I want to make sure if you are paying others to work for you in any capacity that you know how to pay them properly.
The IRS is very strict when it comes to paying others for services. They want everyone to be an employee so that you will be paying payroll taxes into the government regularly. That benefits them the most.
It doesn?t benefit the small business owner though. That is why the IRS looks very closely at who you are paying for services and whether they should be classified as an employee or independent contractor.
When you hire someone to do work for you, there is a simple test you need to perform to make sure you are in compliance with the IRS. Ask yourself these questions:
- Does this person provide services for others besides my business?
- Does this person own their own business recognized by the IRS?
- Does this person supply their own equipment and tools needed to provide the service to me?
- Do I control how this person does the job for me? Or do they decide how to get the job done?
The IRS looks at the entire relationship on a case-by-case basis to make their ruling.
If the first 3 questions above can be answered ?yes? and they decide how to get the job done, then they are easily classified as an independent contractor.
If you provide any type of benefits to the person like vacation time or retirement benefits, then they are an employee.
How much control you have over the person providing the service plays a large role in the determination of how to classify them in your business relationship.
There are different tax reporting requirements for independent contractors and employees, with the latter being more extensive and expensive.
- Independent Contractors ? Your small business does not have to withhold any kind of taxes from the amount you pay independent contractors for services. Your only reporting duty is to the IRS at the end of the year on IRS Form 1099-Misc for any amount totaling payments more than $600 for the year to each individual. You do not, however, have to issue this form to the contractor if they are an incorporated business. And that?s it! Pretty simple!
- Employees ? Business owners must withhold payroll taxes from each employee?s paycheck which includes federal withholding, social security, and medicare taxes. Employers must also pay to the IRS an additional amount that equals the social security and medicare portions of the tax withheld. In addition, the employer must pay Federal Unemployment Tax to the IRS each quarter for each employee up to a set dollar amount. Some states also impose a state unemployment tax that the employer is required to pay each quarter. Your business will have to file several employment tax forms either monthly, quarterly, or yearly depending on the form and the number of employees you have. These forms include Form 941, 940, and W-2 for federal purposes.
As you can see, it is more burdensome to keep up with employee filings and paydays. That is why so many small businesses choose to hire independent contractors when they can.
The key is to make sure you are compliant with IRS rules and regulations concerning the status of the service provider.
Are you handling these payments correctly? Leave comments and questions below.