Hiring a Remote Employee, Part 4: Employment-Related Taxes

Emily Lewis

In this part 4 of my series, I'm going to detail the federal and state payroll taxes necessary once an employee is hired. And, because I love the ease and convenience of paying online, I'll cover the various online accounts I had to create with the IRS and Washington state.

If you haven't read the previous articles in this series, be sure you don't miss out:

  • Part 1 details how I hired an HR consultant and the various employment documents that were necessary.
  • Part 2 dives into employment eligibility verification for remote employees, as well as document storage and record retention requirements.
  • Part 3 covers payroll and what I needed to do with an out–of–state employee.

EFTPS

As I detailed in part 1, my first step after deciding to hire Lea was a call to my accountant, Rachel Kefauver. Among a host of other invaluable information, she gave me the lowdown on the new taxes I would have to pay as an employer:

At the time, we weren't aware of the economic nexus with Washington state (see part 3), so neither of us knew about some of the additional state taxes I would have to pay. But I'm getting ahead of myself… Let's start with federal payroll taxes.

As an LLC, I pay my quarterly estimated federal income taxes as an individual, tied to my social security number. And I pay these online using EFTPS, the IRS' Electronic Federal Tax Payment System. However, Rachel informed me that the payroll-related taxes I would be responsible for need to be tied to a federal EIN (Employer Identification Number). While I already had an EIN, which I had obtained during the process of registering my LLC in New Mexico, my EFTPS account was tied to my social security number.

So, I had to set up a second EFTPS account with my EIN. This is a fairly simple process. You set up a new account on EFTPS and enter all of the required information, including your bank routing and account numbers. In a week or two, EFTPS sends you a PIN that you use to activate your account. The main thing to remember is that it does take up to two weeks to receive you PIN, so you want to be sure to get this setup well in advance of your first tax payment.

Another thing to make note of: EFTPS does not allow you to use the same bank account for more than one account. Of course, as a quality federal service, it doesn't tell you this while you are setting up your account, nor is this detail documented anywhere I could find. I discovered this nuance when I got a letter two weeks after setting up my EIN-related account, denying me access to activate it and log on.

This lead to about a month of paperwork, faxes and phone calls to EFTPS customer service, which was about as helpful as you would expect any federal service to be … which is to say, not at all.

When all was said and done, I had to cancel the EIN-related account I had initially set up by faxing a hard-copy form. (Apparently, while they denied me access, the account remained in the system but couldn't be modified, because I didn't have access to log on.) Once EFTPS confirmed it was cancelled, I had to apply again with my EIN, but this time with a different bank account.

The bottom line with EFTPS is that you can have multiple accounts with it. However, each one must be tied to a unique SSN or EIN, and each one must be tied to a unique bank account.

Federal Employment Taxes

The good news is that once I had my two unique EFTPS accounts set up, paying federal income and payroll taxes has been simple, fast and free.

Filing, on the other hand, I decided let my accountant handle. I give her the income and payroll numbers each quarter, she gives me the federal forms to sign and mail, and I make payments via EFTPS. It's worth every penny and hour it saves me.

Though Rachel and her team handle the filing, I don't like to be totally ignorant of what I'm paying:

  • FICA tax, which is filed with form 941, is the employer's portion of social security and Medicare tax withheld from employee's paychecks. Employees also pay. It is due quarterly.
  • FUTA, which is filed with form 940, is the federal unemployment tax based on payroll. There is no employee contribution; only employer's pay this.

Depending on your tax liability, FUTA can be paid quarterly or annually. If your quarterly liability is less than $500, you can roll over to the next quarter(s) and could even end up paying FUTA annually.

State Unemployment

Most employers are also required to pay state unemployment tax, as well as FUTA. As I detailed in part 3, I have to pay SUTA to Washington state because that is where Lea resides. I do not have to pay state unemployment to New Mexico. (In fact, I don't have to pay any employment-related taxes in New Mexico.)

Unlike federal unemployment, SUTA (at least in Washington) is due quarterly. I don't have the option to rollover or pay annually based on my liability. But, like my federal taxes, I can pay online.

Again, as covered in part 3, you can't just set up an account with Washington's Employment Security Department (ESD) if you are a “new” business. You have to apply for a business license, which, once approved, automatically creates accounts with ESD, as well as with the Departments of Labor & Industries and Revenue.

The catch is if you have a nexus with Washington. If you do, before you apply for a business license, you have to register your business. In my case, I had to register as a Foreign Limited Liability Company.

So, basically, to pay Washington unemployment online you need to first 1) be registered in the state and 2) have a business license.

Workers' Compensation Insurance

In New Mexico, you don't have to pay workers' compensation insurance if you employ less than three people. But, in Washington, workers' compensation is required for almost all employers. As I mentioned in part 2, Lea is considered a Washington employee in this regard, so that meant I had to pay workers' comp.

In Washington, workers' comp is filed and paid to the Department of Labor & Industries. Setting up an account is easy, as is filing and paying. As a bonus (and further testament to the quality of support from Washington state departments), I was assigned an agent from L&I who is available with any questions I have, any time. Seriously! A real person!

B&O Taxes and Apportionment

Because I have an economic nexus with Washington, I do have to file more than employment-related taxes. The state does not collect personal or corporate income tax, so I don't have to pay income taxes in both New Mexico and Washington. However, Washington does collect business and occupation taxes. These are much like New Mexico's Gross Receipts Tax, which are based on gross sales.

These can be filed and paid monthly, quarterly or annually, depending on your liability. For me, I file quarterly, and when I filed for Q3 it was a shock to the system (as in much more money than I anticipated). Thankfully, I called the Department of Revenue and learned about apportionment.

B&O taxes are only due on apportionable income, which is income earned from certain services. My business is classified with these services, but due to Washington's economic nexus calculation, none of my income (so far) is attributed to Washington. As such, I only need to file B&O taxes quarterly, reporting zero income, which means no tax is due. This could change if I get a client based in Washington.

Use Tax

The last Washington tax that I'm responsible for filing is use tax. This tax is for goods and certain services that are purchased but were not assessed sales tax. The purchase doesn't even need to be made in Washington. It could be from a different state that doesn't charge sales tax or charges a sales tax less than Washington's.

They key for use tax, though, is that the goods and services need to be used in the state of Washington. Fortunately for me, my business doesn't use any goods or services in Washington (so far) that aren't charged sales tax. So, much like the B&O taxes, I only need to file use tax and report zero value of goods and services, which means no tax is due.

Knowledge Bomb

With that, I've reached the end of my “Hiring a Remote Employee” series. I'm pretty sure I covered everything I learned and had to do, but I'm also pretty sure there's stuff I overlooked because there is just so much involved. Also, while the federal responsibilities are for most (if not all) employers, every state is different. What I needed to do in Washington could be different in other states.

If you are considering hiring your first employee, remote or not, I hope these articles provide you some perspective and give you a bit of guidance for your own processes. Thanks for reading!

Legal Blah Blah

I hope it goes without saying, but please don't take anything I've posted here as anything other than my and Lea's own personal experiences. What worked for us is just that … what worked for us.

If you need expert advice, seek an expert.

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