 Most family child care providers use a full service payroll company to generate paychecks, W-2s, and prepare quarterly payroll tax returns, as well as making payroll tax deposits. Using a payroll company is the best way to go for most small business owners. It can be a headache to deal with the many payroll tax forms yourself (federal and state), especially since the penalties are high when you miss a deadline.
Family Child Care Taxes has an affordable payroll service for California child care providers. If you feel you have the time, as well as a knack for detail-oriented number crunching and remembering deadlines, you can certainly do all or some of the payroll tax work yourself. Even if you engage a payroll service, you should know enough about payroll taxes to monitor the service you receive. This Federal and California Payroll Tax Guide serves both of these purposes. Remember, child care workers are almost always employees, so there's no getting around setting up payroll and doing things properly. Visit the IRS website and learn how to distinguish between an employee and an independent contractor. Even very short-time or part-time workers are employees. California family child care providers must pay their workers an hourly wage of at least the $8.00 per hour California minimum wage (effective January 1, 2008). You cannot pay a flat daily, weekly or monthly amount. Have your workers sign in and out to document hours worked. For information regarding other California labor laws, contact the Division of Labor Standards Enforcement (DLSE) within the Department of Industrial Relations (DIR). ... FEDERAL & CALIFORNIA PAYROLL TAX GUIDE This guide provides instructions for commercial employers (businesses). If you are a household employer, consult IRS Publication 926, Household Employer's Tax Guide and EDD Publication DE 8829, California Household Employer's Guide. A household employer is an individual who hires a household worker, such as a nanny, housekeeper or elder care giver. Child care providers, and other home business owners, are considered commercial employers, NOT household employers.
WHAT ARE PAYROLL TAXES?
There are federal and state payroll taxes (also known as employment taxes), which are further broken down between taxes that are paid by the employER and those paid by the employEE. Federal employment taxes are paid to the Internal Revenue Service (IRS). Complete federal employer information can be found in IRS Publication 15 (Circular E) Employer's Tax Guide. (For updated 2009 tax tables, refer to IRS Publication 15-T.) Help is available through the IRS Business & Specialty Tax Line at 800-829-4933. California employment taxes are paid to the Employment Development Department (EDD). Complete state employer information can be found in the California Employer's Guide. For assistance, call the EDD Payroll Assistance Line at 888-745-3886. The employer pays: Half of social security (6.2%) and Medicare (1.45%) contributions
Federal unemployment insurance (0.8%)
California unemployment insurance (3.4% for new employers and varies after that)
California employer training tax (0.1%) The employee pays: Half of social security (6.2%) and Medicare (1.45%) contributions
California state disability insurance (1.1% for 2009)
Federal income tax withholding
California income tax withholding You can avoid some of these taxes if you hire your own child under age 21, your spouse or a parent. This includes domestic partner employees, for California tax purposes.
PAYROLL TASKS
Every payday, the employer is responsible for deducting the employee-paid taxes from "gross pay" in order to calculate the employee's "net paycheck." Essentially, the employer is taking custody of some of the employee's earnings so that it can be turned over to the government. Payroll tax deposits made by the employer come from both employer and employee dollars. One reason for high payroll tax penalties is to ensure that employers turn over their employees' withheld taxes. Employers have a fiduciary responsibility, which is the legal way of saying they have a sacred duty to safeguard tax dollars belonging to their employees. The Internal Revenue Service takes a dim view of businesses that pay their bills using employee money and neglect their payroll tax deposits. They come down hard on such employers. Every month, small business employers must make payroll tax deposits. However, many of you have payroll small enough to allow for quarterly payments. It is also possible that you will be notified by the IRS to pay annually (see the next paragraph). See the "PAYROLL TAX DEPOSITS" section later for further information. Large employers are required to make tax deposits more often than monthly. Complete deposit rules are covered in IRS Pub 15 (Circular E) and the California Employer's Guide. Every quarter, employers must file federal and California payroll tax returns. Some small employers, including many childcare providers, will be directed by the IRS to file (and pay) annually using Form 944, rather than the quarterly Form 941. There is no such option for California, so state payroll returns are filed quarterly. Every January, employers must file certain annual tax returns and prepare W-2 Forms for their employees. The annual tax returns include IRS Form 940 for unemployment insurance and California DE 7, Annual Reconciliation Statement. Further information follows, including links to all forms and instructions.
GETTING STARTED
If you don't already have a Federal Employer Identification Number (EIN), you should apply for an EIN now. Get your California employer id number after you receive your Federal EIN. Apply online using the Employment Development Department (EDD) EZReg Service within fifteen (15) days after paying over $100 in wages in a calendar quarter. Alternatively, you can use CA EDD Form DE-1, Registration Form for Commercial Employers, and apply by mail, fax or telephone (see the DE 1 instructions on page 2). When you hire someone, you must determine if the person is legal to work in the US. Complete Form I-9, Employment Eligibility Verification from the Department of Homeland Security. Also available in Spanish: Form I-9, Employment Eligibility Verification (Sp) Have your employee fill out Form W-4, Employee's Withholding Allowance Certificate. Also available in Spanish: Form W-4, Employee's Withholding Allowance Certificate (Sp). IMPORTANT: Keep the I-9 and the W-4 forms in your records. DO NOT send these forms to the government. Do send or fax Form DE 34, Report of New Employee(s) to the California EDD within 20 days of hiring or rehiring a worker. Finally, before we continue, be aware that employers must have workers' compensation coverage. California imposes severe penalties on employers who don't comply. And if, after reading this far, you are thinking that it's much too complicated to bother following employment tax laws, read about what can happen if you don't treat your workers as proper employees and how easy it is for them to turn you in to the IRS.
PAYROLL TAX RETURNS
You can fill out most of the forms below online before you print them. Some of the forms can be saved to your computer as PDF files. Always print and save copies of payroll tax forms for your records. At the end of every quarter, you have one month to file your quarterly payroll tax returns, unless you have been notified by the IRS to file annually. Such employers must still file their California payroll tax returns quarterly, however. The quarters end on these dates: March 31
June 30
September 30
December 31 Payroll tax returns are due on these dates (or the first business day thereafter if the due date falls on a weekend or holiday): April 30
July 31
October 31
January 31 Here are the Quarterly Payroll Tax Forms: IRS Form 941, Employer's Quarterly Federal Tax Return (Form 941 instructions) EDD Form DE 6, California Quarterly Wage and Withholding Report Here are the Annual Payroll Tax Forms (due January 31): IRS Form 944, Employer's Annual Federal Tax Return (Form 944 instructions) The IRS will notify you if they want you to file this annual form, rather than the quarterly Form 941. You can opt in or opt out of filing Form 944 for the current year by calling 800-829-4933 no later than April 1.) IRS Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return (Form 940 instructions) EDD Form DE-7, CA Annual Reconciliation Statement
PAYROLL TAX DEPOSITS
In addition to filing tax returns quarterly, you can make payments quarterly if the total tax owed for the quarter is less than $2,500, for federal tax purposes, or $350, for California purposes. If you are above either of these thresholds, refer to the federal and/or state employer guide to see whether you must pay monthly or semi-weekly. Most child care providers and other small businesses are on a monthly payment schedule. For federal purposes, you can pay annually if you are filing Form 944. I recommend that you still make payments quarterly, however. That way you will avoid having to make one large payroll tax payment at the end of the year. Form 944 filers can make payments as often as desired, but must pay in full no later than January 31. I recommend that you make payroll tax deposits electronically. This is the most convenient method and avoids the possibility of your check getting lost in the mail. IRS payments are made through the Electronic Federal Tax Payment System (EFTPS). It is also possible to pay by check using Form 8109, Federal Tax Deposit Coupon, but you have to get your hands on the form first (it cannot be downloaded) and that is easier said than done. Therefore, using EFTPS is essentially required, but signup is easy. IMPORTANT: Register for EFTPS under your EIN to make payroll tax payments (Form 940, 941 or 944 payments). If you also want to make estimated tax payments electronically, then register a second time under your social security number. California EDD payments can be made electronically through the California EFT System. First you must register using the DE 26 Electronic Funds Transfer Authorization Agreement. Fill out Section II and use the ACH Debit method. You also have the option to pay state payroll taxes by check using a DE 88 tax deposit coupon.
W-2 FORMS
Provide W-2 forms to your employees no later than January 31 (or the first business day thereafter if the due date falls on a weekend or holiday). You cannot download W-2 forms from the Internet. You must obtain the official red scannable forms from the IRS (1-800-829-3676) or by purchasing them at a local office supply store. You need both the W-2 form (which contain two forms per page) and the W-3 transmittal form. The office supply W-2 packages include W-3 forms. Send W-2s to the Social Security Administration, along with the W-3 transmittal form, no later than February 28. (These forms are NOT sent to the IRS.) IRS W-2, Wage and Tax Statement IRS W-2 and W-3 instructions Better yet, forget dealing with these red scannable forms and go to the SSA's Business Services Online. Here you can register, create, save, print and submit W-2s online. I've been using this service for years and love it.
YOU MADE IT TO THE END! GOOD LUCK!
If you need assistance, try our affordable payroll service for California day care providers.
Last update: 1 May 2010
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