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Payroll Tax Guide for Daycare Providers and Other Small Business Owners
Federal and California Payroll Tax Forms

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Cash payments provided to most all child care workers are considered wages and subject to employment taxes, so there's no getting around setting up payroll and doing things properly if you are a day care owner with paid helpers. 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 considered employees.

Here is an article that looks at the overall cost of having an employee.

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. This 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 can be high when you miss a deadline.

Our FCC Payroll Service is an affordable option 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.

California employers must pay at least the hourly minimum wage. You cannot pay child care workers 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).

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FEDERAL & CALIFORNIA PAYROLL TAX GUIDE

PLEASE NOTE: Do not rely on this information as your sole source of payroll tax information. Tax rates and procedures are subject to change at any time.

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. 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 (0.6%), however, since 2011, additional FUTA tax has applied in some states
California unemployment insurance (3.4% for new employers; will vary in later years)
California employer training tax (0.1% for new employers; may vary in later years)

The employee pays:

Half of social security (6.2%*) and Medicare (1.45%) contributions
California state disability insurance (0.9% for 2015; 1% for 2012, 2013, and 2014)
Federal income tax withholding
California income tax withholding

*The employee's social security contribution was reduced to 4.2% for 2011 and 2012.

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 below 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 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, certain year end forms are due. Employers must provide a W-2 Form to each employee and to the IRS. Also due is the federal unemployment (FUTA) tax return, Form 940.


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 through the Employment Development Department (EDD) 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 United States. Complete Form I-9, Employment Eligibility Verification from the U.S. Citizenship and Immigration Services. Complete and retain the I-9 for each individual you hire. This includes citizens and non-citizens. The form will help you examine the employment eligibility and identity document(s) an employee presents to determine whether the document(s) reasonably appear to be genuine and relate to the individual. The list of acceptable documents can be found on the last page of the form.

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.


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 DE9, California Quarterly Contribution Return and Report of Wages

EDD Form DE9C, California Contribution Return and Report of Wages (Continuation)

Here are the Annual Payroll Tax Forms (due January 31):

IRS Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return (Form 940 instructions)

IRS Form 944, Employer's Annual Federal Tax Return (Form 944 instructions)

Most employers file four quarterly 941 forms. To simplify things, the IRS asks some employers to file just one 944 form at the end of the year.

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. Personally, I usually opt out for California employers. They have to file state forms every three months anyway and I find it easier to file the federal 941 forms at the same time.


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. I find that most child care providers qualify to pay their employment taxes quarterly.

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 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.

Federal tax payments must be made electronically. Sign up to pay through the Electronic Federal Tax Payment System (EFTPS).

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 for income tax purposes, sign up for a second EFTPS account under your social security number (SSN).

California EDD payments can be made electronically through the California EFT System. Select the Employment Development Department and sign up as a first time user. You can also pay state payroll taxes 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, so order the forms early. 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.

Form W-2, Wage and Tax Statement

Form W-3, Transmittal of Wage and Tax Statements

W-2 and W-3 instructions

Send W-2s to the Social Security Administration (not to the IRS), along with the W-3 transmittal form, no later than February 28.

Prefer a simpler method and a due date of March 31? Forget the scannable forms and file electronically!

This is easily done through the SSA's Business Services Online (BSO). There you can register, create, save, print and submit W-2s online.


YOU MADE IT TO THE END! GOOD LUCK!

If you need assistance, try our affordable FCC Payroll Service for California day care providers and other small business owners.


Last update: 26 January 2015

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© 2010, All Rights Reserved Alison T. Jacks / Family Child Care Taxes

Alison T. Jacks is an Enrolled Agent specializing in tax preparation and payroll services for California family child care providers. A graduate of the University of California, Berkeley, she is dedicated to effective client communication and attention to detail. Alison has a diverse clientele, but since 2007, she has been accepting child care provider clients only. The FCC Payroll Service was launched in 2010 to meet the needs of preschool and day care employers.

Alison is located in San Francisco East Bay City of Fremont, but she works with clients living throughout Central, Southern, and Northern California. She is a member of the National Association of Tax Professionals.

Website by Cooksey-Talbott Studio.

Special thanks to Cooksey-Talbott for his photographs of the Fremont Hills.