Hiring Employees

Checklist for Hiring Employees

How to withhold taxes for income tax, Social Security Tax and Medicare Taxes

To know how much income tax to withhold from employees' wages, you should have a Form W–4, Employee's Withholding Allowance Certificate, on file for each employee.  Ask all new employees to give you a signed Form W–4, when they start work or help the employee complete the Form W–4, using the Form W-4 Calculator. Make the form effective with the first wage payment. If a new employee does not give you a completed Form W-4, withhold tax as if he or she is single, with no withholding allowances.

A Form W-4 remains in effect until the employee gives you a new one. If an employee gives you a Form W-4 that replaces an existing Form W-4, begin withholding no later than the start of the first payroll period ending on or after the 30th day from the date you received the replacement Form W-4. For exceptions, see Publication 15 under “Exemption from income tax withholding,” “Sending certain Forms W-4 to the IRS,” and “Invalid Forms W-4.”

The amount of income tax withholding must be based on filing status and withholding allowances.

Wage Bracket Method

Under the wage bracket method, find the proper table in Publication 15 for your payroll period and the employee's marital status as shown on his or her Form W-4. Then, based on the number of withholding allowances claimed on the Form W-4 and the amount of wages, find the amount of tax to withhold.

Employment Tax Rates & Wage Base

Social Security Tax:
Tax Rate - 6.2% each for employers and employees
Wage Base - $97,500 for 2007, $102,000 for 2008

Medicare Tax:
Tax Rate-1.45% each for employers and employees
All wages subject to Medicare tax

Federal Unemployment (FUTA) Tax:
Tax Rate-6.2% before state credit (employers only)
Wage Base-$7,000

Agricultural Employers. Generally, you must withhold social security and Medicare taxes on all cash wage payments you make to your employees.

The $150 Test or the $2,500 Test for Farmwork
All cash wages you pay to an employee during the year for farmwork are subject to social security and Medicare taxes and income tax withholding if either of the two tests below is met:

• You pay cash wages to an employee of $150 or more in a year for farmwork (count all cash wages paid on a time, piecework, or other basis). The $150 test applies separately to each farmworker you employ. If you employ a family of workers, each member is treated separately. Do not count wages paid by other employers.
• The total you pay for farmwork (cash and noncash) to all your employees is $2,500 or more during the year.

Income Tax Withholding Methods

Important References

Publication 15           Circular E, Employer’s Tax Guide
Form W–4                Employee’s Withholding Allowance Certificate
Publication 51           Circular A, Agricultural Employer’s Tax Guide
Publication 553         Highlights of 2006 Tax Changes

Web Link

Social Security Administration