Small Business Payroll Taxes
What's an employee?
An employee is generally someone that is supervised closely by someone else. Generally has their supplies and work space supplied by someone else. In generally it can be terminated or ultimately hired by someone else. As suppose to an independent contractor, who might free lance and work their own schedule and provide their own materials.
What is an "independent contractor"?
An independent contractor is generally somebody who sets their own hours, that might work for more than one client, that provides their own materials. If I'm a CPA, for example, I'd have my own computer, my own adding machine, my own paper and pencils. An independent contractor is somebody that has the ability to work the hours that they want to work, as opposed to having set, mandated hours, as an employee would have.
When should I hire an independent contractor?
Generally, the classification of whether somebody is an employee or contractor is not one that somebody can just make on their own. We always suggest that people take a look at the IRS 20 point test, which is on the IRS website; www.irs.gov. If you answer yes to more questions than others, it could mean that you're an employee, or a contractor. But the rules are not hard and fast, it's more of a global type of summary.
What are the advantages of hiring independent contractors?
One of the questions that's come up a lot in our practice from employers is what the advantages are via association with independent contractors or employees. Generally, employers are responsible for payroll taxes like Social Security and Medicare with employees, but they're not with independent contractors. Also, employers generally extend benefits like medical insurance and pension benefits to employees but not to contractors, because contractors are by nature self-sufficient. Often, the cost of an association with a contractor could be lower.
How do I handle my employees' tax withholding?
Witholding from employee wages can be very critical. Generally, you give an employee a Form W-4, sometimes at the beginning of each calendar year and the employee designates a certain number of exemptions. Now those exemptions determine the rate of witholding on the salary. A greater number of exemptions will mean less money withheld from the salary. The employer is required to keep the W-4 on file and then use the IRS withholding tables to figure out how much should be withheld from the salary. Employers who have employees are either required to remit their taxes to the government on a periodic basis and that could be next day, that could be within a few days, or that could be the fifteenth of the following month depending on the level of their payroll. We advise small businesses to look into actually hiring payroll services.
What taxes must I pay on behalf of my employees?
If you're an employer, you will be required to match the amount of Social Security and Medicare that your employee has withheld from their checks. If the Social Security and Medicare withholding is $100, you'll have to match it with another $100 from your employer bank account. You may also be liable for federal and state unemployment insurance. There is most certainly a cost with having employees. We tell our clients taxes sometimes cost eight or nine percent of the employee's gross salary.
What is a "W-4"?
The W-4 form is something that's filled out by the employee, often at the beginning of every year, and the employee designates on the W-4 form the number of exemptions that they wish to claim. Exemptions could be for themselves, their spouses, their children, but it governs the amount withheld from their paycheck. The greater the number of exemptions claimed on the W-4, the lower the withholding from the paycheck.
Do I have to file my employees' W-4s?
On the Form W-4, if the employee claims ten or more exemptions, that W-4 form may have to be filed with the IRS. But if the employee claims less than ten exemptions on the W-4, generally, the W-4form doesn't need to be filed. It just needs to be maintained by the employer.
How do I handle my independent contractors' taxes?
If you pay an independent contractor, you'll generally be required to send them a 1099 form. It's best to send the 1099 form to the independent contractor by January 31, as they'll need it to file their own taxes, and to send a copy to the federal government by February 28.The 1099 form, in effect, looks just like a little coupon, but it needs to be transmitted with what's called a 1096 form, and a 1096 form is really just a totaller form. So if you're sending three 1099's that are $10,000 each, the 1096 form will say three forms are attached for a total of $30,000.
Payroll is a lot of work! How can I get help?
Payroll is a lot of work. Payroll and sales taxes are two very onerous things that business owners have to deal with. We recommend that people look into online services or payroll providers. Our CPA firm, in fact, uses a payroll provider and we're quite capable of doing it ourselves but some of these providers just do a wonderful job. What they do is make the payroll tax deposits for you by just debiting your bank account and they actually prepare professional looking paychecks for your employees. There is a cost but the cost-savings to your time may justify it.
