If you are hiring employees for the first time, you will discover it’s a long process—and I am not just talking interviews. The paperwork and tax implications of hiring workers are main reasons employers prefer to hire independent contractors. However, with the IRS bearing down to reclassify workers as employees and dishing out whopping penalties for those who transgress,  it’s in your best interest to make sure you comply.

Payroll processing can be tedious, time consuming and oftentimes confusing, and it might be best to have a payroll processing company, your local bank, or your bookkeeper or accountant perform these duties. If you want to do the work yourself, many accounting software packages include basic payroll functions.

You must have a Federal ID number. If you are already a partnership, corporation, or LLC, you likely have already applied for and received a Federal ID number. Check with your tax pro to be sure – you don’t want to end up with two ID numbers. If you do not have one, simply go to IRS Application for Federal ID# and apply.

Each new hire must complete Form I-9, which is used to document that your new employee is authorized to work in the United States. The form is not sent to any government agency but retained in the employee’s personnel file and is subject to audit. The form must be kept for three years after date of hire or for one year after termination, whichever is later.

Form W4 provides the information needed to determine how much tax to withhold from an employee’s paycheck. It also provides the employee’s address and Social Security number for reporting payroll taxes to the state and at year end when completing Form W2.

As an employer, you are responsible for withholding the following taxes: federal withholding, FICA and Medicare, state withholding (if employed in a state that levies income tax) and usually state disability tax. FICA and Medicare must be matched dollar for dollar by the employer. You will be required to deposit your share of these taxes along with the withholdings on a regular basis with the government. Frequency of deposit depends upon the size of your payroll, and it is a violation to not deposit the employee trust fund taxes (withholdings). Those responsible for depositing these taxes can be subject to civil penalties of up to 100% of the tax liability. See Publication 15 for more information.

If you’re coming up short on payroll tax deposit day, at least pay the employee’s share. Mark the memo line “trust fund taxes” and indicate the quarter and year.

The employer must also calculate FUTA tax for each employee. This is used to fund the Federal Unemployment Tax fund. No withholding is performed on employee pay. Instead the employer must kick down 0.8% per year per employee on wages paid up to $7,000. The maximum amount paid in per employee is $56.

When determining the employee’s rate of pay, take into consideration the tax advantages of structuring payroll using fringe benefits as part of compensation. Employees love fringe benefits. I have often heard people remark, “The pay isn’t that great but the benes are unbelievable!” They will then recite a litany of cool benefits, which can include: health insurance, life insurance, child care subsidy, gym membership, cell phone, expense account reimbursements, educational assistance, stock options to name a few. Many of these fringe benefits are pre-tax, which means the benefit is given to the employee without incurring a withholding or employer paid matching tax on the value of the benefit. Publication 15 contains guidelines to taxability of fringe benefits.

There are special rules for certain forms of compensation. For example, if you own a restaurant, tips and meals provided to employees must be treated in a certain manner. Likewise if you provide housing or a company vehicle to your employees, you must follow a special set of rules for recordkeeping and for determining taxability.

Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.

Bonnie Lee is an enrolled agent admitted to practice and representing taxpayers in all 50 states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, Calif., and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Her new e-book Taxpertise for the Creative Mind Murder, Mayem, Romance, Comedy and Tax Tips for Artists of all Kinds is available at all major booksellers. Follow Bonnie Lee on Twitter and on Facebook.