Like HowStuffWorks on Facebook!

How Employee Compensation Works


Regulatory Issues and Government Requirements

The only thing the IRS requires is that business's withhold and match FICA (social security), pay unemployment insurance, and pay workers' compensation insurance. You are required by the state to pay unemployment insurance tax if you have one or more employees for at least 20 weeks during the calendar year, or if you paid at least $1500 in wages during the calendar year. If you have at least three employees you must carry workers' compensation insurance in case one of your employees is injured on the job. This is also administered through the state.

To better understand how FICA tax is set up, keep in mind that the FICA tax, also known as the Social Security tax, is paid equally by the employer and employee. In other words, it is the tax that you withhold from the employee's pay and match. The tax is composed of two elements:

  1. OASDI (6.2%) - Old Age, Survivor and Disability portion of the tax is paid on wages up to the maximum covered wage base for the year. This cap changes every year, so make sure you verify the current level. (For 2003 it is $87,000).
  2. HI (1.45%) - The hospital insurance or Medicare portion of the tax is paid on all wages, without limit (not like the $87k mentioned above).

IRS Form 5500

As an employer who offers benefits for your employees, you have to be in compliance with regulations of the IRS, the Department of Labor/ERISA, the Pension Benefit Guarantee Corporation, and the Social Security Administration. To communicate this information you have to fill out IRS Form 5500, which collects information about your plan qualification, financial condition, and operations. This form has to be filed by the last day of the seventh month following the end of the plan year. You'll have to include any plan audits, actuarial reports, and other documentation.

For more information go to the IRS Web site. The easiest way to find the forms and pubs is to go to the search page and click the link that says "Search for Form or Publication to Download."

Read on to learn more about government requirements.