Record Keeping for Your Workers

Keep permanent records on workers—whether employees or independent contractors—who provide services to your business. The IRS and state tax agencies can demand to see employment records as part of a regular audit or special employment tax audit. Basic employer records should include:

• names, addresses, Social Security numbers, occupations, and dates of employment for everyone paid for their services
• amounts and dates of wage and pension payments to workers
• fringe benefits and goods or services provided to workers (in addition to cash)
• employee tips reported (if applicable)
• Forms W-2 and 1099 copies showing payments to workers, including any that were returned by the post office as undeliverable
• income tax withholding certificates completed by each worker (Forms W-4)
• federal and state payroll tax deposit forms with dates and proof of payment (deposit slip, canceled check, or financial institution receipt)
• federal Forms 940 (annual) and 941 (quarterly) and corresponding state payroll tax forms
• your individual or business income tax returns on which payments to workers were claimed, and
• FICA (Social Security and Medicare) and FUTA (unemployment) taxes paid for each worker.

Checklist for Employers

• Obtain a federal employer identification number by filing IRS Form SS-4 (if you don’t already have one).
• Register with your state’s employment department and make payments of unemployment compensation taxes.
• Have each employee fill out IRS Form W-4, Employee’s Withholding Allowance Certificate, and keep them on file.
• Set up a payroll system for withholding taxes and making regular payroll tax deposits or hire someone to do this.
• File IRS Form 941, Employer’s Quarterly Federal Tax Return, after the end of each quarter.
• File IRS Form 940 or 940-EZ to report your federal unemployment tax after the end of each year.
• File a Form W-2 for each employee annually to report wages to the IRS and state.
• File a Form 1099-MISC to report payments to each independent contractor paid over $600 per year.
• Familiarize yourself with the difference between independent contractors and employees. IRS and state auditors are on the alert for businesses that misclassify workers as independent contractors, and they can levy heavy penalties on violators.

Excerpted from Tax Savvy for Small Business, by Frederick Daily (Nolo).