My company doesn’t want to use a PEO, what do we do now?

If your company is NOT considering using a Professional Employer Organization or is considering leaving your current PEO to do things "in-house", here is a quick check list of things to get done. Being an employer means you have tax obligations. Your responsibilities include.

As an employer you are responsible for withholding employee's taxes for: (as of tax year 2007)

• Federal Income Tax Withholding
• Social Security Taxes (FICA) - 6.2% for wages (per employee) up to $84,600. With your employer matching amount the effective rate is 12.4%.
• Medicare Taxes - Currently at 1.45% for all wages (no wage cap). With your employer matching the effective rate is 2.9%
• Federal Unemployment Taxes (FUTA) - 6.2% up to $7,000 of wages per employee. 5.4% credited back for payment of state unemployment taxes regardless of actual state rates. Effective rate is .8%.
• State Income Tax Withholding - depending on the state where the employee lives.

You are responsible for these taxes and in addition, as the employer you are responsible for matching the amounts withheld for FICA and Medicare taxes.

Your Checklist

• Establish a Federal Tax Withholding Account.

  First you need to establsh your FEIN (Federal Employer Identification Number). If you do not already have and FEIN, complete IRS FORM SS-4 to make application for a Federal Employer Identification Number (FEIN). You will also need to elect a Reporting Agent. A Reporting Agent assists employers make required tax deposits and tax filings. You will need to complete IRS Form 8655 that designates your Reporting Agent. The signator needs to be an officer on your company. Most payroll companies also act as Reporting Agents. If you prefer to make the payments yourself you can set up an account through the IRS EFTPS system .

• Establish Applicable State Income Tax Withholding Account(s).

  If you are not outsourcing your Human Resources and administrative task by using a Professional Employer Organization (PEO) then you have responsibility for making the tax withholding and deposits for employees in each state where you have employees. View tax withholding requirements in your state .

• Establish your Federal Unemployment Tax (FUTA) Calendar and Establish Deposit Accounts.

  Use the IRS Tax calendar to establish your payment schedule. Use Form 8109 when you make your tax deposit at an Federal Reserve Bank for your area or another authorized institution. Calculate amounts (based on per period employee wages) and make payments per the schedule rules for your size company. See IRS Instructions for Form 940 - Employer's Annual federal Unemployment Tax Return for detailed instructions.

• Establish your State Unemployment Tax Account - (SUTA).

  When your company has employees, it has an obligation to contribute to the state Unemployment Insurance fund for each state where you have employees. Amounts are charged based on a percentage of each employee wages up to a capped wage amount. Amounts vary based on your state and your company's experience with your states UI system. View information about SUTA rates for new businesses . You will need to find your states unemployment insurance (SUTA) regulatory body and get instructions for establishing your account, determining your rating and making your quarterly payments. Most states now require employers with over 50 employees to file electronically. Click here to view a list of State Unemployment Insurance resources for your state .

• Acquire Workers' Compensation Insurance Coverage.

  Determine risk type for workers (workers compensation classifications) and shop for a Workers’ Compensation insurance policy. Purchase Workers' Compensation coverage and pay up front for at least six months of coverage. Learn about how workers' compensation insurance coverage is priced and how your coverage needs are based on the type of work being performed and the number of people you employ. In addition learn how your work comp claims will affect your work comp modification factor (also known as your experience rating or mod rate) which in turn affect the price you will pay for your policy. Visit this link for more information about the Workers' Compensation Insurance regulations in your state.

• Ensure your payroll system is set up to file Federal forms including W-2s, W-3s, W-4s, 940s and 941s (quarterly).

• Obtain, prepare and file Immigration & Naturalization I-9 forms (new versions) for existing staff and new hires. Handle any respondent "no-match" letters from the Social Security Administration (SSA).

  The legal requirements for validating the citizenship status of ALL employment applicatnts are changing rapidly as the United States government places more emphasis on stopping the employment of illegal aliens. All employers should be aware of the coming requirments for the Basic Pilot and Employment Eligibility Verfication - EEV programs . While the legal form for these programs will be changing through time all employers need to be paying attention to the rules issued by the Department of Homeland Security and Social Security Administration. Effective in 2008 a new Form I9 is required to be complete and on file for at least 3 years and one year after employment ends for ALL employees.

• Handle paperwork and assume employer liability for all court orders, wage garnishments and tax levies. Ensure levy deduction priorities are followed.

  Ensure your payroll department knows the rules for wage garnishments due to court orders for alimony, child support, IRS levies and other court orders. Rules are specific about the rights of employees when wages are being garnished. Employers found in willful violation of the provisions relating to employee termination due wage garnishment may find themselves liable for payment of back wages, payment of improperly garnished amounts and be forced to reistate the employee. In addition they may prosecuted criminally and fined up to $1,000 or imprisoned for up to a year, or both. In addition some state laws and jurisdictions may be in conflict with one another over their order of priority when multiple garnishments are competing for the employee's wages. Also, certain retirement accounts may not be considered when determining the amount of wages eligible for wage garnishment. Employers with employee garnishments are expected to calculate, deduct and remit the proper amounts to the court of jurisdiction. Consulting a PEO or payroll expert is advised in these circumstances. Review the Department of Labor rules for wage garnishment here.

• Determine your company’s willingness to contribute to employee benefits.

  Your senior management staff needs to assess the necessity and affordabilty of an employee benefits package which may include health insurance, supplemental insurances (like short and long term disabilty insurance), retirement and 401K plans. Failure to provide some level of employee benefits will usually mean that employees seek other job opportunities elsewhere that will offer those benefits. This results in higher employee turnover, higher recruitment costs, higher training costs, higher State Unemployment Insurance costs. High turnover can impair your company's productivity and product quality.

• Research, price, compare, obtain and monitor employee benefits which might include medical, prescription card, dental, life insurance, AD&D, disability coverage, Employee Assistance Program (EAP) and Credit Union.

  Each of your desired benefit products needs to be shopped individualy to determine the best options for your company. Your local insurance agent may be able to assist with your search. Health insurance plans often have wide variations in plan provisions, procedure coverage, geographic coverage, doctor networks, premium costs and deductibles. In addition most plans require at least a 75% participation rate (percent of eligible employees) to even provide an insurance quote. Start your shopping process by preparing a benefits census that descibes the age, sex and level of dependent coverage for all of your employees. Without this information, you stand little chance of even getting a health insurance quote. Analize the cost/benefit of electing a higher or lower deductible and ensure your employees will find it acceptable.

• Determine and communicate effective date of new coverage for employee benefits. Have employees complete all required enrollment forms and elect levels of coverage.

• Ensure 1993's Health Care Financing Administration (HCFA) filing requirements are met along with administrative requirements associated with the new 1997 Health Insurance Portability and Accountability Act (HIPAA).

  In year end 2008, Congress declined funding to enforce a new reporting requirement for employers that maintain health plans. The filing requirement, known as form H-2 because it was to resemble a W-2, caught most employers by surprise and was criticized as an instant burden to small businesses. A provision of the 1993 Revenue Reconciliation Act said employers (or third-party plan administrators or insurers) must report the following health insurance coverage information to a newly established data bank Any electronic depository of data. at the Health Care Financing Administration (HCFA):

  • Name and Social Security number of each person and dependent covered under the plan.
  • Whether the type of health coverage elected is for single or family coverage.
  • The name, address and identification number of the group health plan the employee elects.
  • The length of time for which coverage is selected.
  • The name, address and tax identification number of the employer.

• Recognize your liability and implement policies to ensure compliance under the ADA , Title VII (EEOC) , Civil Rights Act of 1991 , Fair Labor Standards Act and Age Discrimination in Employment Act .

• Make arrangements to set up and manage reporting requirements for IRS Section 125 (Cafeteria) plan if you intend to keep this tax advantage.

• Make arrangements to set up a 401(k) plan .

  Review the IRS rules for 401K plans and be aware of the differences between Highly Compensated Employees (HCEs) and your other workers since you will not be part of a "large employee base" plan.

• File Federal IRS Form 5500 for your 401(k) plan.

• Analyze your cash flow to account for the switch from a scheduled budget allocation for employment services to irregular payments and periodic lump-sum amounts for these services.

• Implement a payroll solution with either an in-house software solution or a service bureau. Ensure all payroll and tax withholdings are accurate.

Because a PEO offer relief from many of these business related challenges, thousands of companies across the USA are now using a PEO to help make their business more successful.

This information is a publication of StaffMarket Services, LLC. and is intended to provide general information regarding HR subjects, legal issues and developments to our clients and other friends. It should not be construed as legal advice or a legal opinion on any specific facts or situations. For further information on your own situation, we encourage you to contact the author of the article or any other member of our firm. Any tax information or written tax advice contained herein (including any attachments) is not intended to be tax advise and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer.

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