You add the amount of the forgiven loan to their W-2 box 1 income each year, and deduct the appropriate payroll tax (employer share of FICA and medicare tax), as well as federal and state withholding.
Basically, treat it as a cash bonus and apply the same withholding rules.
Because this is an employee, anything of value that you provide to an employee in return for their services is considered taxable wages.
