The federal district of Washington, D.C., has unique payroll tax laws that might confuse you if you’re doing payroll for the first time in Washington, D.C.. In this guide to doing payroll in Washington, D.C., we’ll cover everything from how to calculate payroll taxes, to where your business can get help with its payroll taxes, to what federal and local government agencies you need to report your taxes and pay your employees to. You’ll even find links to free forms your business might need!
What is payroll?
Payroll is one of the most crucial yet overlooked aspects of operating a business. When you’re ready to start your own company and work for yourself, you’ll need knowledge about how payroll works: what it does, how it benefits you and your employees, how much it costs to offer an employee wage or salary as well as what the federal and state rules are for paying employees or salaried workers in Washington D.C., Maryland or Virginia.
Does my business need an accountant or bookkeeper?
An accountant or bookkeeper is useful for managing finances and taxes when starting a business. However, this does not mean that you need one on the payroll.
Employee vs independent contractor
Many businesses have employees and independent contractors. Businesses with employees need to make sure that they are paying workers their required wage, withholding the appropriate tax withholdings (e.g., federal income taxes, Social Security and Medicare taxes), and making contributions for employment-based benefits like health insurance premiums, life insurance premiums, worker’s compensation premiums (for eligible states), and state unemployment insurance payments (in most states).
Independent contractors do not have any wage requirements or employee benefits.
Understanding your tax obligations
As an employer in the District of Columbia, you will be required to withhold both Federal and DC taxes from your employee’s wages. Generally, the amount withheld by employers is calculated using either the Social Security wage base for employees earning $118,500 or less (in 2017), or twice the Social Security wage base for employees earning over $118,500.
For each employee, you will need their social security number, address, and phone number (before the first pay period). You will also need their bank information for direct deposit. They may also want you to fill out a W-4 for them with their allowance for withholdings on their wages per federal tax law regulations.
Tax forms for employers
Establishing a business with any number of employees and you will need to comply with federal and state payroll tax laws that regulate how much you can withhold from your employees for tax purposes, how often you can pay them (weekly, biweekly or monthly) and when their payment cycles will start based on their pay frequency (beginning on the first day of work or retroactively). This section covers both federal and state payroll tax obligations.
Tax withholdings from employee paychecks
Generally, you must withhold 7% of an employee’s gross wages (the amount before taxes) and pay this to the District on their behalf as follows: 3% withholding for income tax; 2% withholding for disability insurance premium; and 1% withholding for emergency medical insurance premium. If the wages are taxable, you must withhold 2% of the gross wages (again before taxes) as both income tax and Medicare withholding unless one of the exceptions applies.
Federal wage and tax statements (Form W-2)
Both employers and employees must prepare Form W-2, but the process for doing so is different. Employers should provide copies of the form to each employee and file a copy with their federal employer identification number (FEIN) at the time they are filed with IRS. This can be done electronically or by mailing a copy to an address provided on the form itself.
State wage and tax statements (Forms 941)
The Federal Unemployment Tax Act (FUTA) imposes a tax on employers of 6% of the first $7000 wages paid to each employee during the calendar year with respect to their employment. The FUTA is an excise tax that is imposed on your company for employing people who may not be able to pay taxes themselves. Employers must remit payments quarterly by January 15th, April 15th, June 15th, and September 15th.
Calculating annual payroll taxes
Unlike other taxes such as sales and property taxes, payroll taxes are paid with every paycheck. For example, if a company pays its employees $10 per hour for 20 hours per week the annual gross salary is $40,000.
Expenses related to commuting by bicycle, public transportation, etc.
Bicycle commuting is a great way to save money and feel good about your contribution to the environment. It’s also a lot easier on your body than sitting in a car all day!
Documenting expenses related to business travel and entertainment
It is customary for employees traveling out-of-state to submit receipts related to expenses such as travel and lodging. These types of payments are considered out-of-state expenditures and may be deducted as long as they adhere to certain tax guidelines with the IRS.