employee cannot claim exempt from withholding if income exceeds $700 and includes more than $250 in unearned income (interest, dividends, etc.), and another person can claim the employee as a tax-return dependent.

Deposits. You must mail or deliver withheld income, Social Security and Medicare taxes by check, money order or cash to an authorized financial institution or Federal Reserve Bank. The IRS will send you a federal tax deposit, or FTD, coupon book six weeks after you receive your employer identification number. Some employers must deposit taxes by electronic funds transfer.

Employers must make deposits monthly or semiweekly based on the tax amount reported from July 1 to June 30 of the prior year. Since you will be a first-time employer with no tax liability for that period, you will deposit taxes by the 15th day of each month after the tax liability has been incurred (i.e., payday).

If your accumulated taxes for a return period are less than $1,000, no deposits are required and the tax can be paid quarterly (using IRS form 941).

Unemployment tax. Although you have to report federal unemployment tax, or FUTA, only once a year (using IRS form 940), you must make quarterly deposits unless your cumulative tax liability at the end of the quarter is $100 or less.

State taxes. You will deposit Missouri income tax withholding quarter-monthly, monthly, quarterly or annually. Initially, you will be assigned a filing frequency based on your estimated future withholdings.

If you are liable for Missouri unemployment tax, you must file a contribution and wage report, and pay the contribution during the month following the end of each calendar quarter. You can become liable for these taxes if any of these situations occurs:

You have a total payroll of $1,500 or more in a calendar quarter during either the current or preceding calendar year.

You employ a worker for some portion of a day in each of 20 different weeks in either the current or preceding calendar year.

You acquire and continue without interruption substantially all the business of another employer.

You are liable under the Federal Unemployment Tax Act and employ a worker in Missouri.

Employee benefits. Employees don't take jobs based solely on how much they can earn. You should consider offering employee benefits.

Sick pay. Your sick pay policy may provide full pay from the employee's first day of sickness up to a certain amount of days or portions of days per year. Under a cumulative policy, you will provide a set number of sick days each year and allow employees to accumulate or "bank" unused sick days.

A noncumulative policy gives employees a certain number of paid sick days per year, with unused sick days forfeited at the end of the year. Sick time off is normally subject to withholding, as well.

Health insurance. If you pay and deduct health insurance premiums for the medical care of an employee, the employee's spouse and/or children, the premiums are not subject to withholding as long as you make the payments under a plan you've established.

At least one self-employed person found a way, with IRS approval, to deduct all of his family's medical expenses. He hired his wife to work in the business as a bona fide employee. Under the business's accident and health plan that covered all employees, the wife was reimbursed for her own medical expenses, and those of her husband (the business owner) and their dependents. The IRS ruled that the business could deduct reimbursed medical expenses, but the wife wouldn't be taxed on any of the reimbursements.

Retirement plans. You may want to establish a qualified retirement plan. Some plans let you deduct contributions, which aren't taxed as income until amounts are withdrawn. Because of the complexities of many qualified retirement plans, you might consider a simplified employee pension, or SEP, plan, which requires less paperwork.

Another plan option for sole proprietors, offering tax advantages with fewer restrictions and administrative requirements than qualified plans, is a savings incentive match plan for employees, or SIMPLE.

(Jeff Rowe is a CPA and tax supervisor with the Springfield office of Baird, Kurtz & Dobson, certified public accountants.)